Chesapeake Energy Corp. (CHK) has turned a deal in the Haynesville and Utica plays that lowers its midstream contract costs in exchange for minimum volumes and dedication of 50,000 net Utica acres to Williams Cos. Inc. (WMB).

The deal will switch Chesapeake to fixed-fee agreements in the shales in January 2016. The company expects shortfall payments for existing 2016 and 2017 minimum volume commitments (MVC) to be wiped out as a result.

Williams will use the additional land to build more pipelines in the Utica.

“Unexpected and positive news for Chesapeake,” said David Kistler, managing director, Simmons & Co. International. The new gathering agreement with Williams “should result in increased cash flow due to improved gas differentials and removal of minimum volume commitments in 2016 and beyond.”

In the Utica and Haynesville, Chesapeake will move to fixed-fee agreements that could add $200 million to the company’s EBITDA. Increased earnings will help, though not cure, Chesapeake’s debt load. The company’s leverage will swell in 2017.

The company is targeting a 2015 ending cash balance of about $1.5 billion and a $4 billion undrawn credit facility.

Chesapeake’s restructured contract will require increased Haynesville production. The company said in a Sept. 8 presentation that estimated ultimate recoveries (EUR) have increased by more than 25% in the Haynesville.

“The company believes it can meet this commitment with about one rig per year,” Kistler said.

Chesapeake plans to bring 140 wells online in the next two years—a commitment that will cost $1.1 billion in gross capex, according to estimates by Tudor, Pickering, Holt & Co.

The net effect will be accelerated gas growth in the Haynesville as Chesapeake reduces operating expense in the Haynesville and Utica by as much as $175 million, Tudor, Pickering, Holt said.

In the Utica, Chesapeake will increase the land dedicated to Williams to 190,000 net acres from 140,000 and will be subject to a new MVC of 250 million cubic feet equivalent per day (cfe/d) beginning in mid-2017, Kistler said.

Williams and Chesapeake have executed a long-term, fee-based contract that increases exposure to the dry gas zone of the Utica, where Chesapeake and other operators are targeting production growth, Williams said Sept. 8.

The agreement extends the length of Chesapeake’s acreage dedication to 2035 in a strategic area adjacent to Williams’ existing assets.

Williams said it expects to invest more than $600 million over five years to install more than 200 miles of pipeline and related facilities with up to 800 million cubic feet per day (MMcf/d) of capacity.

“This demonstrates our commitment to working with Chesapeake to align our interests on mutual growth while sustaining the financial support of our investments,” said Alan Armstrong, Williams CEO. “These new fee structures are designed to promote production in the best locations across a wider footprint in these great basins, which improves the economics on both the drilling and midstream side.”

Tudor, Pickering, Holt saw the deal as a slight negative for Williams, with near-term cash flows reduced. The swap of cost of service agreements to fixed fees suggests “lower revenues today in exchange for higher revenues in the out years as volumes ramp,” the firm said.

Doug Lawler, Chesapeake’s CEO, said the company has created operating efficiencies across its entire portfolio in the past two years, resulting in lower costs and higher production and recovery rates.

“Our improved performance in the Haynesville is the primary reason that we were able to negotiate new gathering rates,” Lawler said. “These agreements will result in lower gathering rates and lower differentials, making these assets even more competitive within our portfolio.”

Chesapeake has noted that despite cutting capital spending by $500 million, it will beat original production estimates by about 5%.

Kistler said Chesapeake’s Haynesville gas-gathering fees will be reduced by $170 million annually as MVCs are met through consolidation of its Haynesville and Utica gathering contracts and new wells.

“Chesapeake estimates these combined actions will result in a $200 million annual uplift in EBITDA,” Kistler said. “While certainly a positive, CHK's leverage still remains a concern.”

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.