Chesapeake Energy Corp. (NYSE: CHK) is paying almost $340 million to exit the Barnett Shale as the energy company attempts to clean up its finances.
The mentioned deal will aid Chesapeake in getting rid of financial commitments valued at close to $1.9 billion it had to Williams Partners LP, which is a pipeline firm that moved to market Chesapeake’s natural gas obtained from the Barnett. According to Chesapeake, it was on the hook to give a payment of $170 million to Williams Partners this 2016 and $230 million for the following year.
Instead, the energy producer has agreed to pay $334 million in cash to Williams in order to get out of the pipeline contract in Barnett Shale in Texas. Additionally, the company will move its interests in the Barnett to private equity-backed firm Saddle Barnett Resources LLC.
Furthermore, Saddle Barnett Resources will pay $420 million as part of the mentioned deal, wherein it will take hold of 215,000 acres of land and 2,800 operated wells in the region.
The Chief Executive of Chesapeake Doug Lawler stated that the energy company has not greatly invested in the acreage for some years, so selling it boosts the finances of Chesapeake while giving another firm the chance to drill in the area.
The Chesapeake Chief Executive said, “We are essentially divesting an asset that is a very significant cash-flow drain on the company every single year.”
“This is just another step in strengthening Chesapeake,” he further added.
Williams stated that it anticipates to obtain upfront cash payments worth around $820 million, and also noted that the transactions would lower customer concentration risk.
“These agreements will create a win-win commitment that results in both short- and long-term benefits for Williams,” stated Williams Partners’ general partner CEO Alan Armstrong.
Saddle has not yet given its comment regarding the matter.
Moreover, Chesapeake Energy will also give Williams a payment of $66 million after renegotiating another gas-transportation contract the two have for transferring gas from the Oklahoma fields.
Before, the Barnett Shale in Texas was a productive gas field located close to Fort Worth in North Texas. However, drilling of new wells in the area declined in recent years due to the depressed natural gas environment. Based on a Baker Hughes data, there are presently four rigs drilling in Barnett Shale, in comparison with the 177 rigs that are currently drilling in the Permian Basin.
This three-way deal involving Chesapeake Energy is not typical, but the energy corporation has been recently strained by the minimum volume commitments on pipelines that require Chesapeake to move a great volume of gas or pay a penalty charge. The company has to withdraw from these commitments and pointed out that the agreement will ramp up its operating income by around $200 million to 300 million every year through the year 2019.
As of 10:05 AM GMT -4 on August 11, the CHK stock is changing hands at 4.92, up by 2.50 percent or 0.12 points.