Chesapeake to Build $900M Complex

Natural gas producer Chesapeake Energy Corporation (CHK - Analyst Report) – through its affiliate Chesapeake Midstream Development, L.P. (“CMD”) – has joined hands with M3 Midstream LLC (aka Momentum) and EV Energy Partners, L.P. (EVEP - Snapshot Report), to build a large midstream services complex for approximately $900 million in eastern Ohio.

The complex, to be located in Columbiana County, will provide the required infrastructure to service production from the resource rich Utica shale. The cryogenic unit will have natural gas gathering and compression facilities constructed and run by CMD. It will also include processing, natural gas liquids (NGL) fractionation, loading and terminal facilities, to be manufactured and run by Momentum.

The facility will have an initial capacity of 600 million cubic feet per day and will process natural gas and NGL as well as carry the output to a central NGL hub complex in Harrison County. The complex at Harrison County will initially offer NGL storage capacity of 870,000 barrels and fractionation capacity of 90,000 barrels per day, as well as rail-loading facility.

The partners have started engineering and procurement for the project and plan to use the majority of $900 million investment in the first two years of a five-year financing plan. The first cryogenic plant is estimated to come online by the second quarter of 2013.

Chesapeake, Momentum and EVEP will hold 59%, 33% and 8%, respectively. Total S.A. (TOT - Analyst Report) holds a 25% stake with Chesapeake in the Utica Shale and also has an option to participate in the project. Total’s participation in the project will proportionately reduce the ownership of Chesapeake and EVEP to 44% and 6%, respectively.

We think Chesapeake’s focus on shale gas plays should provide the impetus to monetize its assets more effectively. This, coupled with the company’s concentration on liquids will boost returns. Chesapeake remains positive about its acreage in the Utica, where new wells have been drilled successfully.

Chesapeake holds a Zacks #3 Rank, which translates into a Hold rating for a period of one to three months. For the long term, we maintain a Neutral rating on the stock.