Chesapeake Energy – Back from the Brink?

Financials Natural Gas
March 17, 2017

The Midcontinent Express Pipeline (MEP) stretches through northern Texas and Louisiana into Mississippi, providing transportation away from the Barnett Shale. Perhaps unsurprisingly, the firm contract capacity on the pipe is entirely supply push, largely serving exploration and production companies. And most notably, among these is Chesapeake Energy Marketing. But is Chesapeake still the black sheep of the energy sector? 

At this time last year, Chesapeake was on the brink of bankruptcy. After years of questionable operations and dreadful finances, during this week’s earnings call Chesapeake’s executives seemed optimistic. One contributing factor to an improved cost structure involved Chesapeake unloading assets, including those in the Barnett Shale. In September 2016, Total S.A. announced that it would exercise its preemption right to acquire Chesapeake’s 75% interests in the jointly held Barnett Shale. Total E&P USA has owned the remaining 25% in the Barnett Assets since December 2009 and is now 100% owner and operator of the assets. 

In late February, MEP provided that it amended two existing negotiated rate firm transportation agreements between MEP and Chesapeake Energy Marketing, effective March 1, 2017. The amendments impact not only the rates charged, but also the quantities of gas shipped. To effectuate the restructuring, one contract for 214,500 Dth/day of capacity in Zone 1 has been terminated and another will be amended to reduce the contracted capacity from 487,000 Dth/day to 275,000 Dth/day in Zone 1. That means 426,500 Dth/day of firm capacity have rolled off. What does this mean for MEP? The terminated contract alone could result in a loss of over $53,000 per day (the capacity commitment multiplied by the negotiated reservation rate, assuming a 100% load factor) until a new shipper signs up.

Total’s Contracted Firm Transportation (2017/Q1)

Is Chesapeake seeking to renegotiate with other natural gas pipelines? Or does the Chesapeake management team’s recently stated shift from “defense to offense” suggest that these renegotiations may be the last we see? Chesapeake Energy Marketing has nearly 60 contracts alone and other Chesapeake affiliates have twice that many firm transportation contracts. Chesapeake’s activity in the Barnett only accounts for part of the supply it hopes to ship. Total has far fewer contracts than Chesapeake, with transportation commitments on six interstate pipes, two in the Midcontinent (MEP and Boardwalk’s Gulf Crossing). Will Total take over Chesapeake’s former commitments or will another major Barnett producer, such as Devon Energy, step up? If you’re signed up for our daily alerts, you’ll be the first to know.

Firm Transportation Contract Terms