Fitch Ratings Welcomes Merger of Chesapeake and Southwestern

Fitch Ratings has expressed its approval of the recent merger between Chesapeake and Southwestern. In response to this significant development, Fitch Ratings upgraded both companies' BB-plus long-term issuer default ratings to Rating Watch Positive. If the merger continues to show promise, Fitch Ratings may further upgrade the ratings in the medium term.

The BB-plus rating, which currently places these companies in speculative-grade or junk status, could potentially be upgraded to investment grade. This would be a highly favorable change, as investment-grade issuers generally pay lower interest rates compared to less creditworthy issuers. The additional compensation for risk demanded by investors is thus reduced.

In a statement, Fitch expressed confidence in the potential of the combined entity to maintain an investment-grade rating due to its substantial scale. With the combined reserves estimated to be around 32 trillion feet of natural gas equivalent (Tcfe) and production expected to reach 7.9 billion cubic feet of natural gas equivalent a day (bcfe/d), this new company will become the third-largest global producer of natural gas.

Chesapeake will benefit from an expanded presence in the Haynesville Shale, with approximately 650,000 net acres, as well as 1.2 million net acres in Appalachia. With its drilling inventory expected to last for 15 years at projected production levels, Chesapeake will be able to leverage these assets effectively.

In assuming Southwestern's debt, Chesapeake aims to maintain a sub 1.5x EBITDA (earnings before interest, taxes, depreciation, and amortization) leverage after the transaction is completed. Fitch Ratings believes that the new entity will continue to exhibit strong liquidity and possess a back-end maturity profile.

While Fitch Ratings anticipates resolving the rating watch once the deal is finalized, it acknowledges that the process may extend beyond six months.

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Chesapeake's Journey: Emerging from Bankruptcy

The long-awaited deal announcement comes three years after Chesapeake, based in Oklahoma, successfully emerged from bankruptcy on February 9, 2021. This marks a significant milestone for the company, which had initially filed for chapter 11 protection in June 2020 due to the unbearable debt burden brought on by falling natural-gas prices during the COVID pandemic. Renowned for its involvement in the fracking boom, Chesapeake's recovery has been remarkable.

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