Chesapeake Energy (CHK) to Exit Barnett Shale

August 10, 2016 4:37 PM EDT

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Chesapeake Energy Corporation (NYSE: CHK) announced that it has entered into an agreement to convey its interests in the Barnett Shale operating area located in North Texas to Saddle Barnett Resources, LLC ("Saddle Resources"), a company backed by First Reserve, a leading global private equity and infrastructure investment firm exclusively focused on energy, and simultaneously terminate future commitments associated with this asset.

The impacts to Chesapeake upon completion of these actions will be as follows:

  • Increases Chesapeake's operating income, before charges and other termination costs associated with this transaction, by approximately $200 to $300 million per year from 2016 through 2019
  • Reduces remaining 2016 gathering, processing and transportation (GP&T) expenses by approximately $250 million, including $170 million for a projected minimum volume commitment (MVC) shortfall payment
  • Provides 2017 projected GP&T expenses with a range of $7.15 to $7.65 per barrel of oil equivalent (boe), approximately $0.45 per boe lower than current 2016 guidance (using midpoints)
  • Reduces projected 2017 GP&T expenses by approximately $465 million, including $230 million of projected MVC shortfall payments
  • Eliminates future Barnett Shale midstream and downstream commitments of approximately $1.9 billion
  • Increases the PV-10 of the company's total proved reserves by approximately $550 million after removal of Barnett assets and the associated projected MVC shortfall payments

As part of the transaction, Chesapeake and Williams Partners (NYSE: WPZ) have 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. 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.

In addition, the company announced it has renegotiated its gas gathering agreement with Williams in its Mid-Continent operating area in exchange for a payment by the company of $66 million.

Separately, Chesapeake accelerated the value of a gas supply contract by selling its rights under a long-term gas supply agreement for $146 million in cash proceeds. Both of these transactions are discussed further below.

Chesapeake Chief Executive Officer 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.

"We are also releasing preliminary 2017 guidance for the items most directly impacted by these transactions, including wide initial ranges for production and capital spending, in order to highlight our flexibility around commodity prices. The transformation of Chesapeake into a top-tier E&P company continues, and these transactions, along with our previously announced balance sheet and liquidity improvements, provide significant forward progress. We believe there are more positive moves to come."

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 exchange for a cash payment of $66 million, Chesapeake also 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.

Lawler continued, "We believe that our approximately 1.5 million net acreage position in the Mid-Continent area represents a tremendous resource. The new gas gathering agreement makes our operations more competitive and enhances the operating income from this asset."

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. This transaction strengthens the company's liquidity position by providing partial funding to pay for these announced midstream transactions.

As a result of these transactions, Chesapeake has updated its guidance on certain factors that affect its financial performance for the remainder of 2016 and has also provided preliminary 2017 guidance. Changes from the company's August 4, 2016 Outlook are italicized bold below.

CHESAPEAKE ENERGY CORPORATION

MANAGEMENT'S OUTLOOK AS OF AUGUST 9, 2016

Year Ending

12/31/2016

Adjusted Production Growth(a)

(2%) to 3%

Absolute Production

Liquids – mmbbls

56 - 60

Oil – mmbbls

33 - 35

NGL - mmbbls

23 - 25

Natural gas - bcf

1,000 - 1,040

Total absolute production - mmboe

223 - 233

Absolute daily rate - mboe

611 - 638

Estimated Realized Hedging Effects(b) (based on 8/1/16 strip prices):

Oil - $/bbl

$4.63

Natural gas - $/mcf

$0.13

NGL - $/bbl

($0.18)

Estimated Basis to NYMEX Prices:

Oil - $/bbl

$2.55 - $2.65

Natural gas - $/mcf

$0.35 - $0.45

NGL - $/bbl

$5.20 - $5.45

Operating Costs per Boe of Projected Production:

Production expense

$3.20 - $3.40

Gathering, processing and transportation expenses

$7.60 - $8.10

Oil - $/bbl

$3.75 - $3.95

Natural Gas - $/mcf

$1.40 - $1.50

NGL - $/bbl

$7.60 - $7.85

Production taxes

$0.35 - $0.45

General and administrative(c)

$0.60 - $0.70

Stock-based compensation (noncash)

$0.10 - $0.20

DD&A of natural gas and liquids assets

$3.50 - $4.50

Depreciation of other assets

$0.40 - $0.50

Interest expense(d)

$1.05 - $1.15

Marketing, gathering and compression net margin(e)

($20) - $0

Book Tax Rate

0%

Capital Expenditures ($ in millions)(f)

$1,000 - $1,500

Capitalized Interest ($ in millions)

$260

Total Capital Expenditures ($ in millions)

$1,260 - $1,760

(a)

Based on 2015 production of 559 mboe per day, adjusted for 2015 and 2016 sales.

(b)

Includes expected settlements for commodity derivatives adjusted for option premiums. For derivatives closed early, settlements are reflected in the period of original contract expiration.

(c)

Excludes expenses associated with stock-based compensation.

(d)

Excludes unrealized gains (losses) on interest rate derivatives.

(e)

Includes revenue and operating expenses. Excludes depreciation and amortization of other assets and unrealized gains (losses) on supply contract derivatives. Includes the impact of the recent sale of a long-term gas supply contract.

(f)

Includes capital expenditures for drilling and completion, leasehold, geological and geophysical costs, rig termination payments and other property and plant and equipment and excludes approximately $259 million for the repurchase of overriding royalty interests associated with the sale of certain of the company's properties.

CHESAPEAKE ENERGY CORPORATION

MANAGEMENT'S PRELIMINARY OUTLOOK FOR 2017 AS OF AUGUST 9, 2016

Adjusted Production Growth(a)

(7%) to (2%)

Absolute Production

Liquids - mmbbls

51 - 55

Oil - mmbbls

33 - 35

NGL - mmbbls

18 - 20

Natural gas - bcf

860 - 900

Total absolute production - mmboe

194 - 205

Absolute daily rate - mboe

532 - 562

Operating Costs per Boe of Projected Production:

Production expense

$3.10 - $3.30

Gathering, processing and transportation expenses

$7.15 - $7.65

Oil - $/bbl

$4.65 - $4.85

Natural Gas - $/mcf

$1.25 - $1.35

NGL - $/bbl

$7.40 - $7.60

Marketing, gathering and compression net margin(b)

($60) – ($40)

Capital Expenditures ($ in millions)(a)(c)

$1,600 - $2,400

Capitalized Interest ($ in millions)

$200

Total Capital Expenditures ($ in millions)

$1,800 - $2,600

(a)

Based on 2016 production of 567 mboe per day, adjusted for 2016 asset sales. Subject to future asset acquisition and divestiture activity.

(b)

Includes revenue and operating expenses. Excludes depreciation and amortization of other assets and unrealized gains (losses) on supply contract derivatives.

(c)

Includes capital expenditures for drilling and completion, leasehold, geological and geophysical costs, rig termination payments and other property and plant and equipment.



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