Chesapeake Energy Corporation Agrees To Exit Barnett Shale, Asset To Be Acquired And Operated By First Reserve, Announces Renegotiation Of Mid-Continent Gas Gathering Agreement And Provides Preliminary 2017 Guidance
Chesapeake Agrees to Terminate Gas Gathering and Downstream Agreements in the Barnett;
Mid-Continent Gas Gathering Fees Reduced by More Than 35%;
Chesapeake to Make $400 Million Payment to Williams Partners;
Closes on Monetization of Gas Supply Contract
PR Newswire
OKLAHOMA CITY

OKLAHOMA CITY, Aug. 10, 2016 /PRNewswire/ -- Chesapeake Energy Corporation (NYSE:CHK) today 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.

 

Headquartered in Oklahoma City, Chesapeake Energy Corporation's (NYSE: CHK) operations are focused on discovering and developing its large and geographically diverse resource base of unconventional oil and natural gas assets onshore in the United States.  The company also owns oil and natural gas marketing and natural gas gathering and compression businesses.  Further information is available at www.chk.com where Chesapeake routinely posts announcements, updates, events, investor information, presentations and news releases.

This news release includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements other than statements of historical fact, including the consummation and expected benefits of transactions. They include statements that give our current expectations or forecasts of future events, production and well connection forecasts, estimates of operating costs, anticipated capital and operational efficiencies, planned development drilling and expected drilling cost reductions, general and administrative expenses, capital expenditures, the timing of anticipated noncore asset sales and proceeds to be received therefrom, projected cash flow and liquidity, our ability to enhance our cash flow and financial flexibility, plans and objectives for future operations (including our ability to optimize base production and execute gas gathering agreements), the ability of our employees, portfolio strength and operational leadership to create long-term value, and the assumptions on which such statements are based. Although we believe the expectations and forecasts reflected in the forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate or changed assumptions or by known or unknown risks and uncertainties.

Factors that could cause actual results to differ materially from expected results include those described under "Risk Factors" in Item 1A of our annual report on Form 10-K and any updates to those factors set forth in Chesapeake's subsequent quarterly reports on Form 10-Q or current reports on Form 8-K (available at http://www.chk.com/investors/sec-filings).  These risk factors include the volatility of oil, natural gas and NGL prices; write-downs of our oil and natural gas carrying values due to declines in prices; the limitations our level of indebtedness may have on our financial flexibility; the availability of operating cash flow and other funds to finance reserve replacement costs; our ability to replace reserves and sustain production; uncertainties inherent in estimating quantities of oil, natural gas and NGL reserves and projecting future rates of production and the amount and timing of development expenditures; our ability to generate profits or achieve targeted results in drilling and well operations; leasehold terms expiring before production can be established; commodity derivative activities resulting in lower prices realized on oil, natural gas and NGL sales; the need to secure derivative liabilities and the inability of counterparties to satisfy their obligations; adverse developments or losses from pending or future litigation and regulatory proceedings, including royalty claims; charges incurred in response to market conditions and in connection with actions to reduce financial leverage and complexity; drilling and operating risks and resulting liabilities; effects of environmental protection laws and regulation on our business; legislative and regulatory initiatives further regulating hydraulic fracturing; our need to secure adequate supplies of water for our drilling operations and to dispose of or recycle the water used; federal and state tax proposals affecting our industry; potential OTC derivatives regulation limiting our ability to hedge against commodity price fluctuations; impacts of potential legislative and regulatory actions addressing climate change; competition in the oil and gas exploration and production industry; a deterioration in general economic, business or industry conditions; negative public perceptions of our industry; limited control over properties we do not operate; pipeline and gathering system capacity constraints and transportation interruptions; cyber attacks adversely impacting our operations; and interruption in operations at our headquarters due to a catastrophic event.

The transactions may not be completed in the time frame anticipated or at all. In addition, these transactions are subject to closing conditions, including the consummation of the related transactions and receipt of third-party consents, and may not be completed in the time frame anticipated or at all. We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date of this news release, and we undertake no obligation to update any of the information provided in this release or the accompanying Outlook, except as required by applicable law.

NON-GAAP FINANCIAL MEASURES

PV-10 is a non-GAAP metric used by the industry, investors and analysts to estimate the present value, discounted at 10% per annum, of estimated future cash flows of the company's estimated proved reserves before income tax and asset retirement obligations. The standardized measure of discounted future net cash flows is the most directly comparable GAAP measure. Management believes that PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and natural gas companies. We are unable to reconcile PV-10 to the standardized measure because it is not practical to project taxes for future periods. PV-10 should not be considered as an alternative to the standardized measure of discounted future net cash flows as computed under GAAP.

INVESTOR CONTACT:

MEDIA CONTACT:          

CHESAPEAKE ENERGY CORPORATION

Brad Sylvester, CFA

(405) 935-8870

ir@chk.com

Gordon Pennoyer
(405) 935-8878
media@chk.com

6100 North Western Avenue
P.O. Box 18496
Oklahoma City, OK 73154

 

SOURCE Chesapeake Energy Corporation