Chesapeake Signs Deal to Cut Transportation Costs

OKLAHOMA CITY – Chesapeake Energy Corp. said Tuesday it has signed new gas gathering agreements with the Williams Companies in its Utica shale holdings in eastern Ohio and its position in the Haynesville shale in Louisiana.

The deal, announced before the start of trading will result in lower transportation costs in exchange for greater volumes that Williams can gather.

At midday, shares of Chesapeake were up 6%.

“These agreements will result in lower gathering rates and lower differentials, making these assets even more competitive within our portfolio,” Chesapeake CEO Doug Lawler said in a statement. “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.”

Chesapeake will 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, the company said.

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 million British thermal units per day beginning in mid-2017. The company expects to meet this commitment with approximately one rig per year.

Chesapeake will also 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 to be met with the consolidation of two gathering systems and a projected increase in Haynesville area volumes.

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.

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