Chesapeake Energy's $7.4 billion merger deal values Southwestern Energy stock at a discount

By Tomi Kilgore

The expected announcement of the deal comes three years after Chesapeake Energy emerged from bankruptcy

Shares of Southwestern Energy Co. fell Thursday, after the natural gas company announced a merger with oil-and-gas company Chesapeake Energy Corp., as the $7.4 billion stock deal, which had been expected, valued Southwestern's stock at a discount.

Under terms of the deal, Southwestern shareholders will receive 0.0867 Chesapeake shares (CHK) for each Southwestern share (SWN) they own. Based on Wednesday's closing price for Chesapeake's stock at $77.18, that values Southwestern shares at $6.69 each, or 2.9% below Wednesday's close of $6.89.

The Wall Street Journal had reported on Jan. 5 that a merger was imminent, lifting Southwestern's stock by 7.7% since then through Wednesday.

Southwestern shares dropped 5.7% in premarket trading Thursday, and Chesapeake's stock ticked down 0.2%.

The companies had a combined market capitalization of about $17.7 billion as of Wednesday's close. After the merger closes, which is expected to occur in the second quarter of 2024, the combined company, with an enterprise value of about $24 billion, will assume a new name.

"This powerful combination redefines the natural gas producer, forming the first U.S. based independent that can truly compete on an international scale," said Chesapeake Chief Executive Nick Dell'Osso.

"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," Dell'Osso added.

(See below for more buyout candidates.)

The deal announcement comes three years after Oklahoma-based Chesapeake emerged from bankruptcy, on Feb. 9, 2021. The storied company, which was at the center of the fracking boom, had filed for Chapter 11 protection in June 2020, as the COVID pandemic made Chesapeake's debt load unbearable amid falling natural-gas prices.

The merger with Southwestern "marks the next stage in [Chesapeake's] evolution," said Siebert Williams Shank analyst Gabriele Sorbara, as it creates the largest natural gas exploration and production company in the U.S. by production, proved reserves, market capitalization and enterprise value.

Although Sorbara believes the deal is "strategically sound" and will boost earnings long term, Chesapeake's stock is expected to "lag" in the near term as reduced free cash flow will likely reduce capital returns, especially as the company will now prioritize debt reduction over share buybacks.

He believes the merger confirms a "dominant theme" in the energy sector, as companies focus on boosting inventories. (Read more about Occidental Petroleum Corp. (OXY) $12 billion purchase of CrownRock LP and APA Corp.'s (APA) deal to buy Callon Petroleum Co. (CPE) valued at $4.5 billion.)

"[W]e anticipate nearly all the companies in our coverage to be transactional in one form or another in the coming years," Sorbara wrote in a note to clients.

Here are the companies that Sorbara believe are the most likely targets to receive acquisition interest at a large premium, with the companies' market caps as of Wednesday's close:

Devon Energy Corp. DVN - $28.15 billion.Diamondback Energy Inc. FANG - $27.09 billion.Gulfport Energy Corp. GPOR - $2.3 billion.Marathon Oil Corp. MRO - $13.37 billion.Matador Resources Co. MTDR - $6.53 billion.Permian Resources Corp. PR - $10.15 billion.

-Tomi Kilgore

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01-11-24 0813ET

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