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(Reuters Breakingviews) – Chesapeake Energy is the latest to join the fossil-fuel merger rush, and has the benefit of safety in numbers. That’s true in two ways: first, because its $7.4 billion purchase of Southwestern Energy is financially attractive for Chesapeake shareholders, and secondly because Boss Nick Dell’Osso is treading an M&A path that rivals like Exxon Mobil and Chevron have already beaten.
The merger announced on Thursday – inspired by Dell’Osso’s own admission by the fact neither firm has much growth potential in an energy-soaked market – has something for both sides. The combination would be one of the biggest U.S. gas producers but, more importantly for shareholders, would result in $400 million of annual cost savings, given their operations overlap in both the Haynesville basin in Louisiana, and in Appalachia. Taxed at the statutory corporate rate, and put on a multiple of 10, these are worth over $3 billion. Since it will own 60% of the new company, Chesapeake gets over $1.8 billion of that, enough to cover the $300 million nominal premium.
Since Dell’Osso isn’t planning for a growth-laden future, most of the additional cash generated will presumably go back to investors in the form of buybacks and dividends. The deal also reduces risk, which is pleasing for any investor who has been burned by energy’s past volatility. Like other recent deals, the use of stock instead of cash reduces the impact of price swings between now and when the deal closes. Both have gas fields close to ports where gas is liquefied and shipped overseas, giving them options beyond their local saturated markets.
On a personal level, Dell’Osso also benefits from being part of the pack. Oil deals are flourishing, partly because once activity picks up, leaders have to hurry if they want to land their preferred target. Chesapeake still has battle scars from its 2020 bankruptcy, the result of a hefty debt load from rapid expansion and an ill-timed turn to oil. Yet Dell’Osso can take comfort from not being the first, or presumably the last, to make an acquisitive leap this time around.
Chesapeake Energy said on Jan. 11 it had agreed to buy Southwestern Energy in an all-stock deal valued at $7.4 billion based on Chesapeake’s closing price on Jan. 10. Southwestern Energy shareholders will receive just under 0.09 shares of Chesapeake for every share they hold.
The offer is worth $6.69 per share based on closing prices on Jan.10, roughly a 5% premium based on Southwestern’s closing share price on Jan. 4, the day before news of a possible deal emerged. Chesapeake shareholders would own about 60% of the combined firm, and Southwestern 40%.
The deal would make the combined company one of the largest U.S. producers of natural gas, with current net production of about 7.9 billion cubic feet equivalent per day.
Chesapeake declared bankruptcy in 2020 and emerged in 2021 with about $8 billion less debt. It exited the Eagle Ford basin in 2023, selling oil and gas assets for more than $3.5 billion, to focus on gas from the Marcellus and Haynesville basins.
Editing by John Foley and Sharon Lam
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