Chesapeake aims for top U.S. natural gas producer spot with $7.4 billion deal for Southwestern Energy

Chesapeake Energy said on Thursday it would buy smaller rival Southwestern Energy in an all-stock transaction valued at $7.4 billion, a deal that would enable the second-largest U.S. natural gas producer to take the top spot.

The move extends a recent spate of multi-billion deals in the U.S. energy sector including Exxon Mobil‘s $60 billion Pioneer Natural Resources (PXD.N) offer and Chevron‘s $53 billion agreement for Hess, as companies seek lucrative acreage to rebuild depleting assets.

Chesapeake has offered $6.69 per Southwestern share held, representing a discount of about 3% to the stock’s last close, according to Reuters calculation.

Southwestern’s shares fell 5.8% in premarket trading. The stock had gained 7.7% since the Wall Street Journal reported on the deal talks last week.

U.S. natural gas prices are expected to tick higher from a jump in exports, analysts have said, after a gloomy 2023 due to record production, ample inventories and a mild winter.

The 40% plunge in prices in 2023 from a year earlier also weighed on profits at natural gas producers. Southwestern reported third-quarter net income that was a tenth of its year-earlier earnings.

The Southwestern bid is the biggest in Chesapeake’s efforts to add heft to a pivot to natural gas assets since emerging from bankruptcy in 2021. Last year, it beefed up its position in the gas-rich shale plays of the U.S. northeast with its $2.5 billion buyout of Chief E&D.

Oklahoma City-based Chesapeake exited the Eagle Ford basin last year in multiple sales for total proceeds of more than $3.5 billion to focus on the gas-rich Marcellus and Haynesville shale formations.

Most of Southwestern’s production is in Appalachia’s shale formations and the Haynesville basin in Louisiana.

Combining these acreage the pro forma company has current net production of about 7.9 billion cubic feet equivalent per day (Bcfepd), the companies said.

If the merger goes through, the combined firm would overtake EQT Corp as the largest independent natural gas-focused exploration and production company in the U.S. by market value and output

The deal is expected to close in the second quarter. Chesapeake shareholders will own about 60% of the combined company and Southwestern investors the rest.