The planned merger of US natural gas producers Chesapeake Energy and Southwestern Energy carries echoes of the oil-focused merger frenzy currently roiling the Permian basin, but additional gas-focused consolidation may be less imminent than some expect.
October was a big month for oil and gas M&A: ExxonMobil announced plans to acquire Pioneer Natural Resources for $59.5bn; Chevron pledged $53bn to take over Hess; and rumors of a potential Chesapeake-Southwestern deal emerged in major news outlets and the companies' earnings calls.
But the overlapping timelines in this activity overlook fundamental differences in the crude and US gas markets, as well as the uniqueness of the $7.4bn Chesapeake-Southwestern deal that was confirmed with formal announcement this month. The merger, which promises to create the largest US gas producer by volume, is still subject to the customary regulatory approval process.
"This is more the exception than the start of a market trend," Enverus analyst Andrew Dittmar said. "I don't think it will set off a merger wave like we had in the Permian."
Two key differences between today's crude and US gas markets are that gas prices are far more volatile, and further from the midpoint of the price cycle. Both features widen the spread between prospective bids and offers, deterring dealmaking.
"Building scale is good but risky," Rystad analyst Ademiju Allen said. "I don't believe this will trigger a wave of consolidation amongst the gas E&Ps."
There are also fewer large, privately held gas-focused drillers than there are oil-focused ones. Consolidation among private operators is generally easier to consummate due to their smaller number of stakeholders.
To overcome these obstacles, a gas merger has to offer significant upside for both parties. According to a range of analysts, the Chesapeake-Southwestern deal offers just that.
The two companies are "an unusually good fit in the Haynesville," Dittmar said. Citi analyst Paul Diamond called the deal "low-hanging fruit," predicting the combination of Southwestern's high-quality acreage in the Haynesville with Chesapeake's expertise in the basin will boost productivity. The combined company also stands to benefit from significant acreage contiguity in northwestern Louisiana, enabling it to overcome midstream constraints and market gas where demand is highest.
Access to Haynesville production is increasingly sought after — especially compared to acreage in pipeline-constrained Appalachia — because of its proximity to the US Gulf coast, where the bulk of LNG export terminals are slated to begin entering service at the end of this year. Those terminals represent producers' entrée to the global gas market, which trades at wide premiums to US gas.
High risk, high reward
While upstream gas consolidation faces stronger headwinds than crude, the opportunity to exploit the coming LNG boom may be too attractive for some dealmakers to neglect.
To the extent such activity transpires in the coming years, it is likely to be concentrated among privately held drillers in the Haynesville with access to LNG terminals.
It is not infeasible to imagine the Haynesville's largest privately held gas driller, Aethon Energy, for instance, being acquired before the end of next year.
Appalachian producers interested in large-scale mergers may face stronger opposition from antitrust regulators. The very factors that dampen interest in the Marcellus and Utica basins of Pennsylvania, West Virginia and Ohio — hampered production growth, pipeline constraints and limited access to LNG terminals — also strengthen the case for monopoly concerns, Dittmar said.
