Chesapeake Energy exits the Barnett Shale with a whimper

Chesapeake Energy, once the proud face of the shale gas drilling boom in North Texas, is transferring its 215,000 acres of natural gas assets in the Barnett Shale to a Dallas company backed by a global private equity firm.

Chesapeake is not receiving any cash for the assets — which include about 2,800 operating wells — in turning it over to Saddle Barnett Resources LLC, a company backed by First Reserve, an equity and investment firm focused solely on energy assets, Chesapeake announced Wednesday.

But by leaving the Barnett, which Chesapeake first entered in 2004 and where it became a major player, the company hopes to boost its operating income between $200 million and $300 million a year through 2019. And the company said it will eliminate about $1.9 billion of future midstream and downstream commitments.

As part of the deal, Chesapeake has agreed to pay Williams Partners roughly $334 million to get out of a pipeline deal to transport the Barnett Shale natural gas. Saddle Barnett Resources will pay $420 million to Williams to cancel the deal. Chesapeake said the transfer, while subject to closing conditions, will hopefully close in the third quarter of 2016.

“Today's announcements mark a major step in our continued progress to transform Chesapeake,” said Chesapeake Chief Executive Officer Doug Lawler in a prepared statement. Lawler, who took over Chesapeake from its controverial former CEO, the late Aubrey McClendon, has been tasked by the board to turn around the once-proud energy company.

“The transformation of Chesapeake into a top-tier E&P company continues, and these transactions, along with our previously announced balance sheet and liquidity improvements, provide significant forward progress. We believe there are more positive moves to come,” Lawler said.

Rumors have been swirling for months about a possible sale of the company’s North Texas assets. During an earnings call earlier this month, Lawler called the Barnett “a great asset” but said the company was not directing capital into the field for drilling in the near-term.

Many observers also felt that Chesapaeake was working to clear up its problems in the Barnett Shale by settling hundreds of lawsuits filed by property owners accusing the company of cheating it out of royalty payments, making way for a sale.

In one of those settlements, Chesapeake agreed to pay about $51 million to more than 13,000 clients represented by two Fort Worth law firms. It also has been reaching out-of-court settlements on what are called high value lawsuits brought by large landowners and government institutions like the city of Fort Worth and the Fort Worth school district.

Williams company officials called the transaction a good deal for everyone involved. The company will get an additional $66 million from Chesapeake to renegotiate its existing gas gathering agreement in Oklahoma, leading to a 36 percent reduction in operating costs to Chesapeake.

“These agreements will create a win-win commitment that results in both short- and long-term benefits for Williams Partners,” said Alan Armstrong, chief executive officer of the company’s general partner, in a prepared statement. “Chesapeake is a great customer and an efficient operator; we look forward to a continued st rong relationship as its leadership team directs the company’s focus on its most productive areas.”

The deal marks the end of an era in Fort Worth.

Under McClendon’s guidance, Chesapeake became an energy behomoth based largely on his devotion to modern hydraulic fracturing — or fracking —developed in the Barnett Shale. While other companies initially had second thoughts about the process, McClendon embraced it, along with horizontal drilling in an urban setting. His hard-charging personality turned Chesapeake into a company valued at $35.6 billion in 2008.

Under McClendon, Chesapeake cast a big shadow in North Texas, leading a leasing frenzy last decade, giving millions to charities and supporting events such as the annual Parade of Lights Christmas parade in Fort Worth. The company at one time owned the Pier 1 Imports office tower near downtown.

What Chesapeake was willing to pay for natural gas leases sent land prices soaring and made landowners rich.

But just as quickly, the company’s fortunes turned sour when natural gas prices collapsed. The Barnett gradually became a smaller piece of Chesapeake’s business, with the field today producing approximately 62,000 boe (barrels of oil equivalent) per day. McClendon was forced out in a 2014 shareholder revolt, and died in a fiery auto crash in Oklahoma City earlier this year.

In an email to employees issued late Wednesday, Lawler said the Barnett Shale transaction by no means is a reflection on the dedicated and hard-working employees supporting it. Chesapeake still has about 170 employees working in the Barnett Shale, and Lawler said they hopefully will transition to Saddle Barnett Resources.

“While the Barnett has great potential, it simply could not compete for capital in a portfolio with the depth and breadth of Chesapeake’s at current commodity prices,” Lawler wrote in the email to employees.

This report contains material from Bloomberg News and the Star-Telegram archives.

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This story was originally published August 10, 2016 at 7:47 PM with the headline "Chesapeake Energy exits the Barnett Shale with a whimper."