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Williams (WMB), Chesapeake Energy Restructure Contracts

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Pipeline operator Williams Companies Inc.WMB has entered into an agreement with upstream operator Chesapeake EnergyCHK to restructure prior commitments to optimize production and achieve cost benefits. Shares of Williams gained about 1.4% and Chesapeake Energy shares increased 5.5% following the announcement.

The deals with Chesapeake were made though a subsidiary of Williams Partners L.P. WPZ . Williams Companies holds a 60% stake in Williams Partners.

This is a win-win deal for both the companies. The agreement ensures cost benefits for Chesapeake and steady revenue generation for Williams through longer, fixed-fee contracts.

Utica Update

The companies have signed a long-term, fee-based contract in the Utica shale, a modification of the existing deal between them. Chesapeake has increased the dedicated acreage by 50,000 acres to 190,000 acres for a contract period till 2035. Also, the contract type has been changed from cost-of-service to fixed-fee based and will be effective from Jan 2016. The deal includes minimum volume commitments as well. This is expected to provide gathering rate benefits of about 25 cents per mmbtu for Chesapeake.

Williams expects that this change in contract type will enable it to invest over $600 million in the Utica region over the next five years. The company intends to increase pipeline capacity and install additional infrastructure to support the growing production in the region.

Haynesville Update

Williams and Chesapeake consolidated the prior Springridge and Mansfield contracts into a single agreement. The new contract has been extended to 2035 and will have a fixed-fee structure, starting Jan 2016. Chesapeake is expected to benefit from reduced gathering rates. The company is likely to witness lower gathering rates of about 20 cents per million cubic feet (mcf) in 2016 and 30 cents per mcf in 2018 and beyond.

The contract also has minimum volume commitments and a drilling commitment to commission about 140 wells by 2017. These drilling ventures should substantially increase production in the Haynesville shale over the next two years.

These increased drilling and volume commitments should positively impact Williams' EBITDA in the near-term.

Zacks Rank and a Stock to Consider

Currently, both Williams Companies and Chesapeake Energy carry a Zacks Rank #3 (Hold). A better-ranked stock from the energy sector is Warren Resources Inc. WRES . The company sports a Zacks Rank #1 (Strong Buy).

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WILLIAMS COS (WMB): Free Stock Analysis Report

WILLIAMS PTR LP (WPZ): Free Stock Analysis Report

CHESAPEAKE ENGY (CHK): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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