This analysis of Chesapeake Midstream Partners (CHKM) was provided to TradingIPOs subscribers in advance of its Wednesday, July 28 IPO. Chesapeake sold 21.3 million units for $21 apiece, at the higher end of the range.
Chesapeake Midstream Partners plans on offering 24.4 million units at a range of $19-$21. A lot of underwriters on this one. UBS, Citi, Morgan Stanley, BofA Merrill Lynch, Barclays, Credit Suisse, Goldman Sachs, Wells Fargo are all joint book runners. BBVA and BMO co-managing. Post-IPO CHKM will have 142 total units outstanding for a market cap of $2.84 billion on a pricing of $20. 1/2 of the IPO proceeds will be used to repay borrowings, the remainder for capital expenditures.
Chesapeake Energy (CHK) and Global Infrastructure Partners will each own 42% of CHKM post-IPO. CHK will manage CHKM.
From the prospectus:
We are a limited partnership formed by Chesapeake and GIP to own, operate, develop and acquire natural gas gathering systems and other midstream energy assets.
The company's business is natural gas-gathering pipelines. Gathering pipelines are the first segment of midstream energy infrastructure that connects natural gas produced at the wellhead to third-party takeaway pipelines.
CHKM's pipelines service Chesapeake and Total (TOT) under long-term 20 year contracts.
Gathering systems are primarily in the Barnett Shale region in north-central Texas. There are 2,800 miles of pipelines servicing 4,000 natural gas wells. In the three months ending 3/31/10, CHKM's pipelines gathered 1.5 Bcf of natural gas per day, making them one of the largest natural gas gatherers in the US.
Chesapeake Energy - One of the largest natural gas producers in the U.S. by volume of natural gas produced. The most active driller of natural gas in the US based on number of active rigs. CHK focuses on unconventional shale drilling. CHK plans on dropping down additional gathering assets to CHKM over time. Strong parent here, which is a key to a successful midstream MLP.
CHKM relies on CHK for virtually all revenues.
Commodity risk here is limited as CHKM collects all revenues via long term fixed fee contracts. CHKM does not take ownership of the natural gas flowing through their pipelines. 20 year fixed fee contracts mean solid cash flow projections here.
Growth - Other than future dropdowns from CHK, CHKM expects volumes to increase in their current operations. In early 2010, CHK and Total formed a joint venture agreement in which Total took on a 25% interest in CHK's Barnett Shale assets. Total is providing $2.25 billion in funding to the assets and CHK plans to significantly increase rig count in the region by end of 2010.
Capex - CHKM plans on using 1/2 the IPO proceeds toward an extensive expansion program. In the 12 months ending 6/30/11, CHKM plans on spending $223.5 million on capital expenditures, primarily pipeline expansion, to meet CHK's and Total's field needs. **Cash on hand from ipo will fully cover this expansion capex. We've seen a few deals lately in which the MLP borrows money to fund capex and distribute yield. In this case, IPO proceeds will be sufficient to fund CHKM's aggressive expansion plans over the next 12 months.
***Clean balance sheet post-IPO. $1.75 per unit in cash on hand post-IPO. As noted above, this IPO cash will be used for expansion capex over the next 12 months.
Distributions - Quarterly distributions of $0.3375 per unit, 1.35 per unit annually. On a pricing of $20, CHKM would be yielding 6.75% annually.
Historically yields $350-$400 million in annual revenues.
Forecast for the 12 months ending 6/30/11 - A substantial increase in revenues to $479 million. As noted above, with the partnership with Total, CHK plans on aggressively increasing drilling on their Barnet Shale properties. CHKM is also spending aggressively in pipeline expansion to meet those wells. Strong operating margins of 44%.
***Distribution coverage ratio is expected to be 119%. This includes an additional $70 million in maintenance capex also. Very strong coverage ratio here, CHKM has plenty of cash flows for maintenance capex and yield, a good sign.
Quick 'back of the envelope' look at other public MLP gathering pipelines operating in the same general geographic area:
Energy Transfer Partners (ETP): 7% yield, $6 billion of debt.
Crosstex Energy (XTEX): Over-leveraged, halted distributions while selling off assets. $750 million in current debt, may yield 2.5% over next 12 months (best case scenario).
Quicksilver Gas Services (KGS): 7.3% yield, $250 million in debt. KGS looks pretty attractive here actually.
Westcorp (WES): 5.7% yield, $385 million in debt.
Regency Energy Partners (RGNC): 6.9% yield, $1 billion in debt.
CHKM on a $20 pricing: 6.75% yield, no debt.
Conclusion - Grade 'A' pipeline IPO here. Strong parent, clean balance sheet. Expect CHKM to utilize the clean balance sheet to acquire dropdown gathering assets from parent CHK which should increase distributions over time. This should work in range short, mid and long term. Recommend strongly.