M&A activity among upstream participants in the Marcellus and Utica Shales has been sparse in recent years, with Shale Experts reporting only one transaction since November 2022.  In a departure from our typical analysis and discussion of recent deals in the upstream oil and gas industry, this week’s Energy Valuation Insights blog takes a break from deal multiples and observes the negotiations of the $7.4 billion merger between Chesapeake Energy Corp. (“Chesapeake”) and Southwestern Energy Co. (“Southwestern”), a significant player in the Marcellus Shale. For a discussion on the deal’s implications for the natural gas industry at large, see Thomas Kasierski’s blog post from January 19, 2024.

The Courtship Begins; Southwestern Plays it Cool

May 5, 2022: Southwestern’s CEO, Bill Way, discusses a potential business combination between Chesapeake and Southwestern with Chesapeake’s Chair of the Board, Michael A. Wichterich.  Discussions are preliminary and no transaction terms are proposed by either party.

May 19, 2022: Members of Southwestern’s executive management team and board of directors discuss strategic alternatives, including a potential business combination with Chesapeake.

September 2022:  Mr. Way and Chesapeake’s CEO, Domenic Dell’Osso, Jr., meet for the first time and have high-level discussions about a potential business combination between Chesapeake and Southwestern.

October 18, 2022: Mr. Wichterich contacts Catherine Kehr, Southwestern’s Chair of the Board, expressing the desire to meet and get to know each other. Over the coming days, Southwestern’s board discusses the merits and considerations for a potential business combination with Chesapeake and decides that engaging in conversations with Chesapeake about a potential business combination is not warranted at that time.

October 27, 2022: Ms. Kehr called Mr. Wichterich and conveyed that an in-person meeting was not warranted at that time.

November 18, 2022: The Southwestern Board determines continued discussions with Chesapeake are not warranted at the time, given current market conditions, notably commodity prices.

Chesapeake Makes an Offer; Southwestern Still Not Interested

March 10, 2023: Following a discussion between Ms. Kehr and Mr. Wichterich, Chesapeake makes an unsolicited, non-binding proposal with respect to a potential negotiated business combination between Southwestern and Chesapeake, contemplating Chesapeake acquiring all of the issued and outstanding equity of Southwestern in a stock-for-stock transaction at an exchange ratio of 0.0662x, implying a value per Southwestern share of $5.07, and implying an approximate 34% pro forma ownership in the combined company by Southwestern’s shareholders.

March 29, 2023: Ms. Kehr delivers Southwestern’s written response to Chesapeake’s proposal, stating that the consideration (including the pro forma ownership implied by the proposed exchange ratio) is insufficient.

March 31, 2023: Ms. Kerhr further explains to Mr. Wichterich that until Southwestern and Chesapeake are more closely aligned on valuation, the Southwestern Board is not interested in discussing a potential transaction.

Round Two: Chesapeake Makes a Second Offer

April 3, 2023: Chesapeake makes a second unsolicited offer, this time contemplating Chesapeake acquiring all of the outstanding equity of Southwestern in a stock-for-stock transaction at an exchange ratio of 0.0718x, implying a value per Southwestern share of $5.46 based on the prior close, and implying an approximate 36% pro forma ownership in the combined company by Southwestern’s shareholders. The offer letter reiterates Chesapeake’s belief that the business combination would present substantial benefits to all stakeholders from increased scale, greater trading liquidity, lower cost of capital, and materially expected potential synergies, and requests an in-person meeting between representatives of Chesapeake and representatives of Southwestern.

April 22, 2023:  Ms. Kehr indicates to Mr. Wichterich that the pro forma ownership offered in the second offer is still insufficient and that the Southwestern Board would additionally need to understand Chesapeake’s intentions regarding governance and organization of the combined entity.

Round Three: Chesapeake Makes a Third Offer

April 23, 2023: Chesapeake sends Southwestern an unsolicited updated proposal letter, the terms of which remain substantially unchanged from the second offer (the exchange ratio remained at 0.0718x).

April 25, 2023: Ms. Kehr informs Mr. Wichterich that the unchanged exchange ratio remains insufficient.

May 2023: Discussions between Chesapeake and Southwestern stall until August 2023.

