Chesapeake Energy announced plans to sell a volumetric production payment (VPP) related to its Eagle Ford Shale assets earlier in the year. The plans were outlined with other assets sales to help fill a funding gap created by decade low natural gas prices. Since the initial announcement, the company has delayed plans to sell the VPP in the Eagle Ford. I've seen two reasons given in the press. The reason I believe to be accurate is that Eagle Ford assets were retained to hold output and cash flow at levels required by debt covenants. With favorable oil prices and production additions in the tens of thousands of barrels per day in 2012, it stands to reason the Eagle Ford is becoming a significant contributor to the company's bottom line.
The other reason mentioned by the press is oil prices have fallen $15 over the past several weeks. While WTI oil prices have fallen below $90 per barrel as of this morning (May 30, 2012), Eagle Ford crude and condensate is trading at a premium to the aforementioned benchmark. Oil, from the Eagle Ford, trades at a premium to WTI and is more comparable to Light Louisiana Sweet (LLS) crude. LLS prices closed at an almost $11 premium to WTI yesterday. I'm not downplaying the $15 move in WTI, but prices in South Texas are holding at a higher level near $100 per barrel.
My expectation is that Chesapeake will close on an Eagle Ford VPP sometime in 2013.
A VPP will allow Chesapeake to recover some of its capital investment by selling future production at an earlier time. VPP’s usually have a prescribed time period and a prescribed volume. Chesapeake will deliver the product for the buyer until the conditions of the agreement are met. When the obligations are met, existing production will revert back to Chesapeake.