Williams Has Plan to Bring Drilling Back to Cradle of Shale

  • Williams ties pipeline contract to U.S. gas futures prices
  • Company says model will revive gas exploration in Barnett

Chesapeake Energy Exits Barnett Shale

Williams Partners LP has a plan to revive drilling in the birthplace of the U.S. shale boom.

The Tulsa, Oklahoma-based pipeline giant has drafted a service contract with a private equity-backed company that’s taking over Chesapeake Energy Corp.’s assets in the Barnett shale formation of Texas. It says the pact will bring back natural gas exploration to the once-prolific play and make money-losing wells profitable again. The key: tying the monthly fees it charges for gathering and delivering fuel to the price of gas traded on the New York Mercantile Exchange.

“The conditional gas gathering agreement will bring drilling back to the Barnett Shale and return wells determined to be uneconomic under earlier gathering rates,” the company said in a statement late Wednesday. Its chief executive officer, Alan Armstrong, described the agreement as “a win-win commitment.”

Related: Chesapeake Energy to Exit Barnett, Birthplace of Shale Boom

Williams is rewriting contracts following Chesapeake’s decision on Wednesday to give its Barnett holdings to First Reserve Corp.-backed Saddle Operating LLC. Quitting the gas fields will eliminate $1.9 billion in long-term pipeline agreements for Chesapeake, based on a statement from the company. As part of its new Barnett agreements, Williams said it will receive $754 million in cash that’ll be used to pay down debt. The pipeline operator will get another $66 million from Chesapeake related to a revised contract in the U.S. Midcontinent region.

Volume Growth

“Both basins now have a better chance of seeing volume growth in coming years,” Brandon Blossman, an analyst at Tudor Pickering Holt & Co., said in a note.

Williams Partners rose 0.5 percent to $35.25 at 10:04 a.m. in New York trading. Williams Cos., the general partner, was up 1.6 percent to $25.80.

Once ground zero for the U.S. shale boom, the Barnett shale in North Texas faded in importance as natural gas prices collapsed and energy producers discovered new plays such as the Marcellus and Utica shales closer to demand markets along the eastern seaboard. As of last week, there were no rigs drilling for gas in the Barnett, according to Baker Hughes Inc. Williams Partners was meanwhile responsible for gathering about half of Chesapeake’s output there, based on a Bloomberg Intelligence report issued March 10.

Even then, Bloomberg Intelligence analysts Michael Kay and Gurpal Dosanjh said, Chesapeake had been “struggling to meet minimum volume obligations” with Williams.

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