Chesapeake to buy Southwestern Energy as natural gas prices rise

As the U.S. Energy Information Agency forecasts natural gas prices to rise in 2024 and 2025, the $7.4 billion all-stock merger of Chesapeake Energy Corp. NASDAQ: CHK and Southwestern Energy Co. NYSE: SWN appears to be timed perfectly.

Natural gas prices have been rising globally, primarily driven by supply-and-demand market factors.

On January 11, the two companies announced an agreement to merge in an all-stock transaction valued at $7.4 billion, or $6.69 per share. The deal is billed as a merger, but Chesapeake is, in practice, acquiring Southwestern. 

When the deal closes, Southwestern shareholders will receive 0.0867 shares of Chesapeake common stock for each share of Southwestern stock. 

Combining two major natural gas explorers and producers

Oklahoma City-based Chesapeake Energy is a major U.S.-based natural gas producer actively involved in exploring, developing, and producing natural gas resources. Its acquisition, exploration, development and production operations are focused in Pennsylvania, Louisiana and Texas. 

It also sells oil and natural gas liquids. Its biggest customers include Valero Energy Corp. NYSE: VLO and Shell plc's NYSE: SHEL North American unit. 

With a market capitalization of $10.16 billion, Chesapeake is not tracked with S&P 500 energy stocks but is a component of the SPDR S&P MIDCAP 400 ETF Trust NYSEARCA: MDY.

Southwestern Energy is the smaller of the two companies, with a market capitalization of $7.16 billion. It's also a prominent natural gas exploration and production company with operations in the U.S. It's also tracked in the S&P midcap index.

Cash returns to shareholders

The news release states, "The combined company, which will assume a new name at closing, will be uniquely positioned to deliver affordable, lower carbon energy to meet growing domestic and international demand with significant, sustainable cash returns to shareholders through cycles."

In the release, Chesapeake CEO Nick Dell'Osso hinted at the companies' ambitions. He said, "This powerful combination redefines the natural gas producer, forming the first U.S.-based independent that can truly compete on an international scale."

He added, "The world is short energy and demand for our products is growing, both in the U.S. and overseas. We will be positioned to deliver more natural gas at a lower cost, accelerating America's energy reach and fueling a more affordable, reliable, and lower carbon future."

The two companies' combined net production of approximately 7.9 billion cubic feet of natural gas per day. It will also have 15 years' worth of inventory in more than 5,000 locations. In the natural gas industry, locations include shale formations, sandstone beds and coal seams. 

Prices set to rise on increased demand

Forecasters expect natural gas prices to rise this year amid heavy demand and limited supply. Analysts believe the effects may be seen globally, more than in the U.S., although the domestic supply-and-demand equation is expected to balance itself out later this year. 

In a January 26 report, "Global gas demand set for stronger growth in 2024 despite heightened geopolitical uncertainty," the International Energy Agency forecast that demand will grow by 2.5% this year. The group said that greater demand for heating in commercial and residential spaces will be a driver.

"While prices remain well above historical averages, demand in price-sensitive industrial sectors will see a return to growth, according to the report," the report said. "In power generation, gas use is forecast to increase only marginally, as higher gas burn in the Asia Pacific region, North America and the Middle East is forecast to be partly offset by reduced demand in Europe."

The Chesapeake-Southwestern merger will address this growing global natural gas consumption. 

Global market and trade presence

To maximize the value of their combined scale of production, the new entity will build a global marketing and trading presence in Houston "to supply lower-cost, lower carbon energy to meet increasing domestic and international liquid natural gas demand," according to the merger news release. 

Chesapeake Energy's dividend yield is 2.97%, and the company raised its shareholder payout in the past two years. Southwestern doesn't pay a dividend, but through Chesapeake's existing shareholder return program, the combined company expects a dividend increase of approximately 20% improvement over five years due to synergies and greater cash flow generation. 

Chesapeake analyst forecasts show that Wall Street is applauding the deal. The consensus price target is $104.30, an upside of 35.45%. Analysts have a "moderate buy" rating on the stock.