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Natural gas giant Chesapeake Energy Corporation (CHK - Analyst Report) has struck an asset sale deal with private equity firm Global Infrastructure Partners (GIP) related to its pipeline properties for a total consideration of $4 billion in cash. This marks the largest deal so far this year by the company, which is struggling to fund its capital budget amid diminishing cash flows.
As part of the three-tier asset sale pact, Chesapeake, the second largest natural gas producer in the U.S., after ExxonMobil Corporation (XOM - Analyst Report) will sell its interests in Chesapeake Midstream Partners LP (CHKM) for about $2 billion. Following the transaction, GIP will own all of the general partner and 69% of the limited partner units of Chesapeake Midstream. Additionally, Chesapeake plans to divest certain Mid-Continent gathering and processing assets to Chesapeake Midstream. Finally, the Oklahoma City-based company will sell its stakes in a subsidiary – Chesapeake Midstream Development LP – for an extra $2 billion to GIP.
The Chesapeake Midstream properties up for sale comprise pipeline networks in Texas, Louisiana, Pennsylvania and other gas-producing states. As of March 31, 2012, it had 3,953 miles of pipeline. About 75% of the partnership’s revenue is generated from Chesapeake Energy, while the balance comes from Total SA (TOT - Analyst Report) and Statoil ASA (STO - Analyst Report).
Importantly, this latest divestiture will allow Chesapeake to shed its earlier announced capital expenditure by $3 billion over the next three years. Recently, Chesapeake also increased the size of its unsecured term loan to $4 billion from $3 billion, for paying down its revolving credit line. The new loan comes at an initial interest rate of 8.5%, which could eventually exceed 11.5% if the company fails to pay it off by the end of the year.
Chesapeake has been in the news in recent times as it is under pressure to fund its capital budget amid diminishing cash flows on the back of falling natural gas prices. Chesapeake intends to offload as much as $11.5 billion to $14.0 billion worth of assets this year in order to bridge the funding gap of $9 billion to $10 billion. Till date, the company has been able to raise approximately $6.6 billion from the asset sale deals.
Earlier, Chesapeake had plans to sell 337,481 net acres of Utica-Point Pleasant Trend acreage in Ohio, as per a prospectus released by Denver-based Meagher Energy Advisors. It includes drilling rights in 19 Ohio counties that are mainly situated to its north-east and south-east.
Chesapeake holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. We maintain our long-term Neutral recommendation for the company.
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