A potential merger between Chesapeake and Southwestern would create the largest natural gas production company in the U.S., but such a combination doesn’t necessarily indicate the natural gas M&A market is heating up, analysts said.

A deal could also raise regulatory questions as a combination of the two E&Ps would put a quarter of Haynesville Shale production and more than a fifth of Marcellus Shale volumes under its control.

On Jan. 5, The Wall Street Journal reported that the two gas-focused E&Ps were in late-stage merger discussions, and that a deal could be announced the week of Jan. 8 to Jan. 12. The story followed an October report by Reuters that also said Chesapeake was considering the acquisition.

Neither company has commented about a possible transaction.

J.P. Morgan analysts noted that any deal would fall under regulatory scrutiny, since, combined, Chesapeake and Southwestern produce 21% of Appalachia’s gross volumes and 25% of the Haynesville’s. In 2023, the companies’ combined Haynesville production averaged 3,297 MMcfe/d, while in the Marcellus they combined for an average 4,651 MMcfe/d.

Oil-focused deals announced in 2023 by Exxon Mobil and Chevron have already prompted Senate Democrats to demand investigations by the Federal Trade Commission. In a November letter, U.S. Senate Majority Leader Charles Schumer said the deals are likely to harm competition, “risking increased consumer prices and reduced output throughout the United States.”

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J.P. Morgan said the deal could benefit both companies because of their mixture of similar assets in Appalachia and especially in the Haynesville Shale.

“A potential combination would make strategic sense, given the potential to wring out material cost synergies from their overlap in the Marcellus and Haynesville shale plays in a natural gas macro environment with abundant natural gas resources in many U.S. resource plays,” J.P. Morgan analysts wrote.

The Haynesville, located in Northeast Texas and Northwest Louisiana, was not the companies’ primary production zone. However, the basin is expected to be more financially beneficial to producers in the near future because of its location in relation to LNG export facilities expected to open along the Gulf Coast starting at the end of 2024.

“From Chesapeake's perspective, we think the transaction would provide it with unmatched inventory depth in the Haynesville and help the company secure additional LNG supply contracts,” analysts for investment firm Stifel wrote.

Both companies would also be able to reduce costs through the merger. J.P. Morgan estimated a combined Chesapeake and Southwestern could cull 5% to 10% from their combined capex budgeted for 2024—and up to $200 million could be saved in annual corporate costs.

While a Chesapeake and Southwestern merger may make sense to some analysts, it doesn’t necessarily translate to a broader movement toward M&A. While Tokyo Gas, Japan’s largest gas supplier, recently acquired privately held Haynesville producer Rockcliff Energy for $2.7 billion, natural gas prices remain in the doldrums.

And Tokyo Gas had been looking to grow its existing asset base in Texas and Louisiana, the company told its investors, and hoped to also take advantage of the same proximity to LNG terminals.

The persistent low price of natural gas doesn’t appear to have led to an increased appetite for deals among gassy E&Ps.

The price of natural gas staged a mini rally over the last week, hitting $3/MMBtu during Jan. 8 trading before falling to $2.95/MMBtu in the afternoon. It was the first time since November that the Henry Hub price had hit the $3/MMBtu mark. Before 2023, natural gas regularly traded well over $3/MMBtu, going back to 2021.

Last week, the U.S. Energy Information Administration announced that natural gas storage levels in the Lower 48 set a new five-year high, with 3,476 Bcf available at the end of December, while U.S. production levels remained high.