In the wake of the news that supermajor Exxon Mobil Corp. is buying Permian Basin shale oil giant Pioneer Natural Resources Co., two of America's largest shale gas producers were said to be exploring their own megadeal.

Citing people familiar with the matter, Reuters reported Oct. 17 that Chesapeake Energy Corp., with a market capitalization of $11.9 billion and $2.1 billion in total debt, is in preliminary talks about buying neighbor and rival Southwestern Energy Co., which has a market capitalization of $8.1 billion and $4.2 billion in total debt. There was no word on how much stock, cash or debt will be used to close a deal, nor a final price.

There is no guarantee that a deal will be consummated, Reuters reported. Neither Southwestern nor Chesapeake returned emails and calls for comment.

A merger would create the largest natural gas producer in America, displacing Appalachian driller EQT Corp. In the most recent second quarter, Chesapeake reported producing 3.5 Bcf/d of gas, while Southwestern reported production of 3.9 Bcf/d. Combining the two production volumes would easily surpass EQT's, which reported 4.94 Bcf/d of gas production in the same quarter.

"We would expect a deal to be primarily or fully done with equity in part to help hedge against commodity moves," Truist upstream analyst Neal Dingmann told clients after the news broke. "We think an all-equity deal would check most investors' boxes and create a premier public gas E&P company."

Chesapeake and Southwestern, both shale gas pioneers since the early days of fracking 20 years ago, operate in the same geographies: the Marcellus and Utica shales of Appalachia and the Haynesville Shale on the Louisiana-Texas border. Both firms have swapped properties with each other over the years, the most significant being Southwestern's $5 billion purchase of Chesapeake's position in the Marcellus in southwestern Pennsylvania in 2014.

The Reuters news moved with about an hour of trading left for Oct. 17. Southwestern shares jumped 8% in heavy trading to close the market at $7.33 per share. Chesapeake shares closed the market with a less than 1% gain to $89.59/share, also on heavier-than-normal trading volumes.

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