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 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
|Adjusted Production Growth(a)||(2%) to 3%|
|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|
Shares of Chesapeake Energy are up over 5% to $5.07 in after-hours trading. CHK has a 1-year high of $9.55 and a 1-year low of $1.50. The stock’s 50-day moving average is $4.70 and its 200-day moving average is $4.32.
On the ratings front, Chesapeake has been the subject of a number of recent research reports. In a report released today, Deutsche Bank analyst Josh Silverstein maintained a Hold rating on CHK, with a price target of $5, which represents a slight upside potential from current levels. Separately, on August 8, Jefferies Co.’s Jon Wolff maintained a Sell rating on the stock and has a price target of $4.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Josh Silverstein and Jon Wolff have a total average return of 28.7% and 1.1% respectively. Silverstein has a success rate of 80.8% and is ranked #9 out of 4110 analysts, while Wolff has a success rate of 51.7% and is ranked #1841.
Overall, 3 research analysts have rated the stock with a Sell rating, 5 research analysts have assigned a Hold rating and 2 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $5.00 which is 4.2% above where the stock opened today.
Chesapeake Energy Corp. is a natural gas and oil exploration and production company, which is engaged in the exploration, development and acquisition of properties for the production of natural gas, oil and natural gas liquids from underground reservoirs. It also provides substantial marketing, drilling and other oilfield services. The company’s natural gas resource plays are the Haynesville/Bossier Shales in northwestern Louisiana and East Texas; the Marcellus Shale in the northern Appalachian Basin of West Virginia and Pennsylvania; and the Barnett Shale in the Fort Worth Basin of north-central Texas. It operates through the following segments: Exploration and Production; Natural Gas, Oil and NGL Marketing, Gathering and Compression; and Oilfield Services. The Exploration and Production segment is engaged in finding and producing natural gas, oil and natural gas liquids. The Natural Gas, Oil and NGL Marketing, Gathering and Compression segment is engaged in marketing, gathering and compression of natural gas, oil and natural gas liquids primarily from Chesapeake-operated wells. The Oilfield Services segment is engaged in contract drilling, oilfield trucking, oilfield rentals, hydraulic fracturing and other oilfield services operations for both Chesapeake-operated wells and wells operated by third parties.