Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Chesapeake Energy is bailing on the Barnett, where the shale boom was born. The price for those 215,000 acres in East Texas? Zero.

Well, not quite.

Yes, Chesapeake has agreed to "convey" -- as it put it so delicately in Wednesday evening's press release -- its Barnett assets to a buyer backed by private equity firm First Reserve, rather than sell them in the conventional sense.

But that doesn't mean it gets nothing out of it. Chesapeake's strategy these days centers on dealing with the hangover from years of overspending and taking on too many liabilities. In a recent report, analysts at Sanford C. Bernstein estimated the average natural gas price needed for a Barnett well to break even, even before factoring in gathering and transportation costs, at $3.82 per million British thermal units. The current benchmark gas price is $2.56. Exiting will relieve Chesapeake of persistent annual losses there.

There's more. For an upfront payment of $400 million -- offset in part by selling off a natural gas supply contract for $146 million -- Chesapeake will get out of long-term pipeline commitments signed in better times with units of Williams Cos totaling $1.9 billion. While Chesapeake carries almost $13 billion of net debt and preferreds already, its commitments for gathering, processing and transportation to pipeline operators and the like added up to another $13.5 billion at the end of June.

Coming Down The Pipe
Almost $7 billion of pipeline commitments fall due for Chesapeake by the end of 2020
Source: Company filings

Crucially, a significant chunk of the pipeline deal is front-loaded: Net-net, Chesapeake saves almost $500 million between now and the end of 2017. For its part, Williams transfers to a more stable customer.

The added bonus is that the whole set of deals announced Wednesday will add about $550 million to the net present value of Chesapeake's reserves, the company says. As I explained here, boosting the size of that collateral is the number one priority for a company this dependent on the kindness of its creditors. Shareholders like it too: The stock was up 6 percent in after-hours trading.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net