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Is $17B CHK – SWN Deal Good for Midstream? The Bear Case

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Chesapeake Energy (CHK) and Southwestern Energy (SWN) have agreed to merge and create the largest US natural gas producer. East Daley Analytics expects the blockbuster deal to shift the risk and reward outlook for several midstream names. Is a CHK-SWN tie-up good for midstream? That depends how several factors play out. We’ll start with the bear case.

The long-rumored tie-up will convert SWN stock into CHK shares for $7.4B, or a $17B market cap including CHK, creating a newly named producer based in Oklahoma City. A merged CHK-SWN will have 7.9 Bcf/d of raw gas production (3Q23) and be the leading producer in the Northeast and ArkLaTex (Haynesville), the top .

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Energy Data Studio subscribers can use the “Producer-to-System Analysis” dashboard to identify midstream companies servicing Chesapeake and Southwestern and understand risk. East Daley’s review finds Energy Transfer (ET), Williams (WMB) and DT Midstream (DTM) as the names with the most exposure to a CHK-SWN combination.

The figures from the “Producer-to-System Analysis” show midstream counterparties for CHK and SWN in Energy Data Studio. By volume, WMB’s Bradford Supply Hub in Northeast Pennsylvania (NE-PA) is the largest gathering system for CHK at nearly 2.1 Bcf/d (see figure 1). DTM’s Blue Union system in the Haynesville is the largest gatherer for SWN with volumes of 1.2 Bcf/d (see figure 2).

In the Haynesville, CHK currently operates 5 rigs vs SWN’s 7. Chesapeake mostly splits its gas between WMB’s Magnolia and ET’s Enable - Haynesville systems, though recently the producer’s rigs have been more weighted towards ET (3 rigs vs 1). SWN sends most of its Haynesville gas to DTM’s Blue Union system. However, like CHK, the producer has been more active of late on ET’s Enable - Haynesville system (4 rigs vs 2).

In the Northeast, CHK is running 4 rigs vs SWN’s 3. CHK primarily operates in Northeast Pennsylvania (NE-PA), sending mostly dry gas production to Williams’ (WMB) Bradford Supply Hub.

SWN is more diversified in Appalachia with 1 rig in NE-PA, 1 in the wet gas window in Southwest Marcellus/West Virginia, and 1 in the Utica. SWN’s 3 Northeast rigs are on DT Midstream’s (DTM) Bluestone, MPLX’s Majorsville/Houston/Harmon Creek, and WMB’s Ohio Valley systems, according to allocations in Energy Data Studio. The producer usually operates 1 rig on ET’s NE-PA dry gathering system, though EDA is not tracking any rigs currently.

EDA has been tracking upstream M&A activity in 2023, mostly focused on adding scale in the Permian Basin. These deals have led to rig cuts of ~30% once producers merge. However, we don’t expect such draconian cuts from a CHK-SWN combo.

Most Permian M&A deals have been buyouts of private companies, while CHK and SWN have long been under investor pressure to keep spending in check. On the merger call, management noted the companies are aligned and not trying to grow gas production currently given the oversupplied market. The companies expect $400MM of reductions from overhead and synergies.

The bear case for the CHK-SWN deal is linked to a future of continued low natural gas prices. On the call, executives highlighted the flexibility to adjust rig activity based on where natural gas prices trend. With prices potentially stuck in a $2/MMBtu range through 2024, the guidance suggests downside risk in the near term.

Among the basins, EDA doesn’t expect rig cuts in the Northeast given the basin’s low break-evens and limited egress capacity. The ArkLaTex in our view is a swing basin in the US gas market, and therefore more vulnerable to cuts if gas prices stay low.

We see drilling on ET's Enable - Haynesville system as most vulnerable in a downside case, particularly since both producers have been active of late on that system. In our ET Financial Blueprint, we estimate ET generated $351MM in EBITDA from its Haynesville G&P assets in 2023. As production ramps up in response to higher LNG demand, we expect those earnings to grow to $637MM by YE27. – Ajay Bakshani, CFA Tickers: CHK, DTM, ET, SWN, WMB.




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