Chesapeake Energy (CHK): Barnett Asset Sale a Positive, No Change To Underperform - Jefferies
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Jefferies analyst, Jonathan Wolff, reiterated his Underperform rating on Chesapeake Energy (NYSE: CHK) noting that after the close, CHK announced that it had entered into a transaction to transfer its Barnett shale acreage/production to a newly established PE-backed producer. Due to the large remaining minimum volume commitments (MVCs) associated with the midstream contracts, the midstream contract holder Williams Partners (WPZ) will receive $754 MM in cash. WPZ says they are essentially being made entirely whole on an NPV basis, with cash payments of $334 from CHK and $420 MM from the PE entity.
The Barnett assets included 215,000 net acres with production of ~65 mboe/d (96% gas, 4% NGLs) and 81 MM boe of total reserves. The assets had a negative cash flow and CHK has an MVC shortfall on the asset. Post-transaction CHK estimates that operating income will increase by $200- $300 MM/annually from 2016-2019.
CHK also released preliminary guidance for 2017, including “wide initial ranges for production and capital spending” to allow for flexibility around commodity prices. The initial budget of $1.6-$2.4 B (excluding capital interest of $200 MM) with adjusted production of roughly -2% to -6% declines.
No change to the price target of $4.00.
CHK reached a deal to fully exit its Barnett position enabling it to shed large future contracted midstream liabilities. CHK will provide WPZ with a $400 MM cash payment and transfer its whole Barnett position without remuneration to a private company. Disclosures indicate near-term cash flow accretion and provides a further beam of light for CHK's long-term survival.
Shares of Chesapeake Energy closed at $4.80 yesterday.
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