John McFarland at Oil and Gas Lawyer Blog has a thought provoking post about Chesapeake's trade to Saddle Barnett Resources, LLC in the Barnett Shale. It is incredible that Chesapeake is essentially trading what used to be it's most prized asset while paying $334 million to extricate itself from an onerous gas purchasing agreement.
It should not be lost on the shareholders that the gas purchasing agreements were an accounting trick that Chesapeake negotiated with itself before the midstream company spun off as Access Energy. To quote from McFarland's piece,
"Recall that Chesapeake originally built out its own gathering system for its Barnett wells, which was held in an affiliate called Chesapeake Midstream. It spun those assets off into a separate, public entity called Access Midstream, but not before entering into a gathering agreement with its affiliate that provided very favorable terms to Chesapeake Midstream, including payment of a minimum volume commitment, which required Chesapeake to pay for a minimum volume of gas, even if it could not provide the gas. This gathering agreement greatly enhanced the market value of the spinoff, Access Midstream, which was later acquired by Williams. Since gas prices have remained low, Chesapeake has not been able to deliver its minimum volume commitment, increasing its gathering and transportation costs to the point where they exceeded the price it could get for its gas."
If that's not Funny Money, I don't know what is. Another case of management's incentives not being aligned with investors and most importantly a board consisting of know-nothing yes men who found their rubber stamp at the 11th hour.
More to follow,