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  • IPO sleeper of the wk? Chesapeake Midstream Partners, L.P. (CHKM) 0 comments
    Jul 26, 2010 4:48 PM | about stocks: ACMP, PNG, CHK
    Chesapeake Midstream Partners, L.P. (CHKM) $425mm IPO
    Market cap of $1.38bb at price range mid-point of $20,
    scheduled for Thurs, July 29


    Looks under priced relative to recent IPO of PAA Nat Gas Storage (NYSE:PNG)

    IPOreport includes valuation metrics & financials

    Expects a minimum of $1.35 annually, 6.75% annual rate at price point mid-point of $20

    For the three months ended March 31, 2010, CHKM’s assets gathered approximately 1.5 Bcf of natural gas per day, which CHKM believes ranks it among the largest natural gas gatherers in the U.S.

    CHKM is a limited partnership formed by Chesapeake Energy Corp (NYSE: CHK, $17bb market cap) and GIP (fund managers) to own, operate, develop and acquire natural gas gathering systems and other midstream energy assets.
    . Chesapeake is the second largest natural gas producer in the U.S. by volume of natural gas produced and is the most active driller for natural gas in the U.S. by number of drilling rigs utilized
    . GIP is a $5.6 billion independent infrastructure investment fund
    . At the closing of this IPO, GIP will indirectly own 50% of both the general partner and incentive distribution rights through its ownership in Chesapeake Midstream Ventures.

    The two largest customers for CHKM are Chesapeake itself and and Total, Chesapeake’s upstream joint venture partner in the Barnett Shale region.
    On January 25, 2010, Chesapeake closed its $2.25 billion Barnett Shale upstream joint venture arrangement with Total under which Total acquired a 25% non-operated interest in Chesapeake’s Barnett Shale acreage in exchange for a cash payment of $800 million and its agreement to provide funding for $1.45 billion of future drilling and completion expenditures.
    Total S.A. is the fifth largest integrated oil and gas company in the world based on market capitalization. CHKM expects that Chesapeake’s drilling activity in the Barnett Shale region will increase as compared to its 2009 drilling activity in part as a result of this joint venture.

    In unconventional natural gas technology and production. Chesapeake has been developing expertise in horizontal drilling technology since shortly after its inception in 1989 and was one of the first companies to recognize the potential of unconventional natural gas resource plays in the U.S.
    During the past five years, Chesapeake has grown from the eighth largest natural gas producer in the U.S. to the second largest natural gas producer, measured by natural gas volumes produced, in large part as a result of its success in finding and developing unconventional natural gas assets.
    Chesapeake currently maintains an active drilling program and the largest leasehold position in the U.S. “Big Four” natural gas shale plays (5.3 million gross acres, of which less than 10% have been dedicated to CHKM).

    CHKM systems consist of 2,810 miles of gathering pipelines, servicing over 3,500 natural gas wells.

    CHKM’s gathering systems operate in the Barnett Shale region in north-central Texas and CHK’s Mid-Continent region, which includes the Anadarko, Arkoma, Delaware and Permian Basins.
    CHKM generates the majority of its operating income in the Barnett Shale region, where CHKM services more than 1,500 wells in the core of the prolific Barnett Shale.
    In CHK’s Mid-Continent region, there is an enhanced focus on the unconventional resources located in the Colony Granite Wash and Texas Panhandle Granite Wash plays of the Anadarko Basin.

    CHKM’s operating areas are the core growth areas for Chesapeake. The natural gas gathered by CHKM’s systems in the Barnett Shale and Mid-Continent regions represented approximately 38% and 26%, respectively, of Chesapeake’s total natural gas production during the nine months ended September 30, 2009.
    Chesapeake’s undeveloped reserves within these regions provide CHKM with significant organic growth opportunities.
    According to their joint venture arrangement, Chesapeake and Total hold an aggregate approximate 400,000 gross acres in the greater Barnett Shale area as of January 2010, and Chesapeake expects to increase its operated rig count in its Barnett Shale acreage dedication as a result of its upstream joint venture with Total by more than 40% relative to fourth-quarter 2009 levels.

    CHKM believes that the combination of its fixed-fee business model and contractual protections provide CHKM with long-term cash flow stability and a strong platform from which to grow its business
    According to CHKM’s 20-year gas gathering agreements, Chesapeake and Total have agreed to provide CHKM with extensive acreage dedications in the Barnett Shale region and, with respect to CHKM’s agreement with Chesapeake, also CHKM’s Mid-Continent region.
    These agreements generally require CHKM to connect Chesapeake and Total operated natural gas drilling pads and wells within CHKM’s acreage dedications to CHKM’s gathering systems and contain the terms that are intended to support the stability of CHKM’s cash flows including
    . 10-year minimum volume commitments in CHKM’s Barnett Shale region, which mitigate throughput volume variability;
    . Fee redetermination mechanisms in CHKM’s Barnett Shale and Mid-Continent regions, which are designed to support a return on CHKM’s invested capital and allow CHKM gathering rates to be adjusted, subject to specified caps, to account for variability in revenues, capital expenditures and compression expenses; and
    Price escalators in CHKM’s Barnett Shale and Mid-Continent regions, which annually increase CHKM’s gathering rates.

    . Given that substantially all of the natural gas gathered and transported through CHKM’s systems is owned by Chesapeake, Total and their working interest partners within the acreage dedications, CHKM does not currently face significant competition for its natural gas volumes. In addition, Chesapeake and Total have dedicated all of their natural gas produced from existing and future wells located on lands within CHKM’s acreage dedication in the Barnett Shale region, and Chesapeake has made a similar dedication in CHKM’s Mid-Continent region.
    . In the future, CHKM may face competition for Chesapeake’s production drilled outside of CHKM’s acreage dedication and in attracting third-party volumes to CHKM’s systems. Additionally, to the extent CHKM makes acquisitions from third parties CHKM could face incremental competition.
    . CHKM currently anticipates that competitors in the Barnett Shale region would include Energy Transfer Partners, Crosstex Energy, Quicksilver Gas Services, Freedom Pipeline, Peregrine Pipeline, XTO Energy, EOG Resources, DFW Mid-Stream and Enbridge Energy Partners.
    . Currently anticipate that competitors in our Mid-Continent region would include Enogex, Atlas Pipeline Partners and DCP Midstream.

    . $117mm to repay debt & fees
    . Balance to fund capital expenditures

    IPOreport includes valuation metrics & financials

    Themes: IPO Stocks: ACMP, PNG, CHK
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