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Chesapeake Spins Off Barnett, Other Midstream Assets

September 28, 2009
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Chesapeake Energy Corp. continued monetizing assets last week, announcing the spin-off of some of its midstream holdings to a joint venture it formed with a private equity partner. Such a deal has been in the works for a while and creates an entity that CEO Aubrey K. McClendon said could one day rank among the country's largest public midstream companies.

New York-based private equity fund Global Infrastructure Partners (GIP) is Chesapeake's partner in the deal. The Oklahoma City-based producer will contribute substantially all of its midstream assets in the Barnett Shale and also the majority of the its nonshale midstream assets in the Arkoma, Anadarko, Delaware and Permian basins to the new entity, Chesapeake Midstream Partners LLC (CMP). GIP will purchase a 50% interest in CMP. Chesapeake will retain the remaining 50% interest in CMP and receive $588 million in cash from GIP. Closing is expected by Wednesday.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. said last Friday the transaction is a "positive" and should calm fears that Chesapeake might need to sell new equity. They also noted that the $588 million in cash Chesapeake will receive will fund ongoing exploration and production. The analysts said the deal values the midstream assets at least at six to eight times earnings before interest, taxes, depreciation and amortization (EBITDA) and probably closer to 10 times EBITDA. "Global Infrastructure Partners may be paying up for these assets to position for future 'dropdowns' of 'growthier' shale midstream assets," they noted.

McClendon said the deal unlocks the value of the company's midstream assets and advances its asset monetization program. "More importantly, we believe CMP will become one of the premier natural gas gathering businesses in the industry and serve as an attractive vehicle for monetizing additional Chesapeake gathering systems as they become more fully developed," McClendon said. "CMP will continue to generate substantial synergies with our upstream operations and some day, we expect CMP to become one of the largest public midstream companies in the nation."

CMP will enter into various agreements with Chesapeake, including a long-term gas gathering agreement at rates consistent with current market pricing. CMP will focus on unregulated business activities in service to both Chesapeake and third-party gas producers. Its revenues will be generated almost entirely from fixed fee-based arrangements for gathering, compression, dehydration and treating services. J. Mike Stice, Chesapeake senior vice president for natural gas projects, will serve as CEO of CMP.

CMP will expand its management team by adding a chief operating officer and chief financial officer in the next few months, Chesapeake said. The CMP assets will continue to be operated by existing Chesapeake employees through an employee secondment agreement. In return for certain cost reimbursements, CMP will utilize various support functions within Chesapeake, including accounting, human resources and information technology.

Chesapeake will continue to operate its midstream assets outside of the CMP joint venture in a separate company, Chesapeake Midstream Development LP (CMD), which will include gas gathering assets in the Fayetteville Shale, Haynesville Shale, Marcellus Shale and other areas in Appalachia.

A midstream spin-off has been in the works at Chesapeake since at least last summer (see NGI, Aug. 18, 2008). Last fall the company closed a secured revolving bank credit facility to mature in 2012 for CMP (see NGI, Oct. 20, 2008). Chesapeake was still talking with potential partners as recently as August (see NGI, Aug. 10).

Concurrent with GIP's funding of its interest in the joint venture, CMP is scheduled to close a new $500 million secured revolving bank credit facility agreement that matures in September 2012. CMP plans to utilize the facility to partially fund capital expenditures associated with the building of additional gas gathering systems and for general corporate purposes. Additionally, Chesapeake said it will amend and restate the existing lending agreement on its midstream assets to reduce the total capacity from $460 million to $250 million, among other changes. This separate secured revolving bank credit facility will support CMD's midstream activities.

A conference call to discuss the deal is scheduled for Monday morning.

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