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Chesapeake Is Said to Discuss $4 Billion Pipeline Sale

Photographer: Daniel Acker/Bloomberg

Workers after connecting a section of drill pipe on a Chesapeake Energy Corp. natural gas drill site in Bradford County, Pennsylvania. Close

Workers after connecting a section of drill pipe on a Chesapeake Energy Corp. natural... Read More

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Photographer: Daniel Acker/Bloomberg

Workers after connecting a section of drill pipe on a Chesapeake Energy Corp. natural gas drill site in Bradford County, Pennsylvania.

Chesapeake Energy Corp. (CHK) is in advanced talks to sell pipelines to Global Infrastructure Partners for more than $4 billion, said two people with knowledge of the matter.

The energy explorer, facing a $22 billion cash-flow shortfall after natural-gas prices touched a decade low, is discussing selling its entire stake in Chesapeake Midstream Partners LP (CHKM) and other pipeline assets, said the people, who spoke on condition of anonymity because the talks are private. The negotiations may lead to a deal within days and could also fall apart, the people said.

Chesapeake Midstream operates pipeline networks in Texas, Louisiana, Pennsylvania and other gas-producing states, and had 3,953 miles (6,360 kilometers) of pipe as of March 31. The partnership gets about 75 percent of its revenue from Oklahoma City-based Chesapeake Energy, with the remainder from energy producers such as France’s Total SA (FP) and Norwegian oil company Statoil ASA. (STL) Chesapeake Energy also owned 1,950 miles of pipelines separate from the Midstream partnership as of Dec. 31.

Chesapeake Midstream will be a “cash machine” for Global Infrastructure because it’s structured to pay an increasing dividend as profits increase, said David Askew, an analyst at RBC Capital Markets Corp. in Austin, Texas. As a master-limited partnership, or MLP, the company distributes most of its cash after capital spending to unit holders and its controlling partner.

Cash-Flow Shortfall

“Chesapeake Midstream should be a fast grower with a growing stable of assets,” Askew, who rates the units “outperform,” said in a telephone interview yesterday. “As a growing MLP, it should be pretty lucrative.”

Chesapeake Energy Chief Executive Officer Aubrey McClendon is seeking buyers for assets from Appalachia to the Rocky Mountains to plug a cash-flow shortfall that James Sullivan, an analyst with Alembic Global Advisors, has estimated may exceed $22 billion by the end of next year.

McClendon exited gas hedging contracts held by Chesapeake Energy in late 2011, leaving the company exposed when milder- than-normal winter weather across the northern U.S. slashed demand for the furnace fuel and prices plunged. Sullivan said in a May 17 note that the company may be forced to curtail spending on drilling if McClendon fails to sell enough assets.

Icahn Initiatives

Selling pipelines was one of the “cost savings initiatives” that billionaire investor Carl Icahn said he would push for, along with other asset sales and reduced capital spending, in a June 4 filing with the Securities & Exchange Commission. Icahn’s 7.6 percent stake won him the right to appoint one of four new directors who will replace almost half the board by June 22 under an overhaul announced earlier this week.

Chesapeake Midstream rose 4.6 percent to $25.28 at the close in New York. Chesapeake Energy rose 7.1 percent to $18.21.

The talks between Chesapeake and Global Infrastructure predate Icahn’s purchase of his stake, the people with knowledge of the talks said. Chesapeake held a 45.2 percent limited partner interest in the midstream partnership as of Dec. 31, according to a regulatory filing. It also jointly owns Chesapeake Midstream’s general partner with Global Infrastructure.

Michael Kehs, a Chesapeake spokesman, and Jack Cowell of Global Infrastructure declined to comment.

Pipelines, Airports

Global Infrastructure, with offices in New York and London, manages more than $10 billion of investments including pipelines, power generation, ports and airports, according to its website.

McClendon, who sits on the boards of both the Midstream pipeline company and its controlling partner, has been under a cloud since a series of media reports in March and April about personal loans he obtained using minority stakes in company- owned wells that he’d been allowed to gather for his private portfolio.

Chesapeake Energy announced May 1 that he will step down as chairman of the parent company when a replacement is chosen.

Shedding pipelines would be a retreat from McClendon’s vision of so-called vertical integration, which involves owning oil and gas fields as well as ancillary assets such as gas- processing plants, drilling rigs and hydraulic-fracturing equipment.

2010 Debut

Chesapeake Energy said in its most recent annual report that owning pipelines makes the company more efficient at managing costs involved with gathering and processing gas.

Chesapeake Energy started a pipeline venture with Global Infrastructure in 2009 when the infrastructure investment fund led by Adebayo Ogunlesi bought a stake in some Chesapeake pipelines. They took Chesapeake Midstream public the following year.

Since the initial share sale, Chesapeake Midstream’s units have increased 15 percent, outperforming Chesapeake Energy’s 20 percent decline. The partnership has paid out $492 million in dividends since it became publicly traded.

Chesapeake Energy owned 33.7 million common units, and 34.5 million subordinated units, of Chesapeake Midstream as of Feb. 22. Those interests would be worth about $1.6 billion based on the $24.17 closing price of the common units yesterday.

To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net; Jeff Green in Southfield, Michigan at jgreen16@bloomberg.net; Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Katherine Snyder at ksnyder@bloomberg.net

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