Williams Partners (WPZ) Enters Conditional Commitment in Barnett Shale; Affirms Chesapeake (CHK) Agreement Terminations

August 10, 2016 5:21 PM EDT

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Williams Partners L.P. (NYSE: WPZ) announced it has conditionally committed to execute a new gas gathering agreement with a new producer customer, a private company successor to Chesapeake Energy (NYSE: CHK), in the Barnett Shale. Williams Partners’ agreements with Chesapeake, including Chesapeake’s Minimum Volume Commitment (MVC) obligations in the Barnett Shale, will be terminated at closing. Among other conditions, the commitment is subject to the closing of the sale of Chesapeake’s Barnett assets to the producer customer, which is subject to certain significant closing conditions including the receipt of third-party consents. The new gas gathering agreement is expected to be executed in the third quarter of 2016 when the Chesapeake sale is expected to close.

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Additionally, Williams Partners and Chesapeake announced they have agreed to a revised contract in the Mid-Continent region, subject to the payment of $66 million by Chesapeake.

“These agreements will create a win-win commitment that results in both short- and long-term benefits for Williams Partners,” said Alan Armstrong, chief executive officer of Williams Partners’ general partner. “Chesapeake is a great customer and an efficient operator; we look forward to a continued strong relationship as its leadership team directs the company’s focus on its most productive areas.”

Armstrong continued: “As a midstream service provider, we best serve our shareholders and our upstream partners by supporting the economics of key production areas. These conditional agreements will help re-position the Barnett as a competitive basin for our new Barnett producer customer as current drilling and completion technologies are implemented.”

On a pro-forma basis, such agreements would reduce the percentage of Williams Partners’ revenues derived from Chesapeake to 15 percent as measured by the first half of 2016 revenues and estimated MVCs. Additionally, such agreements, which will be entered into by subsidiaries of Williams Partners, L.P. (NYSE: WPZ), are expected to reduce customer concentration risk and result in additional drilling and volumes in the basins. The $820 million of up-front cash that will be paid to Williams Partners upon execution of the agreements will be used to reduce revolver borrowings. The cash proceeds will be treated as deferred revenue for accounting purposes, with a majority to be amortized into income over the 3 ½-year period beginning in 2016 through June 30, 2019, which coincides with the original MVC term.

Barnett Agreements

The conditional Barnett agreements provide accelerated upfront cash payments to Williams Partners totaling $754 million, as well as new terms and conditions under which Williams Partners will provide gas gathering services to a new Barnett producer customer (Chesapeake’s successor in the Barnett) through 2029.

Williams Partners expects the combination of $754 million in up-front cash proceeds and the on-going cash flows generated by gathering services provided to the new Barnett producer customer, to represent equivalent net present value of cash flows as compared to Williams Partners’ expectations of Chesapeake’s performance under the existing agreement. Cumulative undiscounted cash flows for the years 2016-2019 are expected to be approximately $240 million lower, and higher thereafter, as a result of the conditional agreement.

By eliminating Chesapeake’s MVC payments and establishing monthly gathering rates at a percentage of NYMEX Henry Hub settlement prices through the end of 2029, the conditional gas gathering agreement will bring drilling back to the Barnett Shale and return wells determined to be uneconomic under earlier gathering rates to production. The Barnett gathering area is expected, therefore, to realize additional drilling and improved volumes, enhancing Williams Partners’ long-term competitive position. Importantly, the new Barnett producer customer will commit to an annual $40 million drilling commitment through 2018, as well as a commitment to fund all incremental well connects and growth capital.

It is expected that Williams Partners’ existing gathering agreement including MVC obligations with a third-party producer, who has a 22 percent working interest in the Barnett production, will remain unchanged through mid-2019 and then may be adjusted thereafter.

Mid-Continent Region Agreement

The revised Mid-Continent agreement will provide an accelerated up-front $66 million cash payment to Williams Partners from Chesapeake and simplify several contractual requirements, allowing both Chesapeake and Williams Partners to optimize their respective operations and asset portfolio mixes.

Previous Renegotiations with Chesapeake

In September 2015, Williams Partners and Chesapeake announced an expansion of gas gathering services for Chesapeake Energy in growing dry gas production areas of the Utica Shale in eastern Ohio and a consolidation of contracts in the Haynesville Shale in northwestern Louisiana to optimize production opportunities, streamline fee structures and restructure commitments to incentivize long-term development of the fields. The companies also announced a new contract for the Haynesville area. The news release announcing the 2015 agreements can be found on our website.

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