Chesapeake Energy Corp., one of the biggest deal makers in the U.S. energy patch, has secured more funding for its onshore exploration and production program after it agreed to sell its natural gas pipeline gathering system in the Marcellus Shale to an affiliate for $865 million, analysts said.

Appalachia Midstream Services LP (AMS) is to become part of the stable of assets owned and operated by Chesapeake Midstream Partners LP (CHKM). The deal was announced late Wednesday (see Daily GPI, Dec. 29, 2011). CHKM agreed to pay its parent corporation $600 million in cash and $265 million in equity. The deal is slated to close by end of business on Friday, but it likely is only one of several transactions to be undertaken by Chesapeake in the coming months, said analysts.

“The company has valuable midstream assets across several plays that it can develop and drop down to CHKM,” said Sterne Agee’s Tim Rezvan and Michael McAllister.

All of Chesapeake’s midstream assets may be made available for future dropdowns, CHKM CEO J. Mike Stice told analysts on Thursday. The dropdown to CHKM by Chesapeake is the second since August 2010, when an initial public offering (IPO) for the midstream unit was launched, he noted.

When the midstream affiliate was formed in 2009 Chesapeake at the time 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. A year ago CHKM acquired Chesapeake’s Springridge gas gathering system and related facilities in the Haynesville Shale for $500 million.

CHKM is interested in expanding its footprint in the Marcellus and Utica shales beyond gas gathering systems, however.

Chesapeake has been “very supportive of both opportunities to move ethane out of the region and we’re also supportive of any opportunities in the local market,” said Stice. “If a petrochemical plant is justified in Ohio, West Virginia, Pennsylvania to take advantage of he ethane, we’re more than willing to support that effort. We’re excited about the local market and ethane opportunities today. It’s important to have strategies to have ethane available to all comers. When you combine the Marcellus South with Utica’s ethane, there’s plenty for everybody.”

Chesapeake has a vested interest in seeing CHKM succeed and also in securing funding for its exploration programs. In November Chesapeake’s 3Q2011 earnings report indicated rising debt levels and continued heavy spending in the U.S. onshore (see Daily GPI, Nov. 7, 2011). During the period Chesapeake increased its debt year/year by $1.7 billion while capital spending for new acreage totaled more than $1.2 billion. At the time CEO Aubrey McClendon said the company would “come up with the cash we need to run our business.”

At the end of 2010 Chesapeake’s share price was $25.91, only three cents higher than 2009’s year-end price of $25.88. At midday Thursday the company was trading at $22.57/share. The company’s share price has reached $35.95 in the past year.

In addition to the midstream dropdowns, Chesapeake in early 2011 said it planned to sell its stakes in the Fayetteville Shale, as well as in privately held Chaparral Energy Inc. and oilfield services company Frac Tech Holdings LLC, which would result in pre-tax proceeds of more than $5 billion (see Daily GPI, Feb. 8, 2011). Less than three weeks later Australian energy giant BHP Billiton Petroleum paid Chesapeake $475 billion in cash to acquire the Fayetteville assets (see Daily GPI, Feb. 28, 2011). Chaparral and Frac Tech deals have yet to be disclosed.

Chesapeake is expected to complete a joint venture (JV) in the Utica Shale that it announced two months ago and that may happen within the next few days, according to the Sterne Agee analysts. Two transactions would monetize 1.5 million net acres in the Ohio play; the independent is to receive about $3.4 billion in proceeds (see Daily GPI, Nov. 4, 2011).

In one transaction Chesapeake signed a letter of intent with an undisclosed “international major energy company,” that gave the foreign company an undivided 25% stake in 650,000 net acres of the Utica play. In the second transaction with EIG Global Energy Partners, Chesapeake sold $500 million of perpetual preferred shares in CHK Utica LLC.

There’s been no word on when the deal with the undisclosed energy company is to close, but it should be soon, said the Sterne Agee analysts. “We believe the company does not need to close the deal by year-end, but needs to close before fourth-quarter earnings are released in February to avoid disappointing investors,” Rezvan and McAllister wrote.

Jefferies & Co. on Thursday said an update on the Utica JV should be “imminent.” Analysts are maintaining a “buy” rating on Chesapeake because of the Marcellus midstream sale. The dropdown “should help bridge the 2012 funding gap,” said Jefferies analysts. “Progress along this front should result in the stock reflecting some of the upside embedded in [its] asset base.”

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