Round Four: A Fourth Offer; This Time Southwestern Counters

August 21, 2023: Chesapeake makes a fourth unsolicited offer to Southwestern, this time noting that it has signed a definitive agreement with respect to its divestiture of certain Eagle Ford shale assets and that Chesapeake would like to reopen previous discussions at a revised exchange ratio of 0.0833x, implying a value per Southwestern share of $7.16 and implying an approximate 39% pro forma ownership in the combined company by Southwestern shareholders. Chesapeake also requests access to non-public information about Southwestern.

August 29, 2023: Southwestern responds to Chesapeake, noting that the proposed ownership remains insufficient but that Southwestern would be open to meeting with Chesapeake and providing certain non-public information.

October 10, 2023: Chesapeake indicates it is open to increasing its offered exchange ratio from 0.0833x to 0.0851x, implying a value per Southwestern share of $7.58 based on the prior day’s close, implying an approximate 39.5% pro forma ownership in the combined company by Southwestern’s shareholders.

October 12, 2023: Southwestern counter proposes an exchange ratio of 0.0900x, implying a value per Southwestern share of $7.99 and an approximate 41% pro-forma ownership in the combined company by Southwestern’s shareholders. The Southwestern Board also authorizes the executive management of Southwestern to provide certain additional non-public information requested by Chesapeake in connection with the counterproposal.  At this point, I guess you could say things are getting pretty serious.

Rumors Swirl; Southwestern Counters Again

October 17, 2023: Reuters reports that Chesapeake is exploring purchasing Southwestern.  The day after the article was published, the market exchange ratio of Southwestern stock relative to Chesapeake stock increased by approximately 7.6%.

November 9, 2023:  Chesapeake confirms its prior proposal of an exchange ratio of 0.0851x (39.5% pro forma ownership) and remains silent about Southwestern’s counterproposal at 0.0900x (41% pro forma ownership).

December 1, 2023: Chesapeake indicates it is not prepared to increase its prior exchange ratio proposal at that time.  However, the two companies continue to discuss the framework for identifying and selecting employees for the merged entity, the name of the new company, and the role of Southwestern’s corporate office in Houston.

December 4, 2023: Southwestern authorizes a counterproposal to Chesapeake at an exchange ratio of 0.0880x, reflecting Southwestern shareholders’ 40.2% pro forma ownership of the combined company.  Southwestern further proposes (i) a new name and ticker symbol; (ii) headquarters or a substantial presence in Houston; (iii) a construct for staffing the combined company based on the best person for the job as determined by Messrs. Way and Dell’Osso acting together; and (iv) that four of eleven directors on the combined company board would be nominated by Southwestern.

December 8, 2023: Mr. Dell’Osso calls Mr. Way to indicate that Chesapeake would soon be providing a counterproposal that would include the following terms: (i) Southwestern shareholders would own 40% of the pro forma combined company; (ii) that four of eleven directors on the combined company board would represent Southwestern; (iii) that the combined company board would have a non-executive chairman; (iv) that the combined company would have a new name; (v) that while the combined company would have a material presence in the Houston office, the headquarters of the combined company would be in Oklahoma City; and (vi) that the combined company would be staffed by the most qualified individuals among both companies’ respective employees.

December 10, 2023: Southwestern’s board unanimously determines it is willing to proceed with the transaction based on the counterproposal provided by Chesapeake.

Fairness Opinions Are Rendered; A Deal Is Announced

January 10, 2024:  Evercore, Chesapeake’s financial advisor, presents its final financial analysis and renders its oral opinion to the Chesapeake board as to the fairness, from a financial point of view, of the exchange ratio pursuant to the merger agreement.

Thereafter, the Chesapeake board determined that it is in the best interests of Chesapeake and its shareholders for Chesapeake to enter into a merger agreement with Southwestern.

Goldman Sachs, Southwestern’s financial advisor, provides the Southwestern Board with its financial analysis with respect to the proposed business combination and renders its oral opinion that the exchange ratio is fair, from a financial point of view to the holders (other than Chesapeake and its affiliates) of Southwestern common stock.

The merger agreement is finalized and executed.

January 11, 2024: Chesapeake and Southwestern issue a joint press release announcing the transaction.

Conclusion

We have assisted many clients with various valuation needs in the upstream oil and gas industry in North America and around the world.  In addition to our corporate valuation services, Mercer Capital provides investment banking and transaction advisory services to a broad range of public and private companies and financial institutions.  We have relevant experience working with companies in the oil and gas space and can leverage our historical valuation and investment banking experience to help you navigate a critical transaction, providing timely, accurate, and reliable results.  Contact a Mercer Capital professional to discuss your needs in confidence.