Chesapeake Energy to Sell Pipelines to GIP for $4 Billion

Chesapeake Energy Corp., the U.S. energy explorer facing a $22 billion cash shortfall because of falling natural-gas prices, agreed to sell its pipeline interests to Global Infrastructure Partners for more than $4 billion.

Chesapeake will sell its interests in Chesapeake Midstream Partners LP to Global Infrastructure for $2 billion, the Oklahoma City-based company said in a statement today. Chesapeake also will raise more than $2 billion by divesting its pipeline development unit and some central U.S. conduits to Chesapeake Midstream.

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 Alembic Global Advisors has estimated may top $22 billion by the end of next year. Buying Chesapeake’s pipeline assets will add to Global Infrastructure’s more than $10 billion in gas conduits, electricity plants, ports and airports.

“It’s highly sensible for them to be selling assets to tide themselves over any short-term price squeeze,” said Timothy W.N. Guinness, founder of Guinness Asset Management Ltd. in London, which has about 432,900 Chesapeake shares among $450 million under management. “There’s a shortage of cash-yielding assets in the world, so these are relatively attractive when you can only get low rates of interest on U.S. treasuries.”

Shedding Assets

Shedding pipeline interests will allow Chesapeake Energy to cut capital spending by $3 billion over the next three years, the company said.

“It makes a ton of sense,” Jason Wangler, a Houston-based analyst for Wunderlich Securities Inc., said today in a telephone interview. “Book value is $2.4 billion and they’re getting $4 billion,” said Wangler, who rates the shares buy and owns none.

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

Shares Rise

Chesapeake Energy rose 2.9 percent to $18.36 at the close in New York. Chesapeake Midstream climbed 4.7 percent to $26.24.

The pipeline transactions, together with $2.6 billion in asset sales already completed this year, get Chesapeake about halfway to its goal of generating as much as $14 billion from its assets this year. The company also is seeking to sell its drilling acreage in Texas’ Permian Basin oil fields and form a joint venture for its acreage in the Mississippi Lime.

“We feel very good about our ability to meet our targeted range for 2012 asset sales,” the company said in the statement.

Chesapeake Midstream will be a “cash machine” for Global Infrastructure because it’s structured to pay an increasing dividend as profits increase, David Askew, an analyst at RBC Capital Markets Corp. in Austin, Texas, said before the announcement.

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

Global Infrastructure

Global Infrastructure will control Chesapeake Midstream through 100 percent ownership of its general partner and will own 69 percent of the publicly traded limited partner units, Chesapeake Midstream said in a statement today.

The infrastructure group will sell stakes in a new fund to finance the purchase of Chesapeake’s stake, Matt Harris, a partner, said in a conference call today. The midstream affiliate will grow as it buys more assets that cash-strapped Chesapeake Energy must divest, Harris said.

“That’s an opportunity that wasn’t available six months ago,” he said.

Chesapeake Midstream expects to buy as much as $500 million in assets from Chesapeake every year for a decade, Chief Executive Officer Mike Stice said on the call. It plans to close its purchase of more Chesapeake assets by year-end.

The partnership agreed to buy operations in Oklahoma and the Permian Basin in west Texas, he said. A separate agreement with Global Infrastructure calls for acquisitions in the Utica Shale of Ohio, Louisiana’s Haynesville Shale and the Eagle Ford Shale in south Texas.

Gas Hedging

The acquisition follows Global Infrastructure’s purchase of Edinburgh Airport for 807.2 million pounds ($1.24 billion) in April. Global Infrastructure’s investments in pipelines, water, waste and transport have annual revenue of more than $4 billion and employ 12,000 people, according to its website.

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

Selling pipelines was one of the measures 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.

Board Overhaul

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 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.

McClendon, who sits on the boards of both the Midstream pipeline company and its controlling partner, has been criticized by shareholders 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.

Selling the pipelines is 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.

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 Midstream was advised by Jones Day. Global Infrastructure was advised by Latham & Watkins LLP. Chesapeake Energy was advised by Bracewell & Giulliani LLP.


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