Williams Partners conditionally committed to a new gas gathering agreement with Saddle Barnett Resources, a private equity-backed company based in Dallas, which will take over Chesapeake Energy’s interests in the Barnett Shale. Williams Partners’ agreements with Chesapeake, including Chesapeake’s Minimum Volume Commitment (MVC) obligations in the Barnett Shale, will end at closing.
Chesapeake will pay Williams $334 million to get out of its pipeline contract, while Saddle will pay Williams $420 million as part of the deal.
The commitment is subject to the closing of the sale of Chesapeake’s Barnett assets to the producer. The new gas gathering agreement is expected to be executed in the third quarter when the Chesapeake sale is expected to close. Additionally, Williams Partners and Chesapeake plan to revise the Mid-Continent region contract, subject to the payment of $66 million by Chesapeake.
“These agreements will create a win-win commitment that results in both short- and long-term benefits for Williams Partners,” said Alan Armstrong, CEO of Williams Partners’ general partner. “As a midstream service provider, we best serve our shareholders and our upstream partners by supporting the economics of key production areas. These conditional agreements will help re-position the Barnett as a competitive basin for our new Barnett producer customer as current drilling and completion technologies are implemented.”
Williams Partners said on a pro-forma basis, such agreements would reduce the percentage of Williams Partners’ revenues derived from Chesapeake to 15% as measured by the first half of 2016 revenues and estimated MVCs. Additionally, such agreements, which will be entered into by subsidiaries of Williams Partners, should “reduce customer concentration risk and result in additional drilling and volumes in the basins.”
The $820 million of up-front cash that will be paid to Williams Partners upon execution of the agreements will be used to reduce revolver borrowings. The cash proceeds will be treated as deferred revenue for accounting purposes, with a majority to be amortized into income over the 3 ½-year period beginning in 2016 through June 30, 2019, which coincides with the original MVC term.
The deal with Chesapeake will give Saddle about 2,800 operated wells and about 215,000 acres of land in the area