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The Case for Upside from a CHK–SWN Combo

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Chesapeake Energy (CHK) and Southwestern Energy (SWN) will merge into the largest US natural gas producer. The $17B deal could be good or bad news for midstream companies, depending how a few factors break. East Daley Analytics looks at the bullish case for the giant producer merger.

EDA reviewed the CHK-SWN deal Wednesday (January 17) and, using the “Producer-to-System Analysis” screen in Energy Data Studio, identified the midstream companies serving the two producers. CHK and SWN currently produce 7.9 Bcf/d between the Northeast and Haynesville, creating plenty of business for midstream services.

The breakdown for Chesapeake and Southwestern by G&P system is shown in the figures from Energy Data Studio. Our review finds Energy Transfer (ET), Williams (WMB) and DT Midstream (DTM) as the names with the most exposure to a CHK-SWN combination.

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Users can track historical rig and supply trends by producer and midstream system in Energy Data Studio. EDA profiled recent activity for CHK and SWN in our earlier note. We also laid out the bear case for the CHK-SWN merger, tied to a future of rig cuts and lower volumes if natural gas prices stay low.

The upside case for CHK-SWN is linked to LNG, and how well the new producer can execute in the LNG space. The to-be-named company plans to build a marketing operation in Houston to trade in global gas and LNG markets.

LNG deals typically require long-term contracts, and counterparties with solid credit assure lenders. These hurdles historically have kept the E&P sector locked out as investors in the LNG boom. The CHK-SWN combo creates a producing company with more resources to lock down deals, and a better balance sheet to credibly compete in the LNG space.

If gas prices remain stuck in the $2 range, rig cuts may be minimal anyways. As we noted, the two producers are already holding gas production flat. Moreover, CHK and SWN have commitments in the Haynesville to several new pipeline expansions. These projects include DTM’s staggered LEAP project, and ET’s Gulf Run Pipeline expansion. The CHK-SWN combo may want to maintain Haynesville supply to fill these projects.

If a CHK-SWN combo can execute in LNG markets and expose more gas production to higher international prices, then low US prices may not matter so much. In an optimistic scenario, the combo could successfully underpin new LNG exports projects as both suppliers and investors, growing long-term demand and raising volumes for midstream names with exposure. – Ajay Bakshani, CFA, Alex Gafford and Andrew Ware Tickers: CHK, DTM, ET, MPLX, SWN, WMB.




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