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Chesapeake Announces Barnett Region Asset Sale

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Chesapeake Energy’s Barnett asset sale

Chesapeake Energy (CHK), one of the largest US drilling companies, announced the sale of its assets in the Barnett Shale on August 10, 2016. The assets are being sold to a private company backed by First Reserve, an energy-focused private equity company.

Williams Partners (WPZ), which provides gas gathering services to CHK in the Barnett region, has “conditionally committed to execute a new gas gathering agreement” with the new producer customer. The existing agreement, including MVC (minimum volume commitment) obligations, would be terminated following the close of the above transaction. A shipper is required make shortfall payments in case throughput volumes fall below the MVC.

Williams Partners expects to receive $754 million in cash up front on the MVC cancellation. The partnership is also expecting $66 million from another contract revision with Chesapeake in the Mid-Continent region. A total of $820 million will be used to reduce WPZ’s revolver borrowing.

Williams Partners’ counterparty exposure is expected to fall following the completion of this transaction, because the share of its revenue derived from Chesapeake will fall to ~15%. We’ll look at the other impacts of this transaction in the next article.

According to the press release, “The cash proceeds will be treated as deferred revenue for accounting purposes, with a majority to be amortized into income over the 3 ½-year period beginning in 2016 through June 30, 2019, which coincides with the original MVC term.”

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Stock price reaction

Williams Partners’ and Williams Companies’ (WMB) shares rallied by 4.1% and 2.1%, respectively, after the Market closed following the announcement. CHK’s stock also reacted positively to the announcement the next day.

WPZ has returned 25.9% since the beginning of 2016. At the same time, the Alerian MLP ETF (AMLP), which comprises 26 midstream energy MLPs, has returned 4.2%. Its peers Energy Transfer Partners (ETP) and EnLink Midstream Partners (ENLK) have returned 22.7% and 2.7%, respectively, during the same timeframe.

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