Chesapeake Energy (ticker: CHK) announced on August 10, 2016, that the company would be exiting the Barnett Shale as part of an agreement to convey the Barnett assets to Saddle Barnett Resources.
This transaction will mark Chesapeake’s exit from the birthplace of horizontal drilling and will eliminate the costs associated with drilling as well as pipeline contracts. The Barnett Shale has faded in prominence recently in favor of the growing Marcellus and Utica shale plays which are seen as more economic options. Production from the Barnett accounted for less than 10% of the company’s output.
Pro forma for the transaction, Chesapeake expects operating income to increase by approximately $200 to $300 million per year from 2016 to 2019. The divestiture of the assets will also reduce 2016 gathering, processing, and transportation (GP&T) expenses by $250 million and 2017 GP&T expenses by $465 million. As part of the agreement, Chesapeake has eliminated future Barnett Shale midstream and downstream commitments of approximately $1.9 billion.
Abandoning the Barnett Shale will have a positive impact in several ways for Chesapeake. Aside from the cost savings, the company’s proved reserves will increase in value by $550 million by removing assets and commitments that would hamper value for Chesapeake.
As part of the transaction, Chesapeake and Williams Partners have agreed to terminate the current gathering agreement, projected minimum volume commitments, shortfall payments and fees pertaining to the Barnett Shale assets, for which Chesapeake expects to pay $334 million in cash to Williams.
Chesapeake Chief Executive Officer Doug Lawler commented, “Today’s announcements mark a major step in our continued progress to transform Chesapeake. 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.
“While the Barnett has great potential, it simply could not compete for capital in a portfolio with the depth and breadth of Chesapeake’s at current commodity prices,” Lawler said in an e-mail to employees, a copy of which was obtained by Bloomberg.
Analysts at BMO had this to say about the transaction, “Taking the operating income uplift, including MVC reduction, and netting it against the cash payments to make this deal happen, we show a PV of $667MM. That compares to a value closer to $930MM on a daily flowing production basis and the $730MM estimate in our NAV (PDP and resource potential; we calculate a 21% decline rate for the Barnett Shale assets). That negative difference confirms for us that the company couldn’t sell the Barnett Shale operations as originally burdened with the mid-stream commitments. Maybe no other way out, and maybe it doesn’t matter.”
