Chesapeake Energy Corp. (NYSE: CHK) has finalized new gas gathering agreements with the Williams Companies (NYSE: WMB) in its Haynesville shale operating area in northwest Louisiana and its dry gas Utica shale operating area in eastern Ohio.
Key attributes include improvement in per unit gathering rates established in two major growth assets beginning in 2016, leading to enhanced volume growth; a combination of gathering system agreements that allows Chesapeake to satisfy minimum volume commitment (MVC) obligations in the Haynesville shale play, increasing realized pricing per mcf of gas; and aligned strategic interests that improve drilling economics, operational efficiency, and midstream asset utilization.
Chesapeake will move to a fixed-fee agreement in the Haynesville shale play beginning in January 2016. Gas gathering fees in the Haynesville play will be reduced on a unit basis, and the existing minimum volume obligations are expected to be met with the consolidation of two gathering systems and a projected increase in Haynesville area volumes.
Inclusive of previously expected MVC shortfall payments, Chesapeake’s gas production is expected to see improved gathering rates of approximately $0.20 per mcf in 2016 and 2017 and approximately $0.30 per mcf in 2018 and beyond. As part of the transaction, and consistent with Chesapeake’s current operating plans, the company committed to turn 140 equivalent wells online before the end of 2017. This commitment is projected to result in production growth in the Haynesville shale asset over the next two years, thus also increasing Williams’ revenue from the area.
Chesapeake will also move to a fixed-fee agreement in the dry gas Utica shale, beginning in January 2016, and is expected to see an estimated gathering rate reduction of approximately $0.25 per mmbtu. As part of the transaction, Chesapeake is dedicating an additional 50,000 net acres to Williams and will be subject to a new minimum volume commitment of 250 Mmbtu/d beginning in mid-2017. The company expects to meet this commitment with approximately one rig per year.
“These deals drastically improve the cost structure and economics of CHK's drilling programs in the two regions by reducing transportation costs/improving differentials 20–30% starting in 2016,” said Global Hunter Securities analysts in a note Tuesday. “As such, this should allow CHK to get more active in both regions, and, given the fact they are two of CHK's most important plays, the 10% bump to current natural gas prices should help significantly.”
The deal alleviates “another issue from an investor standpoint by cleaning up messes made before the current management arrived,” the analysts continued. “The minimum volume commitments and higher transportation costs for CHK have been a front-page issue for the better part of a year, so, with this deal being made, we think some of that is alleviated. Obviously, while the company did have to give up something in return, we think, overall, these are savvy moves that the current management was able to negotiate after being in a tough spot by the prior regime.”