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CHK-SWN Merger Likely to See Antitrust Scrutiny

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The $17B merger between Chesapeake Energy (CHK) and Southwestern Energy (SWN) is still in the early innings in the view of East Daley Analytics, as the combination of top natural gas producers is likely to see scrutiny from the Biden administration.

CHK and SWN announced the all-stock deal on January 11 to create the largest US natural gas producer. East Daley reviewed the CHK-SWN combination following the announcement and presented scenarios that could turn bullish or bearish for the midstream sector. The companies separately reported 4Q23 earnings last week, and are sticking to a 2Q24 target to close the deal.

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Natural gas historically has been a domestic market but, as LNG exports have ramped, the business has become more politically sensitive. The Department of Energy’s (DOE) recent pause of LNG export licensing underscores that reality. East Daley expects more scrutiny of mergers as a result. For example, top US natural gas producer EQT needed 11 months to complete its acquisition of Tug Hill in the Northeast. EQT would fall to the No. 2 gas producer if the CHK-SWN deal closes.

Meanwhile, the Federal Trade Commission (FTC) has been flexing its oversight authority of deals for antitrust concerns. This week the agency sued to block the merger between supermarket chains Kroger and Albertsons. Since June 2021 the FTC has investigated 38 proposed mergers, according to an agency list; half (19) of those plans were eventually abandoned.

The figure shows the combined midstream exposure for the new CHK-SWN company, available in the Producer-to-System Analysis dashboard in Energy Data Studio. Chesapeake and Southwestern together produced ~7.7 Bcf/d of natural gas in 4Q23, the companies reported, representing ~7% of Lower 48 gas supply.

In the Haynesville, CHK and SWN reported ~3.1 Bcf/d of gas production in 4Q23, accounting for 18.5% of basin supply, according to EDA’s ArkLaTex Supply and Demand Forecast. CHK and SWN produced ~4.7 Bcf/d combined in Appalachia, totaling 13.4% of 4Q23 gas production as estimated in the Northeast Supply and Demand Forecast.

From a rig perspective, CHK and SWN would be the most active operators in the Haynesville with a combined 13 rigs. The producers together totaled 28% of the basin’s rig count in February ‘24 (46). In Appalachia, CHK and SWN operated 6 rigs in February and make up 14% of the total rigs (42) in the basin.

Although SWN-CHK would have a lower share of Appalachia production than EQT-Tug Hill, the combined firm would have an even larger share in the Haynesville, a basin poised for growth to feed increasing LNG demand. Thus, East Daley would expect similar, if not a higher level of anti-trust scrutiny, than the EQT-Tug Hill acquisition. – Ajay Bakshani, CFA Tickers: CHK, EQT, SWN.





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