3nd UPDATE: Chesapeake Energy to Sell Midstream Assets for $4 Billion
06/08/2012| 01:18pm US/Eastern
--Chesapeake Energy will sell pipelines and infrastructure for $4 billion in cash
--The divestitures are expected to reduce capital expenses by $3 billion over the next three years
--The company has come under fire for mounting debt and corporate-governance issues
(Adds details, analyst comment, information about the company's shareholder meeting, in the sixth and 12th through 14th paragraphs.)
By Ben Lefebvre and Kristin Jones
Chesapeake Energy Corp. (>> Chesapeake Energy Corporation) plans to sell pipeline assets totaling more than $4 billion in cash, a boon to the embattled natural-gas company as it seeks to finance its expensive journey towards more-profitable oil production while weighed down by a large debt-load and tight cash flow.
The sale of the pipeline and gathering assets to private-equity fund Global Infrastructure Partners LLC will help Chesapeake as it strives to bring its debt level down to $9.5 billion by the end of the year and make up for a $10 billion cash shortfall. At the end of the first quarter, the company said, its long-term debt totaled $13.1 billion, the product of epic land purchases and an ambitious oil-drilling program at a time when its income was eroded by plummeting natural-gas prices.
Chesapeake said it will receive $2 billion by the end of June for the sale of some mid-continent gathering-and-processing assets of Chesapeake Midstream Partners LP (>> Chesapeake Midstream Partners, L.P.). At the same time, Chesapeake Energy agreed to sell its interests in Chesapeake Midstream Development LP, its wholly owned subsidiary, for a possible additional $2 billion.
Friday's deals will bring Chesapeake's disclosed asset sales so far this year to $6.6 billion. The company is trying to sell additional land, including acres in the oil-rich Permian Basin in West Texas, the Utica shale in Ohio, and other parcels in east Texas, Colorado and Michigan. It also seeks to sell a stake in a joint venture in the Mississippi Lime, a formation in Kansas and Oklahoma. The acres could earn the company more than $10 billion.
The divestiture program is designed to alleviate a finance crunch brought about by a glut in natural-gas production, which recently drove prices to their lowest level in a decade. Chesapeake, the second-largest natural-gas producer after Exxon Mobil Corp. (XOM), is one of the many U.S. energy companies now focusing on extracting crude oil, which is more profitable but which also requires massive investments to produce in the quantities Chesapeake wants.
The sale of the pipeline assets will reduce the amount of capital outlays Chesapeake has to make. Between the sale proceeds and the capital-spending savings, the deals would bring Chesapeake Energy a much-needed $7 billion cash surplus during the next three years, analysts said. The assets bring annual earnings of about $500 million.
"That's a fair trade in my opinion," Morningstar analyst Mark Hanson said. "With its spate of announced and contemplated assets sales, the company should be able to scare up enough cash to bridge its funding gap."
But jettisoning its pipelines could eat into the company's profit margins in the long term. Chesapeake will now have to depend on a separate company to move the oil and gas it produces to market, which might increase its transportation costs, Simmons & Co. said in a note to investors.
The acquisitions will result in Global Infrastructure Partners owning 69% of Chesapeake Midstream's limited-partner units and all of its general-partner interest. The fund, led by Credit Suisse Group AG (CS) and General Electric Co. (GE), joined with Chesapeake Energy to form Chesapeake Midstream Partners, an entity that went public in 2010 and operates gas-gathering and processing systems in the Marcellus Shale, Barnett Shale and other U.S. locations.
"These transactions will preserve the strategic relationships we have" with Chesapeake Midstream Partners and Chesapeake Midstream Development, Chesapeake Energy Chief Executive and co-founder Aubrey McClendon said.
Chesapeake disclosed the deals on the day investors gathered in Oklahoma City to attend the company's annual shareholders meeting.
Under pressure from shareholders, Chesapeake is expected to replace more than half of its board with new directors, limiting the power of Mr. McClendon. Two directors--Richard Davidson and V. Burns Hargis--resigned after less than 30% of shareholders endorsed their re-election.
Shareholders voted Friday to reincorporate Chesapeake in Delaware, a move that will put the entire board up for election annually, instead of the company's current system of staggered board votes. Shareholders also voted against a non-binding proposal that approved the compensation packages received by Chesapeake executives, among the highest paid in the industry.
The Chesapeake board also said Friday that, effective immediately, a simple majority of shareholder votes would be needed to pass proposals, replacing a rule requiring approval from two-thirds of shareholders.
Chesapeake Energy shares recently were up 1.8% at $18.17.
Write to Ben Lefebvre at firstname.lastname@example.org.