The Oklahoma City, OK-based company agreed to convey its interests in the Barnett Shale operating area in North Texas to First Reserve-backed Saddle Barnett Resources LLC. As part of the transaction, Chesapeake and Williams Partners (NYSE:WPZ) 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.
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% natural gas, 4% 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 December 31, 2015 were approximately 81 million boe (96% natural gas, 4% natural gas liquids).
In addition, in exchange for a cash payment of $66 million, Chesapeake renegotiated its existing cost-of-service gas gathering agreement with Williams covering the Mid-Continent operating area to a fixed-fee arrangement. As a result, Chesapeake's Mid-Continent gas gathering costs are expected to be reduced by 36%, effective July 1, 2016.
Separately, Chesapeake agreed to accelerate the value of a long-term natural gas supply contract with a $4.00 per million British thermal units floor pricing mechanism by selling it to a third party for cash proceeds of approximately $146 million.
Chesapeake CEO Doug Lawler commented, "Today's announcements mark a major step in our continued progress to transform Chesapeake. By exiting the Barnett, we expect to increase our operating income for the remainder of 2016 through 2019 between $200 and $300 million annually, eliminate approximately $1.9 billion of total future midstream and downstream commitments, and increase the PV-10 of our proved reserves. Given 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, and it will be partially funded by the $146 million sale and assignment of our long-term gas supply contract.
Paying $334M to divest assets removes future liabilities
Analysts from Wunderlich Securities and Capital One Securities expressed their positive views of the deal Thursday.
Calling the Barnett deal “creative,” Wunderlich analysts said Chesapeake “improves income substantially in the near term (and going forward), sheds nearly $2B in future liabilities, and also improves the PV-10 of CHK’s assets nicely given the reduction of those liabilities.” The company “continues to do a good job of improving its financial position,” the analysts continued, “but with more to do,” the analysts remain Hold-rated with a $6 price.
Capital One Securities analyst Phillips Johnston views the deal positively, as well. “Although CHK is paying $334MM in cash to divest its Barnett Shale assets, the deal essentially rids the company of a massive sea anchor of future liabilities, and we expect it will contract CHK’s projected leverage ratios significantly. In short, the asset had a negative cash flow profile over the next few years given high legacy gathering and transportation fees and close to $700MM of projected MVC shortfall payments, so the cash payment is effectively the medicine CHK is taking to make its go forward cash flow profile healthier.”
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.