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Chesapeake Plans Midstream Sale

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Chesapeake Energy Corp (CHK - Free Report) has inked an asset sale deal with Access Midstream Partners, L.P. for its midstream assets, as it tries to narrow cash-flow shortfall while shifting gears to oil-directed drilling from natural gas. The transaction is valued at approximately $2.16 billion.

Per the deal, the natural gas giant intends to sell midstream properties that are mainly located in its Marcellus, Utica, Eagle Ford, Haynesville and Niobrara shale plays. The pact —likely to close by the end of this year — also covers new market-based gathering and processing agreements, including diverse acreage dedication areas.

Oklahoma City-based Chesapeake remains focused on its asset monetization initiatives as it is trying hard to minimize capital expenditure and devolve as much as $14.0 billion worth of assets this year and an additional $4 billion to $5 billion in 2013.

Recently, the company sold certain midstream assets in Oklahoma and Texas for approximately $175 million. Additionally, it expects to complete the divestiture of its remaining midstream belongings, with Mid-Continent and other assets, by the end of first quarter 2013 for approximately $425 million.

All these transactions summed up to a total of about $2.75 billion proceeds. Taking into consideration the second as well as the third quarters’ proceeds of approximately $2.75 billion, the company is expected to collect $4.875 billion from the entire midstream business.

Meanwhile, Chesapeake also sold certain crude oil and condensate gathering assets to a pipeline company Plains All American Pipeline L.P. (PAA - Free Report) for about $125 million. The properties are positioned in the Eagle Ford oil and gas formation in South Texas with a storage capacity of 15,000 barrels and 40 miles of pipelines. It also has 300,000 barrels of storage capacity that are under construction and a truck unloading terminal.

Given the gas price scenario, Chesapeake intends to deploy more funds toward liquids. In particular, the company plans to invest heavily in the development of its holdings in the Eagle Ford Shale, Granite Wash and Mississippi Lime.

However, we prefer to remain on the sidelines and see the stock performing in line with the broader market. 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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