Chesapeake, Awaiting FTC's OK, Plots Southwestern Integration

While the Federal Trade Commission reviews Chesapeake Energy's $7.4 billion deal for Southwestern Energy, the two companies are already aligning organizational design, work practices and processes and data infrastructure while waiting for federal approvals, COO Josh Viets told Hart Energy.

Nissa Darbonne Oil and Gas Investor Mon, 04/01/2024

Nissa Darbonne: Hi, thanks for joining us. I'm Nissa Darbonne, executive editor-at-large for Hart Energy. We're visiting with Josh Viets, chief operating officer for Chesapeake Energy. Josh, thank you.

Josh Viets: Well, thanks. Thank you for having me here today. It's great to be at the conference and appreciate you guys hosting another great event.

ND: Thank you. I understand that in Chesapeake's combination with Southwestern, you're 25 days into the 30 day window for whether the FTC [Federal Trade Commission] wants any additional information, and then otherwise, if not, you can go ahead and proceed to bring it to shareholder vote. Is that the current status?

JV: Yeah, so we do remain within our initial review period. We had provided the FTC with some additional time to provide a review of our filing, but at this point in time, we have not received a second request. And as you mentioned, we are getting close to that initial 30 day time period expiring. And so that will take us into sometime next week [week of April 1]. And at that point in time, if we haven't received that second request, we will start to move forward to closing, which we were still hoping that we'll be able to close the transaction in the second quarter of this year. But I'd also just note that our integration planning efforts are well underway. We're working with the Southwestern team right now and starting to talk about things like organizational design and work practices and processes and data infrastructure for things like applications that engineers and geoscientists are using. So all of that activity is continuing to proceed forward as we wait for the regulatory approvals to come through.

ND: And that combination will make Chesapeake America's largest natural gas producer. Again, it was at one time did some divesting and portfolio reshuffling, but it is poised to become the largest again, 7.3 Bcf a day net, more than 12 Bcf a day gross. Meanwhile, though, you are curtailing production, natural gas prices are quite low at the time the curtailments. Do these consist of delaying TILs and DUCing wells? Are you actually shutting anything in?

JV: Right. So I mean, first of all, the markets are materially oversupplied, of course. We've seen production come into this year at record levels over 105 Bcf a day. Winter didn't help us out this year with one of the warmest winters on record. And so that did have us relook at our business plans for the year. And the plan that we've put in place is really one that is centered around reshaping our production curve. What the market's telling us today, again with gas well below $2, is it doesn't need any more gas. So really the easiest lever that we had was to simply stop turning-in-line new wells. So we'll drill them, we'll complete them, and then we'll sit on them effectively for a period of time. And over the next several quarters, as we get into the end of this year, we'll have built up 80 wells of productive capacity. And what that allows us to do is to quickly respond when the market says it needs the gas to be able to feed that into the market and meet the needs of our consumers. So that is really what is driving our plans is the deferment of new turn-in-lines. It doesn't necessarily involve the active shut-in of base production.

ND: And then on the demand side, we're aware that there's more LNG export capacity under construction, and there's plenty more projects that have approval from FERC [Federal Energy Regulatory Commission] already that are proceeding to fit. Altogether, just those two would be another more than 30 Bcf a day. I believe that would take U.S. exports to more than 50 Bcf a day in LNG and pipe to Mexico as well. So there's that demand. We're already expecting additional demand. We're already expecting also to the electricity demand as a result of all of the EVs that the White House would like to see on the road. I think the new date is 2032 and such, but there's this extraordinary new natural gas fired power demand coming from the use of AI chips, which are extraordinarily more energy intensive than a regular CPU chip. You've done a lot of analysis in this. Tell everyone how you expect that to affect the natural gas market.

JV: Well, sure. I mean, first I would just say we fundamentally believe that natural gas is the right answer to help support the energy additions that we're going to find within our society. You've highlighted one that is getting a lot of press time right now, and it's a market that I think is evolving and that we're paying pretty close attention to. And so one of the reports that's been published here recently by Wells Fargo, it indicated that they would anticipate as a base case in incremental 7 Bcf a day of natural gas required to meet the power demand growth that's anticipated by AI computing and data centers by the end of the decade. So by the end of 2030. Their high case was actually 16 Bcf a day. And so if you think about that in the context of where the U.S. gas markets sit today, 16 Bcf a day on top of 105 Bcf a day that we produce a day is a pretty material move.

So that combined with EVs and broader electrification across the residential and the commercial sector has, I think, just created additional upside of the natural gas markets. But again, I think it's the economies, its society really recognizing the benefits that natural gas provides being a clear choice from a reliability standpoint, which is incredibly important if you're thinking about the data centers and then affordability, providing low cost computing to all of us who are going to take advantage of it while providing a lower carbon fuel. And so again, that's just why we are so convicted about our strategy, including the merger with Southwestern, which is going to further bolster a break even and allow us to better serve our customers within the marketplace.

ND: Josh, if we didn't have this reliable energy source, natural gas, in this country, and natural gas being a dispatchable feedstock versus wind and solar, I mean a data center can't operate on solar. It's certainly not alone because then it wouldn't operate 24-7. If not for having this US natural gas, our own American data centers, our data possibly would have to be housed in Qatar or Russia.

JV: Well, the abundance of resource that we have in this country has clearly created a sense of strong security for us. It's also created economic prosperity, and that's occurred since the industrial revolution, whether it was kerosene or crude oil, a now natural gas. And so we just continue to see natural gas plane, a vital role within our economies. And we think wind and solar absolutely have a place within the energy mix, but it needs to be talked about as an addition to the energy stack rather than a replacement. And that's what we remain focused on, and that's why we're so convicted around supplying domestic international products, international, I'm sorry, domestic and international consumers with our product is because of the attributes that it provides. The reality is there's no perfect energy solution. But what we do know is that we need to help support society and provide it with the affordable and reliable energy source that everybody should be able to access.

ND: Super. Thank you, Josh.

JV: Appreciate it.

ND: And thank you for joining us. For more energy industry intelligence, find it right here at hartenergy.com