Potential Chesapeake-Southwestern merger gains support from top investor Kimmeridge

Elizabeth Elkin, Bloomberg November 20, 2023

(Bloomberg) — Kimmeridge Energy Management Co., which is among the most active and outspoken U.S. oil and gas investors, said a merger of Chesapeake Energy Corp. and Southwestern Energy Co. would create one of the industry’s most sought-after stocks.

“There are only a few must-own stocks in the sector, and this would ultimately be one of them,” Mark Viviano, a managing partner at Kimmeridge, said in a statement. 

Bloomberg reported in October that Chesapeake is considering buying Southwestern through a deal that would create one of the largest U.S. natural gas producers. Kimmeridge is Chesapeake’s 13th largest shareholder. The companies didn’t immediately respond to a request for comment.  

Despite the spate of large deals over the last several weeks, the universe of shale drillers remains highly fragmented and more consolidation is necessary, Kimmeridge founder Ben Dell said in an interview.

While he’s not involved with the talks, Dell said he’s optimistic Chesapeake and Southwestern will eventually hammer out a deal. The roadblocks in such negotiations are typically “personal,” he said.

“My experience in M&A is that who survives from the board and who survives from management are the one and two sticking points,” Dell said. “It is almost never about actual economics.”

Merger and acquisition activity has been accelerating among shale drillers as the sector matures and companies begin to exhaust their portfolios of undrilled opportunities. As a result, executive teams seeking to shore up reserves to ensure ample, future production are buying up rivals.  

Another potential deal that makes sense would be between Chord Energy Corp. of Houston and Calgary-based Enerplus Corp., Viviano said. Both have production in the Bakken shale formation of North Dakota, and a combination of them would create a $10 billion company that would establish a platform for consolidation across the basin, Viviano said. 

Kimmeridge is the third-largest shareholder of Enerplus, owning about 3.4% of the stock.

Chord has a market value of about $6.8 billion. Enerplus, which is worth about $3.4 billion, would probably require a premium of about 15%, given its strong assets, Viviano said. 

Chord and Enerplus didn’t immediately respond to a request for comment. 

Kimmeridge held a 2.4% stake in Chesapeake as of Sept. 30 that at the current share price is worth roughly $260 million. The investor has increased its holdings in the stock by more than 60% since the first quarter of 2022. 

Chesapeake and Southwestern are two of the biggest players in the Marcellus, a giant shale gas formation in the Northeastern U.S.. They also operate in the Haynesville, another gas-heavy basin along the Louisiana-Texas border. The way the two companies’ assets overlap make sense for a merger, and Chesapeake’s strong balance sheet would help Southwestern, Dell said. The companies’ positions in Haynesville are complementary, he said.

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