2024-01-07 04:42:23 ET
Summary
- Southwestern Energy is considering a merger with Chesapeake Energy, potentially benefiting from their operations in the Marcellus and Haynesville regions.
- The company's focus on liquids gives them an advantage over Chesapeake Energy, which has primarily focused on dry gas production.
- Antero Resources receives the best-selling prices in the Marcellus while Comstock Resources has the lowest costs in the Haynesville.
- Increasing the presence by combining the Haynesville operations of Chesapeake and Southwestern makes little business sense.
There are rumors floating around that Southwestern Energy ( SWN ) is considering a merger with Chesapeake ( CHK ). As I have discussed in the past, both managements could use a serious upgrade. But there are attractions in that these companies operate in both the Marcellus and the Haynesville. So, there could be some attraction in that greater size and similar locations could provide some synergy. The question remains: Does that justify a merger?
Liquids
Southwestern Energy has an advantage in that it has liquids production in the form of rich gas wells. That often helps average prices received at a time when natural gas prices are low.
Obviously, the dry gas production is under some pressure given the current prices of natural gas. Southwestern, takes one of the largest "hits" to the benchmark prices in the industry which makes profitability that much harder. Right now, the hedging is bailing out the prices received. However, long-term management needs to maximize the sales price in far better fashion than is the case right now.
Until then it is very likely that liquids from drilling and completing rich gas production will help profitability tremendously at a time when that is needed. This company has a significant help to overall revenue per unit as a result.
As shown above , the company has a considerable discount to the benchmark price shown on the first line. Hedges make up for most of the loss this time. But what really helps the business is the effect that liquids have on the weighted average prices shown at the bottom.
Hedges do not always help. Generally, the liquids superior profitability is far more durable.
This gives the company an advantage over Chesapeake Energy because Chesapeake has focused upon dry gas production as natural gas prices have fallen.
Lease Operating Expenses
Lease operating expenses are on the high side. Now some of that is due to the presence of liquids production. But some of that is likely to be costs that an operator like Chesapeake could potentially improve.
The lease operating expenses, as stated are on the high side.
For comparison purposes, here is what dry gas producer EQT Corporation ( EQT ) reported .
Note that Southwestern has a deduction from sales prices for transportation while EQT is reporting that transportation here. Overall, the cash costs are a bit lower while the depreciation runs a little higher. Still the two companies are probably statistically equal or close to it.
EQT has a selling price that is similar to Southwestern but EQT has a lower percentage of liquids production. Therefore, the natural gas price received is better. Overall, that means that Southwestern has some competitive "catching up to do.
Selling Prices
EQT, as noted has some decent selling prices combined with some of the lowest costs in the industry.
EQT is getting a better sales price for its natural gas to begin with. There is a sizeable basis difference here as well. But you are also starting from that higher selling price. In an industry where pennies count, that makes a big difference. The net result is that even taking into account an adjustment to the price to make it comparable to Southwestern, EQT ends up with more profits from the better gas price (and somewhat lower costs as well).
However, the producer in the Marcellus and Utica Basin with the best natural gas selling price is likely to be Antero Resources ( AR ):
Antero Resources also has some pretty high production costs. But the premium prices that it traditionally receives when compared to other basin producers generally gets to the bottom line to produce superior long-term profitability.
The conclusion has to be that whether or not Southwestern Energy merges with Chesapeake Energy, both companies have some serious work to catch up to Antero Resources when it comes to selling prices. I have noted that EQT corporation is working to get its natural gas to stronger pricing markets. Both Chesapeake and Southwestern need to do the same.
Haynesville Costs
When it comes to Haynesville costs, the lowest cost producer would appear to be Comstock Resources ( CRK ).
The Haynesville has very low production costs. Comstock Resources appears to have the lowest production costs in the Haynesville Basin. That means that both Southwestern and Chesapeake, either separately or combined in a merger, need to work on their Haynesville production costs.
More importantly, the Haynesville is the high-cost (and resulting)swing basin.
(Note: This presentation is gone. So, I referenced an older article with this.)
If Chesapeake makes this acquisition, it is increasing its presence in a swing basin. To me, that makes little to no sense to be larger in a higher cost area when there are plenty of low costs around. In a sense, that makes this good for Southwestern Shareholders because they now have a way to offload their presence in a swing basin probably at a premium if the merger offer happens.
If both companies want to increase profitability, then the key is to exit the Haynesville and replace it with lower cost production either in the Marcellus or another low-cost basin. The companies do not need to merge to do that.
Summary
Antero Resources appears to have the best Marcellus pricing because it sells its gas out of the oversupplied Marcellus basin. Both Chesapeake and Southwestern appear to have a good deal of production sold in the basin. Hence both companies take a considerable pricing hit to the benchmark.
EQT is working on getting its gas to better markets. I have likewise followed this progress over several articles.
When it comes to costs, EQT in the Marcellus and Comstock in the Haynesville appear to be cost leaders. Although Chesapeake likely gives EQT a pretty good "run for the money" when it comes to comparable costs. But the real key is profitability. Neither exactly excites me there either.
The problem with this merger is that both companies are "in the middle" when it comes to a lot of comparisons. Neither really leads in low costs or premium prices. The calls into question what good a merger would do. Clearly Chesapeake can likely lower Southwestern operating costs somewhat. But usually, shareholders want a whole lot more for a deal like this.
The considerations above would kind of lead me to a neutral or hold position. I am really not a fan of either company. I fail to see how things would become better enough after the merge to justify it in the first place. Therefore, I would want to see a few quarters of the combined company if the combination happens, before I would consider an investment.
Both companies have work to do to get better prices for their production while getting the cost of that production down. That may mean exiting the Haynesville rather than increasing the presence there.
For further details see:
Southwestern Energy: Is A Merger Worth It?