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Why Chesapeake Energy Decided to Exit the Barnett Shale

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Sep. 1 2016, Updated 10:04 a.m. ET

CHK exits the Barnett Shale

On August 10, 2016, Chesapeake Energy (CHK) announced its intention to exit the Barnett Shale. This added to the company’s growing list of endeavors to bring down its debt.

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Details of the deal

CHK plans to sell its interest in the Barnett Shale to Saddle Barnett Resources, which is backed by First Reserve, a private equity company. The deal will be instrumental in eliminating financial commitments amounting to ~$1.9 billion to Williams Partners (WPZ), which marketed CHK’s Barnett natural gas production.

CHK has agreed to pay Williams a sum of $334 million to exit the pipeline contract with it, and Saddle Resources will pay WPZ an additional sum of $420 million. Additionally, CHK announced that it would pay WPZ $66 million following renegotiations of their gas gathering and transportation agreements in the Mid-Continent region.

How CHK benefits

CHK noted that this deal would increase its operating income by ~$200 million–$300 million per year from 2016 to 2019. Additionally, the transaction would reduce its remaining 2016 gathering, processing, and transportation costs by ~$250 million. 2017’s projected gathering, processing, and transportation costs are expected to fall by $465 million.

CHK’s updated 2016 gathering, production, and transportation cost guidance is in the range of $7.60–$8.10 per boe (barrel of oil equivalent). This represents a fall of ~8.5% at the midpoint compared to the company’s previous guidance of $8.58 per boe, and a fall of 8.2% compared to its 2015 gathering, production, and transportation costs. CHK’s 2017 gathering, production, and transportation cost guidance range is $7.15–$7.65 per boe.

CHK has been aggressively focusing on asset sales to boost its balance sheet. In May 2016, the company agreed to sell 42,000 net acres in the Anadarko Basin STACK play to Newfield Exploration (NFX). CHK and NFX make up ~2.4% of the iShares U.S. Oil & Gas Exploration & Production ETF (IEO).

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