Chesapeake leaves Barnett, transfers interest to First Reserve unit

Chesapeake Energy Corp., Oklahoma City, has agreed to pay its way out of the Barnett shale in an effort to eliminate future financial commitments in a region it deems uneconomic. The series of deals, expected to close in the third quarter, could ultimately save Chesapeake $1.9 billion.

Saddle Barnett Resources LLC, a Dallas-based firm backed by First Reserve Corp., has agreed to take Chesapeake’s 215,000 net developed and undeveloped acres and 2,800 operated wells in the North Texas shale gas play. In return, Saddle Barnett Resources will help Chesapeake terminate midstream commitments to Williams Partners LP associated with the acreage.

Second-quarter production from the acreage averaged 65,000 boe/d, of which 96% was natural gas and 4% natural gas liquids. The expected net production impact to Chesapeake from the deal is 62,000 boe/d. Proved oil and natural gas reserves on the acreage as of Dec. 31 were 81 million boe/d, of which 96% was natural gas and 4% natural gas liquids.

Big cash to Williams

Chesapeake expects to pay $334 million in cash to Williams relating to a current gathering agreement and associated fees, with Saddle Barnett Resources expected to pay an additional amount. Separately, Chesapeake has agreed to sell a long-term natural gas supply contract with a $4/MMbtu floor pricing mechanism to a third party for $146 million in cash.

In total, the Barnett agreements provide accelerated upfront cash payments to Williams of $754 million, as well as new terms and conditions under which Williams will provide gas gathering services to Saddle Barnett Resources through 2029.

Chesapeake and Williams also have agreed to a revised contract in the Midcontinent region, subject to payment of $66 million by Chesapeake. As a result, Chesapeake’s Midcontinent gas gathering costs are expected to be reduced by 36%, effective July 1. The additional sum increases overall upfront cash payments to Williams, relating both to the Barnett and Midcontinent, to $820 million.

For Chesapeake, the deals reduce its remaining 2016 gathering, processing, and transportation expenses by $250 million, and increase the firm’s operating income by $200-300 million/year during 2016-19. The firm last week reported a second-quarter net loss of $1.79 billion, compared with a $4.15-billion net loss a year earlier.

“We believe that our…1.5 million net acreage position in the Midcontinent area represents a tremendous resource,” said Doug Lawler, Chesapeake chief executive officer. “The new gas gathering agreement makes our operations more competitive and enhances the operating income from this asset.”

The firm is currently operating 3 of its 10 active rigs companywide in the Midcontinent region (OGJ Online, Aug. 5, 2016).

Contact Matt Zborowski at matthewz@ogjonline.com.

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