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Big American oil and gas merger

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2024-01-08

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Big American oil companies are merging to enhance commercial security, protect safety margins, and reduce costs. Now, they are joined by major gas players as US natural gas companies Chesapeake Energy and Southwestern Energy near a $US17 billion merger.

The reasons for these mergers are clear: the desire for scale, cost control amid weak prices and uncertain demand, and the need to safeguard margins in the face of a challenging future for fossil fuels.

If the merger proceeds – expected to be confirmed in the next day or so – it will create America’s largest natural gas group. While impressive, it will still be a fraction of the $US60 billion proposed Exxon Mobil takeover of Pioneer Natural Resources or the $US53 billion Chevron attempt to acquire Hess Corp, as reported by Reuters in October when Chesapeake was considering purchasing Southwestern.

This merger would position the new entity to overtake EQT as the largest natural gas-focused exploration and production firm in the US by market value. Following the news of the talks, shares of Southwestern and Chesapeake closed more than 7% and 3% higher, respectively, on Friday.

These talks occur against the backdrop of sluggish US natural gas prices, prompting producers to either retrench or explore merger opportunities. US natural gas futures saw a 62% decline in 2023 compared to 2022 – the most significant percentage drop since 2006, driven by record production, ample inventories, and mild weather.

The surplus production has been redirected into the LNG export sector, making the US the world’s leading LNG exporter in 2023, surpassing Qatar and Australia.

Chesapeake, which emerged from bankruptcy in 2021 due to the pandemic-triggered restructuring in mid-2020, has been divesting oil-producing assets to focus on natural gas. The company had to file for Chapter 11 bankruptcy because its $US8.6 billion in debt became unsustainable, leading to difficulties in meeting interest payments.

Notably, these two merging companies are neighbors, with both Southwestern and Chesapeake heavily involved in Appalachia's shale formations and the Haynesville basin in Louisiana. This geographical proximity enhances the potential for sustaining cost cuts after the merger is finalized.

This merger story overshadowed the oil market, with US West Texas crude closing approximately 10.5% higher at $US73.81 on Friday and up 3.7% for the week. Brent also closed at $US78.86, up around 0.15% for the day and 2.3% higher for the week.

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