Chesapeake Midstream Partners LP (CHKM) said Wednesday it agreed to pay $865 million to acquire Appalachia Midstream Services LLP, which it said would create the industry’s largest gathering and processing master limited partnership (MLP) as measured by throughput volume.
Appalachian Midstream is a subsidiary of CHKM, which holds its Marcellus Shale midstream assets. CHKM is, in turn, a subsidiary of Chesapeake Energy Corp.
With the acquisition, which is expected to close by Friday, CHKM would own close to 47% of an integrated system of assets that include close to 200 miles of gathering pipeline in the Marcellus Shale, including the liquids-rich southern region. Throughput as of Dec. 15 was just above 1 Bcf/d. Appalachian Midstream has operated the assets under 15-year fixed fee gathering agreements, which include acreage dedications and annual fee redeterminations that target a “mid-teens return” on all invested capital in the acquired assets, it said.
Chesapeake Energy Corp. earlier had said it was committed to generating earnings for the midstream unit of at least $100 million in 2012 and $150 million in 2013.
“We are excited to expand our footprint into the Marcellus Shale, further increasing our basin diversification and, more importantly, exposing us to the increased drilling activity in the liquid-rich regions in the Marcellus South,” said Chesapeake Midstream CEO J. Mike Stice. “With the closing of this transaction, we will have completed two significant acquisitions from Chesapeake in just 18 months since our [initial public offering] and will have created the industry’s largest gathering and processing MLP. Given Chesapeake’s dynamic growth potential and industry-leading leasehold position in the Lower 48, Chesapeake Midstream expects to pursue a substantial number of asset dropdowns from Chesapeake in the years ahead.”
CHKM was formed in 2009 in a 50-50 transaction by Oklahoma City-based Chesapeake and private equity firm Global Infrastructure Partners (see Daily GPI, Sept. 28, 2009). Chesapeake contributed most of its midstream assets in the Barnett Shale and most of its nonshale midstream properties in the Arkoma, Anadarko, Delaware and Permian basins.
Chesapeake CEO Aubrey K. McClendon said including the company’s Springridge Haynesville asset sale of $500 million in December 2010, “we have now dropped down gathering assets of approximately $1.4 billion into CHKM. Combined with the $1.2 billion Barnett, Permian and Midcontinent gathering assets contributed to the formation of CHKM’s predecessor in September 2009, Chesapeake has successfully monetized $2.6 billion of its extensive midstream asset portfolio at a more attractive valuation than if these assets had stayed on Chesapeake’s balance sheet.
“These Marcellus assets are a truly unique platform for growth that will benefit CHKM for decades,” said McClendon. “An asset of this scale and quality highlights the significant value CHKM realizes as an MLP sponsored by the most active driller in the U.S. and the largest leasehold owner in the Lower 48. We look forward to continuing to build Chesapeake’s midstream systems in the Haynesville, Eagle Ford, Greater Anadarko (including the Cleveland, Tonkawa and Mississippian), Niobrara and Utica plays, all of which will be available to CHKM for future dropdowns.”
The acquisition is to be financed by $600 million of cash drawn from CHKM’s revolving credit facility and $265 million of equity (9.8 million common units), which would increase Chesapeake Energy’s limited partnership ownership to 46.1% from 42.3%. CHKM has total borrowing capacity of $1 billion. Terms of the transaction were unanimously approved by Chesapeake Energy’s board of directors and by the board’s conflicts committee, which is comprised of independent directors.
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