Chesapeake's $4 Billion Pipeline Sale A Strong Start On The Road To Recovery

Jun. 7.12 | About: Chesapeake Energy (CHK)

While I am still worried about natural gas prices remaining low due to heavy supply, Chesapeake (NYSE:CHK) is pushing itself to sell non-core assets.

Chesapeake, which is the 2nd largest natural gas producer in the U.S., has been facing a major capital spending issue. With low natural gas prices, the company is not bringing in enough cash flow to sustain its capital spending requirements. This is essentially creating a gap in spending. It's estimated that Chesapeake could run out of money next year if they are not able to sell their assets.

Sounds pretty scary, huh?

Well while it is a cause for concern, Chesapeake will be closing a deal that will allow them to raise $4 billion in capital. In addition, this will help them close a major funding gap they are experiencing. It's estimated that Chesapeake will save $3 billion over the next few years just in expenses by selling these assets.

As part of the deal, Chesapeake will sell its 46.1% stake in Chesapeake Midstream Partners (CHKM) for $2 billion to Global Infrastructure Partners, a private equity firm. The other $2 billion will come from various other pipeline assets.

This is a good move by Chesapeake for various reasons. Chesapeake is selling pipelines, which are considered non-core assets as they do not impact the operations of its drilling business. In addition, Chesapeake will close their funding gap by $7 billion (includes savings). By selling these non-core assets, Chesapeake will be able to focus its business by increasing its presence in the crude oil market.

Another aspect of this deal that makes me happy is that Chesapeake was able to secure a fairly good price for its Midstream Partners stake. Here is why:

  • Chesapeake Midstream has a currently market cap of $3.74 billion.
  • GIP will be buying 46.1% of the company for $2 billion.
  • A 46.1% stake in CHKM at market price is around $1.72 billion.
  • So essentially Chesapeake is getting an additional $230 million over the market price.

Aubrey McClendon has been under attack for his recent business practices, but the way he is conducting this asset sales show he is doing a great job. He is not in a hurry to sell at any price, which means he is trying to maximize the proceeds the company can receive.

This sale shows that Chesapeake is moving in the right direction. In addition, Carl Icahn owns 7.6% of the company. Icahn has a strong record of increasing shareholder value and make the necessary changes need to help close this funding gap. Chesapeake is on the right track with this deal. Let's hope McClendon can keep up the good work.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CHK over the next 72 hours.