Chesapeake Energy Corp. has agreed to leave the region where the U.S. shale revolution began. The Oklahoma City-based company announced Aug. 10 that it has entered into an agreement to convey its interests in the Barnett shale operating area located in North Texas to Saddle Barnett Resources LLC.
In addition, Chesapeake will simultaneously terminate future commitments associated with its Barnett assets.
Saddle is backed by First Reserve, a leading global private equity and infrastructure investment firm exclusively focused on energy.
“Today’s announcements mark a major step in our continued progress to transform Chesapeake,” said Chesapeake CEO Doug Lawler. He added, “Fiven the significant negative cash flow profile of the Barnett assets, the net cash paid out in these transactions has a payback of less than 18 months.”
The agreement will increase Chesapeake’s operating income, before charges and other termination costs associated with this transaction, by approximately $200 to $300 million per year from 2016 through 2019. The transaction also reduces remaining 2016 gathering, processing and transportation (GP&T) expenses by approximately $250 million, including $170 million for a projected minimum volume commitment (MVC) shortfall payment.
Additionally, Chesapeake’s exit from the Barnett shale region provides 2017 projected GP&T expenses with a range of $7.15 to $7.65 per barrel of oil equivalent (boe), approximately $0.45 per boe lower than current 2016 guidance (using midpoints). The deal reduces projected 2017 GP&T expenses by approximately $465 million, including $230 million of projected MVC shortfall payments, as well as eliminates future Barnett shale midstream and downstream commitments of approximately $1.9 billion.
Finally, the transaction increases the PV-10 of the company’s total proved reserves by approximately $550 million after removal of Barnett assets and the associated projected MVC shortfall payments.
As part of the transaction, Chesapeake and Williams Partners have agreed to terminate the current gathering agreement, projected MVC shortfall payments and fees pertaining to the Barnett Shale assets, for which Chesapeake expects to pay $334 million in cash to Williams, with First Reserve portfolio company Saddle Resources expected to pay an additional sum. The transaction is subject to a number of closing conditions, including the receipt of third-party consents, and is expected to close in the third quarter of 2016.
In addition, the company announced it has renegotiated its gas gathering agreement with Williams in its Midcontinent operating area in exchange for a payment by the company of $66 million.
Separately, Chesapeake accelerated the value of a gas supply contract by selling its rights under a long-term gas supply agreement for $146 million in cash proceeds.
“The transformation of Chesapeake into a top-tier E&P company continues, and these transactions, along with our previously announced balance sheet and liquidity improvements, provide significant forward progress,” Lawler said. “We believe there are more positive moves to come.”
Properties in the proposed Barnett transaction include approximately 215,000 net developed and undeveloped acres and approximately 2,800 operated wells, which produced an average of approximately 65,000 boe per day (96 percent natural gas, 4 percent natural gas liquids) in the 2016 second quarter. The expected net production impact from the proposed transaction is approximately 62,000 boe per day. Proved oil and natural gas reserves in the Barnett Shale as of Dec. 31, 2015, were approximately 81 million boe (96 percent natural gas, 4 pecent natural gas liquids).
In exchange for a cash payment of $66 million, Chesapeake also renegotiated its existing cost-of-service gas gathering agreement with Williams covering the Midcontinent operating area to a fixed-fee arrangement. As a result, Chesapeake’s Mid-Continent gas gathering costs are expected to be reduced by 36 percent, effective July 1.
“We believe that our approximately 1.5 million net acreage position in the Midcontinent area represents a tremendous resource,” Lawler said. “The new gas gathering agreement makes our operations more competitive and enhances the operating income from this asset.”
Separately, Chesapeake agreed to accelerate the value of a long-term natural gas supply contract with a $4 per million British thermal units (Btu) floor pricing mechanism by selling it to a third party for cash proceeds of approximately $146 million. This transaction strengthens the company’s liquidity position by providing partial funding to pay for these announced midstream transactions.