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Energy News Roundup: Chesapeake Energy (CHK) Merger, Red Sea Conflict and More

Paul Ausick

Published: January 12, 2024 9:25 am

Turmoil in the Middle East, particularly in the Red Sea and Suez, sent crude prices on a wild ride. Prices dropped by about $3.50 a barrel early in the week and had gained all of that back and a little more by Friday morning. Here is a recap of the week’s events.

Red Sea attacks drive crude prices up

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West Texas Intermediate (WTI) and Brent crude both traded up by around 3.5% Friday morning, following Thursday attacks by U.S. and British forces that killed five people in Yemen. The Houthi-led attacks on shipping in the Red Sea have sent shipping rates for crude and refined products soaring. (These 29 countries are at war right now.)

Yemen is situated at the southern end of the Red Sea on the east side of the Bar el-Mandeb Strait. The route through the Suez Canal and the Red Sea is critical to European and North American shipments of oil and LNG to Asia. According to the U.S. Energy Information Administration, about 12% of the world’s oil and 8% of the global supply of LNG travels through the Red Sea.

The attacks are forcing shippers either to re-route or suspend shipments. Reuters reported earlier in the week that the chartering cost of a very-large crude carrier (VLCC) capable of transporting 2 million barrels of oil has risen from $8 million to $10 million, adding $1.00 per barrel. That drives the price of WTI crude higher than similar grades of crude from Middle Eastern producers like the UAE. One Singapore-based oil trader told Reuters that “U.S. crude is no longer competitive in Asia.”

Natural gas giants merge

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Chesapeake Energy Corp. (NASDAQ: CHK) and Southwestern Energy Co. (NYSE: SWN) announced an agreement Thursday to complete an all-stock merger of the two natural gas producers. The deal’s total value is $7.4 billion, or $6.69 per share based on Chesapeake’s closing price of $77.18 on Wednesday. Southwestern shareholders will receive about 1 share of Chesapeake stock for every 12 Southwestern shares.

Once the merger is completed, the combined company will have a market cap of around $24 billion and will get a new name. Chesapeake is the nation’s second-largest producer of natural gas (behind Exxon Mobil). The deal is expected to close in the second quarter.

Southwestern shareholders did not like the deal, shaving about 2.5% from the share price after Thursday’s announcement. Chesapeake’s shareholders believe they’re getting a good deal (the premium to Southwestern’s share price was about 4.5%), and the stock rose by more than 3% Thursday. Once the deal is done, the new company has a reasonable chance of being included in the S&P 500.

Briefly noted

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According to S&P Global Platts, OPEC+ countries produced 130,000 barrels a day more in December than in November. Even so, OPEC production was down by about 1 million barrels a day compared to December 2022. Deeper cuts from both OPEC’s 13 member nations and its 10 partners in OPEC+ are scheduled to begin in January.

Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-B) increased its stake in Occidental Petroleum Corp. (NYSE: OXY) earlier this week. Berkshire Hathaway now owns about 34% of Oxy’s outstanding common stock.

Reuters reported Friday morning that China’s crude oil imports reached a record 11.28 million barrels a day in 2023, up 11% year over year. Natural gas imports rose by 9.9% to nearly 120 million tons, second only to the amount imported in 2021.