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Chesapeake Exits Barnett Shale

Chesapeake Energy announced last week that it is selling (giving away?) all of its interest in the Barnett Shale to Saddle Barnett Resources, LLC, a company backed by First Reserve. First Reserve is a global private equity investment firm. The Barnett Shale is the birthplace of the shale revolution in the U.S., and the origin of Chesapeake’s meteoric rise as the premier shale gas producer in the country. A key part of the transaction is Chesapeake’s renegotiation of its gathering agreements with Williams Partners. According to Chesapeake’s press release, renegotiation of the Williams agreements will save Chesapeake $1.9 billion in future midstream and downstream costs. Chesapeake is paying Williams $334 million to get out of the contract, and Saddle Resources is “expected to pay an additional sum.”

The sale covers 215,000 net acres and 2,800 wells producing 65,000 boe per day, 96% of which is natural gas. The deal is projected to save Chesapeake $200 to $300 million annually.

It is difficult to know exactly what this transaction entails without knowing more details, but it looks like Chesapeake is in effect transferring its Barnett leases to Saddle Resources for no consideration, and is in addition paying Williams Partners $334 million to get out of the onerous terms of the gathering/transportation agreement. It also looks like Chesapeake has been operating its Barnett leases at a loss, largely because of the Williams gathering/transportation agreement.

Recall that Chesapeake originally built out its own gathering system for its Barnett wells, which was held in an affiliate called Chesapeake Midstream. It spun those assets off into a separate, public entity called Access Midstream, but not before entering into a gathering agreement with its affiliate that provided very favorable terms to Chesapeake Midstream, including payment of a minimum volume commitment, which required Chesapeake to pay for a minimum volume of gas, even if it could not provide the gas. This gathering agreement greatly enhanced the market value of the spinoff, Access Midstream, which was later acquired by Williams. Since gas prices have remained low, Chesapeake has not been able to deliver its minimum volume commitment, increasing its gathering and transportation costs to the point where they exceeded the price it could get for its gas. In most cases, Chesapeake sought to pass along to its royalty owners their royalty share of those high gathering fees, resulting in numerous lawsuits by those royalty owners and large settlement payouts, further increasing Chesapeake’s cost of holding onto its Barnett wells.   Most recently Chesapeake and its partner Total agreed to pay 13,000 Barnett Shale royalty owners $52.5 million to settle their claims.

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