Chesapeake Energy Corp. has begun a “series of steps” to spin off a subsidiary to hold its midstream natural gas assets — and allow it to build pipeline infrastructure in some of its productive shale plays. The new subsidiary would be formed within “months, not quarters,” said a senior executive.

The Oklahoma City-based producer in November indicated it wanted to launch a master limited partnership (MLP) this year to hold midstream assets (see Daily GPI, Nov. 8, 2007).

On Wednesday Chesapeake requested permission from those holding more than $2 billion of the company’s outstanding senior notes due between 2013 and 2016 to allow the debt to be carried in a new subsidiary. Chesapeake now is restricted from carrying debt for the parent company in the notes due in that period, the Securities and Exchange Commission Form 8-K filing indicated.

Following the solicitation, which is scheduled to be completed by Friday (Aug. 22), “Chesapeake intends to transfer certain of its midstream assets to a newly formed group of subsidiaries and designate such subsidiaries as unrestricted subsidiaries under each of the indentures,” the filing stated. “Additionally, such subsidiaries would become obligors under a new revolving credit facility that is anticipated to provide for borrowings of up to $750 million, which would be used by such subsidiaries for capital expenditures and general corporate purposes.”

The debt holders that agree to the solicitation would receive $3.75 in cash for each $1,000 of principal amount of notes they hold and agree to convert, Chesapeake noted.

Chesapeake’s spin-off, either as a MLP or privately held subsidiary, likely would take on existing assets in the Barnett Shale, the Fayetteville Shale and within the Midcontinent, said Jeffrey L. Mobley, senior vice president of investor relations. He discussed the projects with The Oklahoman.

The spin-off also would be used to build new pipelines in the Haynesville Shale across Louisiana and into Texas and within the Marcellus Shale in West Virginia and Pennsylvania, Mobley said.

Converting the senior notes is “one in a series” of steps Chesapeake would take to set up the subsidiary, he said. In any case, he said the subsidiary would have the ability to stand alone and have separate financial resources.

“There are many options available to us” for the subsidiary, Mobley said. “We plan to continue to evaluate those as the time gets closer to forming the new company.”

In related news, Chesapeake is ramping up drilling operations in downtown Fort Worth, TX, to access gas from the Barnett Shale. The Trinidad Rig would drill a well behind a warehouse on the southern edge of the downtown area in a project approved by the city last year (see Daily GPI, Dec. 15, 2007). Drilling would be done in a westerly direction away from the downtown area, according to the company.

By using the downtown site, Chesapeake expect to be able to secure gas underneath several downtown locations, including city hall and the Fort Worth Convention Center. Four other downtown sites also are marked for future drilling, but the projects are not expected to negatively impact transportation or any businesses, the company said.

With the build-up in drilling in the urban areas near Fort Worth since 2001 — and the associated traffic and noise — some citizens have sought a moratorium on energy leasing in the city (see Daily GPI, Aug. 11).

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