LONDON, UK / ACCESSWIRE / August 12, 2016 / Active Wall St. blog coverage looks at the headline from Chesapeake Energy Corp. (NYSE: CHK) as the company has decided to exit its deal with Barnett Shale. Chesapeake Energy is transferring its entire holdings in North Texas to Saddle Barnett Resources, LLC, a company backed by First Reserve, a leading global private equity and infrastructure investment firm exclusively focused on energy. Register with us now for your free membership and blog access at: http://www.activewallst.com/register/.
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Unusual three-way deal
The primary reason for exiting Barnett Shale is due to $1.9 billion in long-term financial agreements for gas gathering, processing, and shipping the company has with Williams Partners L.P. Williams Partners is a pipeline company that moves the natural gas to the markets from Barnett Shale's production facilities for Chesapeake Energy. Chesapeake Energy will pay Williams Partners $334 million in cash towards shortfall in payments and fees with regards to Barnett Shale. The balance amount, which has not been disclosed yet, will be paid to Williams Partners by Saddle Resources directly. Chesapeake Energy has not received any amount for the transfer of Barnett Shale assets which are valued above $1 billion as on July 2016.
Saddle Resources will get the entire Barnett Shale's holdings which includes 215,000 net developed and undeveloped acres and about 2,800 wells. Production from this facility was about 65,000 barrels per day in the second quarter, with 96 percent from natural gas and 4 percent from natural gas liquids. Barnett Shale represented 10% of Chesapeake Energy's gas production output in the region. The deal is likely to be finalized by the end of the third quarter of 2016 subject to regulatory clearances.
Benefits for Chesapeake Energy and effective cost cutting measures
For Chesapeake Energy this is a very important financial decision. The biggest benefit of this deal is that Chesapeake Energy is free of future commitments of $1.9 billion. The company will save around $715 million in just processing and shipping costs from now till the end of 2017. Chesapeake Energy's operating income is expected to increase by $200 million to $300 annually for the period 2016-2019.
Since 2013, the CEO of Chesapeake Energy, Doug Lawler, has been undertaking measures to reduce the company's debts. He has managed to reduce debts worth $3 billion in 2015, which at the end of second quarter 2016 stood at $8.68 billion. Chesapeake Energy is also ending its gas gathering agreement with Williams Partners in the Mid-Continent region for which it will be paying $66 million in cash. This will result in a reduction of 36% for Chesapeake Energy's Mid-Continent gas gathering costs effective July 1, 2016. Apart from this, the company has sold its rights for long-term supply of gas for cash proceeds which will net $46 million for Chesapeake Energy.
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 million 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 have 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."
Williams Partners said in statement that it expects to receive $820 million in cash payments, and said the transactions would reduce customer concentration risk. Alan Armstrong, CEO of Williams Partners' General Partner said: "These agreements will create a win-win commitment that results in both short- and long-term benefits for Williams."
Stock Performance
Shares of Chesapeake Energy climbed 4.79%, closing yesterday's trading session at $5.03. The total numbers of shares traded for the day was 70.3 million compared to the three months average volume of 38.20 million. The company's stock price has gained 15.63% in the past one month and 11.78% since the beginning of the year.
On the same day, shares of William partners gained 0.34%, closing the trading session at $35.18. Total volume traded for the day was 6.74 million shares, which was higher than the 3 months average volume of 1.98 million shares.
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