With the news that Chesapeake Energy (CHK) will raise cash by selling the company's general and limited partner interests in Chesapeake Midstream Partners (CHKM), it seems to be a good time to take a closer look at the master limited partnership - CHKM - as an investment.
Chesapeake Midstream Partners was formed in 2009 as a joint venture between Chesapeake Energy and Global Infrastructure Partners with an IPO in the fall of 2010. The company assets included natural gas gathering and processing facilities in the major shale natural gas plays including Haynesville, Marcellus, Barnett and Mid-Continent. The business is focused on fee for service gathering of gas at the well heads and delivering the gas to centralized processing or transport facilities.
The sale of assets announced on June 8, 2012 has Chesapeake Energy selling the general partner interest and the limited partner units held by Chesapeake Energy to Global Infrastructure Partners for $2.0 billion. Chesapeake Midstream Partners also agreed to the future purchase of additional midstream assets from Chesapeake Energy.
Note: the news release state that Chesapeake Energy will sell 69% of the limited partner units. Slides from a recent presentation show Chesapeake Energy holding 45.2% of the L.P. units and Global Infrastructure Partners owning 22.9%, bringing the total holdings of Global Infrastructure Partners to the 69% after the deal is completed. These numbers make more sense based on the sale price and the $4.0 billion market cap of Chesapeake Midstream Partners. About 30% of the limited partner units will remain in the market trading float.
Since the IPO, Chesapeake Midstream Partners has been a growing distribution machine. After the initial, partial period distribution for the 2010 third quarter of 21.65 cents per units, the distributions increased each quarter from 33.75 cents paid in February 2011 up to 40.5 cents paid in May 2012. Distributable cash flow for the 2012 first quarter was 1.37 times the distribution paid. Chesapeake Midstream Partner shares currently yield 6.16% based on the most recent distribution.
Chesapeake Energy set up the midstream MLP to generate steady distribution growth from drop down assets and the ability to buy up other assets in the areas serviced. Chesapeake Energy is the biggest gas gathering customer for Midstream Partners so if Energy decided to severely cut back production, it would be a problem for the Chesapeake Midstream's cash flow. That outlook seems unlikely and the sales agreement with Global Infrastructure Partners appears to give Chesapeake Midstream Partners the right to buy more assets in the future. At the current yield and rate of distribution growth, Chesapeake Midstream is not a compelling buy, but current investors should not dump their shares.