Chesapeake Energy Corporation has entered into an agreement to sell its interests in the Utica Shale operating area located in Ohio for approximately $2.0 billion to Encino Acquisition Partners, a private oil and gas company headquartered in Houston, Texas. The transaction, which is subject to certain customary closing conditions, including the receipt of third-party consents, is expected to close in the fourth quarter of 2018. The purchase price includes a $100 million contingent payment based on future natural gas prices and is subject to adjustment for certain customary items at or following closing. Chesapeake intends to use the anticipated net proceeds to reduce debt.

Transaction highlights:

• $1.9 billion initial closing proceeds to be applied toward reduction of debt; up to $150 million reduction in annual cash interest expense
• $450 million reduction of projected 2019 gathering, processing and transportation expense, for an expected improvement of approximately $0.50 per barrel of oil equivalent (boe); eliminates all future Utica Shale midstream and downstream commitments of approximately $2.4 billion
• Improves EBITDA by approximately $0.70 per boe in 2019, due to lower cash operating costs and improved oil differentials, assuming flat 2018 commodity prices
• Expect organic replacement of divested EBITDA within one year, primarily driven by oil volume growth from the Powder River Basin (PRB)
• 2019 oil production expected to grow approximately 10% from 2018, adjusted for asset sales, with additional oil growth anticipated for 2020
• 2018 Outlook updated to reflect business performance year to date and impact of pending transaction

Doug Lawler, Chesapeake's President and Chief Executive Officer, commented, 
"Today's announcement makes Chesapeake a stronger and more competitive company. By divesting our position in the Utica and using the proceeds for debt reduction, we will not only significantly improve the health of our balance sheet, but we will also accelerate progress toward our strategic goals of reducing our debt, improving our margins and reaching sustainable free cash flow neutrality.

"Moving forward, we will continue to target our long-term goal of improving our leverage ratio to two times net debt to EBITDA. We remain committed to generating higher returns on invested capital by directing our investments to the highest-return opportunities across our five diverse, multi-zone basins. With the addition of a fifth rig earlier this month, we believe our position in the PRB will lead our organic oil volume growth, driving further leverage reduction, enhancing our margins and improving our free cash flow. As a result, we anticipate growing overall oil production approximately 10% year over year in 2019, adjusted for asset sales, with additional growth forecasted for 2020. The underlying strength of our portfolio, along with the overall price advantages we currently realize from our remaining oil assets, position Chesapeake to replace the divested EBITDA within a year following the close of the transaction.

"We are pleased with our updated 2018 Outlook reflecting our strong performance year to date, as well as adjustments assuming a 2018 fourth quarter close of the Utica sale. While we are reducing our full-year natural gas and NGL volumes accordingly, we are raising our oil guidance by 500,000 barrels. We have also reflected the realized pricing and cost structure adjustments, resulting in a forecasted EBITDA level that is unchanged from our previous guidance that included the Utica for the full year. We are raising our capital expenditures slightly to reflect an accelerated capital program in the Utica on behalf of the buyer pre-closing, the cost of which will be settled in the post-closing adjustments, and increased drilling and completions activity in the PRB. Finally, we expect to seek a renewal and extension of our revolving credit facility in the 2018 third quarter. Pro forma collateral available for the new borrowing base, excluding the Utica assets, is expected to exceed $7 billion.

"Our unwavering commitment to reducing our debt, maintaining capital discipline, removing legacy complexities and simplifying our business has made Chesapeake more competitive. Over the past five years, we have fundamentally transformed all aspects of our company, eliminating more than $12 billion in total leverage, reducing our total midstream and downstream commitments by more than $10 billion, erasing more than $1 billion in annual cash costs, and removing operating leases, subsidiary preferred equity, four minimum volume commitments and nine volumetric production payments. We expect this transaction to improve our margins, result in greater capital efficiency and significantly reduce our outstanding debt. The depth of our assets, strength of our people and improvements highlighted here position Chesapeake to deliver increasing returns directly to our equity holders."  

As part of the transaction, Chesapeake has agreed to sell all of its acreage in Ohio, of which approximately 320,000 net acres are in the commercial window for Utica Shale development, 920 operated and non-operated wells which produced an average of approximately 107,000 boe per day (67% natural gas, 24% natural gas liquids and 9% oil) in 2017, on a net basis, and related property and equipment. Proved oil and natural gas reserves in the Utica Shale as of December 31, 2017 were approximately 480 million boe (72% natural gas, 23% natural gas liquids and 5% oil).  

Powder River Basin Update

The Powder River Basin in Wyoming continues to develop into the oil growth engine of the company, as recently demonstrated by a 78 percent increase in net production compared to the average 2017 fourth quarter rate. On July 22, 2018, total net production hit a new record of approximately 32,000 net boe per day (42% oil, 41% natural gas and 17% natural gas liquids), compared to an average 2017 fourth quarter rate of 18,000 boe per day. Chesapeake now projects net production from the area will reach approximately 38,000 boe per day by year-end 2018, and expects total net annual production from the PRB to more than double in 2019 compared to 2018.