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Chesapeake Energy Incinerates $1.9 Billion In Midstream Liabilities

Summary

Chesapeake Energy Corporation arguably spent far too much on its 2015 drilling activities, largely due to its massive midstream liabilities in the event its production base declines.

Chesapeake is effectively trading its entire position in the Barnett play and $334 million in cash to shed $1.9 billion of its future midstream payments related to the asset.

This deal will increase Chesapeake's annual income generation by $200 million - $300 million from 2016 to 2019 as its GT&P expenses fall dramatically lower.

Due to massive MVC shortfall fees, Chesapeake will also see its PV-10 value increase by $550 million by shedding its Barnett operations and associated problems.

The embattled upstream player is doing whatever it can to be in a position to pay off its 2017 maturities, and this is a step in the right direction.

Chesapeake Energy Corporation (NYSE:CHK) produced 679,200 BOE/d on average during 2015 as the company spent far too much money developing its extensive acreage position. The embattled upstream firm spent ~$3.65 billion on capital expenditures last year, including $3 billion on drilling & completion activities, $231 million on acquisition and geological programs, and $424 million on capitalized interest.

For $3 billion, Chesapeake Energy ran an average of 28 rigs to spud 499 gross wells, complete 547 gross wells, and turn 650 gross wells online, resulting in high single-digit production growth when adjusting for asset sales. That was growth Chesapeake didn't need as it ate up its entire cash pile, creating colossal headaches for the company during a time when it really really needed liquidity.

To get a glimpse of the impact of Chesapeake's outspend look at the carnage dealt to its balance sheet during the worst of the downturn. At the end of 2014, Chesapeake Energy Corporation had $7.47 billion in current assets (including $4.11 billion in cash) versus $5.86 billion in current liabilities and $11.15 billion in long term debt. By the end of June 2016, Chesapeake had $1.2 billion in current assets (includes a whopping $4 million in cash) against $3.78 billion in current liabilities (includes $1.03 billion in debt maturities coming up) and $8.62 billion in long term debt.

Keep in mind Chesapeake Energy's debt reduction was aided by trading equity for debt, purchasing debt on the open market at steep discounts, and through its debt swap program. Even when factoring those maneuvers in, the reduction in Chesapeake Energy's short and long term liabilities ($4.61 billion) was exceed by the cut in its current assets ($6.27 billion) by $1.66 billion, and that comes after a series of asset sales worth over $1 billion as well. Considering Chesapeake's upcoming maturities, some of the cash spent on its 2015 capex budget would have been better directed elsewhere.

On a positive note, Chesapeake Energy was able to bring its volumetric production payment liabilities down from $5.48 billion at the end of 2014 to $1.95 billion at the end of Q2 2016. Below is a look at Chesapeake Energy Corporation's balance sheet streamlining process.

Source: Chesapeake Energy Corporation Q4 2014 10-K

Source: Chesapeake Energy Corporation Q2 2016 10-Q

What has kept Chesapeake Energy going was the decision by its creditors to keep its $4 billion revolving credit line's borrowing base as Chesapeake pledged most of its assets to secure the facility. Chesapeake's creditors pushed back the next borrowing base redetermination to June 15, 2017, giving the...


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