Banking & Finance

Chesapeake May Sell Pipeline Partnership Stake (CHK, CHKM)

Debt-laden natural gas producer Chesapeake Energy Corp. (NYSE: CHK) is reportedly in discussions with private equity firm Global Infrastructure Partners (GIP) regarding a sale of Chesapeake’s stake in Chesapeake Midstream Partners L.P. (NYSE: CHKM) for as much as $4 billion. Chesapeake spun out the majority of its pipeline assets to Chesapeake Midstream in 2010, and as of December 31, 2011, owned 45.2% of the limited partner interest in the pipeline company. GIP owned 29.8% of Chesapeake Midstream’s limited partner interests at the end of December. Chesapeake and GIP are joint owners of Chesapeake Midstream’s 2% general partner interest.

Chesapeake is under pressure to reduce its long-term debt load to around $9.5 billion by the end of the year. The company is selling assets as fast as it can to pile up the cash needed to make that happen. Long-term debt net of cash at the end of 2011 totaled $10.3 billion, down from $12.5 billion at the end of 2010.

But Chesapeake’s total leverage is closer to $24.5 billion, which includes volumetric production payments, off-balance sheet amounts, preferred stock, and the company’s working capital deficit. And as long as the price of natural gas stays low, the value of the company’s reserves also stays low, raising the risk of a substantial writedown. At the end of 2011 the average price of natural gas for the year came in at $4.12/thousand cubic feet. So far in 2012, that average is closer to $2.60/thousand cubic feet although spot prices have been rising recently.

The sale of Chesapeake’s interests in Chesapeake Midstream is another of the demands/suggestions made by Carl Icahn, who has so far gotten just about everything he asked for when he upped his investment in Chesapeake.

Shares of Chesapeake Energy are up nearly 6% at $18.00 in a 52-week range of $13.32-$35.75. Chesapeake Midstream’s common units are up about 5.8% at $25.56 in a 52-week range of $22.50-$31.19.

Paul Ausick

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