There's no question that 2015 has been a bad year for Chesapeake Energy (NYSE:CHK). While we can blame weak oil and gas prices for some of that, the company did make a number of really bad moves, which contributed to its fall. That said, the year wasn't all bad with the company making a couple of really smart moves that shouldn't be overlooked.
The dividend finally dies
The hallmark of Chesapeake Energy has been wild spending, fueling robust production growth. For years the company spent every penny it made, in addition to as many as it could borrow, to grow its production. However, despite vastly overspending its cash flow nearly every year, the company still paid its investors a meager dividend. That said, while the rate of $0.0875 per share was meager, it still added up to nearly a quarter billion dollars each year heading out of the company's checkbook and into investors' pockets. It was a payout that never made sense given its need for cash -- and one the company finally corrected this past July when it eliminated its dividend. The move freed up cash that the company desperately needs right now given how much it burned through this year.
Reducing complexity and cash outflow
In a similar move announced at the same time, Chesapeake sold its CHK Cleveland-Tonkawa subsidiary, which allowed it to redeem that subsidiary's preferred shares. The key to this transaction was that it eliminated future financial and drilling obligations for the company, which will save it $75 million in annual preferred dividend payments and other financial obligations. Again, for a company outspending its cash flow, it didn't make sense to have that much cash going out the door each year.
Sticking with the theme of reducing cash outflows, the other really smart move Chesapeake Energy made this year was to renegotiate some of its gas gathering agreements with Williams Companies (NYSE:WMB) and its MLP Williams Partners (NYSE:WPZ). The new gas gathering agreements with Williams Companies, which covers Chesapeake Energy's Haynesville Shale operating area and its dry gas Utica Shale area, will lead to a significant improvement in per unit gathering rates starting next year. In a sense, it takes what were once burdensome contracts and turns them into an asset for the company.
There are a couple of keys to this contract renegotiation that are in Chesapeake's favor. First, it moves the contract to a fixed fee, which by 2018 will result in a $0.40 per mcf reduction in the gathering costs in the Haynesville. It also eliminates the minimum value commitments that forced Chesapeake to pay for a shortfall in volumes running through Williams' system. The net result is a substantial improvement in Chesapeake Energy's economics in both plays. Furthermore, the agreements set up a framework for future restructuring of its gas gathering agreements elsewhere.
At the same time, Williams will benefit from increased volumes flowing through its systems. Furthermore, the fixed-fee nature of the contracts helps to further mute Williams' direct exposure to commodity prices.
While 2015 will go down as a pretty poor year for Chesapeake Energy, the company did have some notable accomplishments that could really pay off in the years ahead. Its best moves being those where the company stopped cash that had been needlessly flowing out of the company. The hope is that this progress will continue, especially given the fact that Chesapeake still sends too much cash out the door these days.