The FINANCIAL — Chesapeake Energy Corporation on September 8 announced it has finalized new gas gathering agreements with the Williams Companies in its Haynesville Shale operating area located in northwest Louisiana and its dry gas Utica Shale operating area located in eastern Ohio. Key attributes include:
Significant improvement in per unit gathering rates established in two major growth assets beginning in 2016, leading to enhanced volume growth
Combination of gathering system agreements allows Chesapeake to satisfy minimum volume commitment (MVC) obligations in Haynesville Shale, increasing realized pricing per mcf of gas
Aligned strategic interests improve drilling economics, operational efficiency and midstream asset utilization
Doug Lawler, Chesapeake’s Chief Executive Officer, commented, “Chesapeake’s operating efficiencies across the entire portfolio over the last two years have resulted in lower costs, higher production rates and higher recovery rates. Our improved performance in the Haynesville is the primary reason that we were able to negotiate new gathering rates. These agreements will result in lower gathering rates and lower differentials, making these assets even more competitive within our portfolio. In this capital constrained environment, we will benefit from these higher-return assets and expect to allocate incremental capital to these areas, while enabling Williams to more fully utilize its gathering systems. The commercial solution these new contracts provide will only enhance what we have already achieved with our operating performance. This is truly a win-win for both companies, and we continue to work with Williams to further enhance the value of our respective assets.”
Chesapeake will move to a fixed-fee agreement in the Haynesville Shale beginning in January 2016. Gas gathering fees in the Haynesville will be reduced on a unit basis, and the existing minimum volume obligations are expected to be met with the consolidation of two gathering systems and a projected increase in Haynesville area volumes. Inclusive of previously expected MVC shortfall payments, the company’s gas production is expected to see improved gathering rates of approximately $0.20 per mcf in 2016 and 2017 and approximately $0.30 per mcf in 2018 and beyond. As part of the transaction, and consistent with Chesapeake’s current operating plans, the company committed to turn 140 equivalent wells online before the end of 2017. This commitment is projected to result in significant production growth in the Haynesville Shale asset over the next two years, thus also increasing Williams’ revenue from the area, according to Chesapeake Energy.
Chesapeake will also move to a fixed-fee agreement in the dry gas Utica Shale, beginning in January 2016, and is expected to see an estimated gathering rate reduction of approximately $0.25 per mmbtu. As part of the transaction, Chesapeake is dedicating an additional 50,000 net acres to Williams and will be subject to a new minimum volume commitment of 250 mmbtu per day beginning in mid-2017. The company expects to meet this commitment with approximately one rig per year.
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