Chesapeake Energy, once a leader, strikes deal to exit Barnett Shale

Chesapeake Energy agreed to give away its Barnett Shale holdings to a private-equity backed operator, exiting the birthplace of the shale revolution to escape almost $2 billion in onerous pipeline contracts.

Chesapeake will convey all interests in the Barnett region in North Texas to Saddle Operating, a Dallas-based company backed by First Reserve Corp., according to a statement. Quitting the gas fields will slash Chesapeake’s shipping and processing costs by $715 million between now and the end of 2017 and eliminate $1.9 billion in long-term pipeline agreements.

Battered by cratering fuel prices, credit downgrades and a shareholder revolt that cost the company founder his job, Chesapeake has been shedding fields, cutting jobs and exchanging stock for debt to revive the second-largest U.S. gas supplier. The company will receive no proceeds from Saddle for handing over the Barnett assets, which in late July were estimated to be worth as much as $1 billion.

The deal marks the end of an era in Fort Worth, where Chesapeake came into the Barnett in late 2004 and became a major player. The company helped lead a leasing frenzy and became a community benefactor before gas prices collapsed and it started to pull back.

Once ground zero for the U.S. shale boom, the Barnett Shale has faded in importance as explorers discovered new deposits such as the Marcellus and Utica shales that are closer to urban demand centers along the eastern seaboard. For Chesapeake, the Barnett is its second-smallest production region, accounting for 10 percent of the company’s output.

In recent months, Chesapeake has been settling a series of lawsuits filed by large landowners like the city of Fort Worth and smaller property owners, alleging it cheated them out of natural gas royalties.

Chesapeake shares (ticker: CHK) climbed as much as 6.3 percent to $5.10 in the minutes after the statement was released at 4:35 p.m. in New York. The shares have gained about 7 percent this year after losing 77 percent of their value in 2015.

Divesting one of the cornerstones of Chesapeake’s portfolio expands Chief Executive Officer Doug Lawler’s deconstruction of the shale empire amassed by his predecessor, the late Aubrey McClendon. At one point during McClendon’s quarter-century reign, Chesapeake controlled drilling rights across 16 million acres, an area equivalent to half of New York state. Lawler has sold gas fields, reduced the workforce and slashed spending to cope with a debt load that reached $10.4 billion at the end of the first quarter.

As recently as July 29, RBC Capital analyst Scott Hanold estimated Chesapeake could fetch $1 billion for its Barnett assets, an outcome he said would be viewed positively for its debt-reduction potential.

Chesapeake also agreed to pay pipeline operator Williams Partners a $334 million lump sum to terminate their Barnett gas gathering and shipping contract. Saddle is also paying an undisclosed sum to Williams as part of the deal, according to Chesapeake’s statement. Separately, Chesapeake will pay another $66 million to Williams to renegotiate pipeline contracts in Oklahoma.

The transactions mark “a major step in our continued progress to transform Chesapeake,” Lawler said in the statement.

This story was originally published August 10, 2016 at 4:29 PM with the headline "Chesapeake Energy, once a leader, strikes deal to exit Barnett Shale."