Chesapeake initiates sale of certain assets; plans private MLP formation
Mikaila Adams Associate Editor - OGFJ
Oklahoma City-based Chesapeake Energy Corp. has enhanced its financial plan for 2008-2009. The company plans to sell certain producing assets and take advantage of the popular master limited partnership (MLP) market that exists for low decline-rate producing natural gas assets and midstream gas assets. The goal is to capture balance sheet value and fully fund the company’s planned capital expenditures.
In the upcoming months, Chesapeake anticipates completing two transactions associated with the new plan. The company has retained Jefferies Randall & Dewey to assist in selling a non-operated minority interest in certain Chesapeake-operated producing assets in Kentucky and West Virginia representing roughly 145 bcfe of proved reserves and 30 MMcfe net per day of production, or about 1.5% of the company’s current proved reserves and net production.
Chesapeake believes these assets will be attractive to both the MLP and financial markets due to the low-risk, long reserve-life, and low decline-rate profiles of the properties. The company intends to retain drilling rights on the properties below currently producing intervals and outside of existing producing wellbores. It expects to receive proceeds of close to $550 million from the Appalachian asset sale, which is anticipated to close by year-end 2007. Additionally, Chesapeake plans to pursue the sale of four similar packages of mature properties about every six months in 2008 and 2009 for further proceeds of roughly $2 billion.
In addition, Chesapeake has retained UBS Investment Bank to assist in forming a private MLP or an alternative financial structure to own a non-operating majority interest in its midstream natural gas assets, which consist primarily of gas gathering systems and processing assets. These assets, which the company expects to grow in future years, currently generate annualized cash flow of nearly $100 million. Chesapeake believes the transaction will bring in over $1 billion.
As a result of these planned transactions during the next nine quarters, Chesapeake believes the MLP and financial markets will allow it to monetize approximately $3.5 billion of assets that, in management’s opinion, are not adequately reflected in Chesapeake’s current market valuation.
Aubrey K. McClendon, Chesapeake’s CEO, commented, “Our announcement addresses two important topics in our industry today: low natural gas prices and attractive asset values for sellers of natural gas assets into the MLP and financial markets. First, we believe that current low natural gas prices are temporary and result from a modest oversupply of natural gas in the US. This oversupply has largely been caused by two consecutive mild winters in the US, increases in imports of liquefied natural gas resulting from an exceptionally warm European winter last season and increased production from domestic producers through higher drilling activity levels.
“This plan will enable us to realize approximately $3.5 billion in cash from the MLP and financial markets for assets that we believe are not adequately reflected in the company’s current market valuation. Furthermore, we have lowered our planned total capital expenditures for 2008 and 2009 by approximately $1 billion. In combination with the $3.5 billion in planned asset monetizations, we believe that our shareholders and debtholders will be pleased that Chesapeake will be cash self-sufficient for the foreseeable future and yet can still meet its previously announced production and reserve growth forecasts. Importantly, we believe that by year-end 2009, the company’s production will be nearly 40% higher than at June 30, 2007, and its proved reserves will be nearly 30% higher. We believe the market will recognize the substantial value creation potential of this enhanced financial plan.”
As part of a recent conference call, McClendon said that the sale of certain midstream assets and the creation of the MLP was a complete maturation of the company’s strategy that has been in the works over the last year. He is confident in the values that can be achieved in the MLP market. “We’re confident that our long-life Appalachian reserves and other long-life reserves are not valued more than $2 mcf, yet we can sell them, we think, for $3.50 to $4 in the MLP market. Out with the old and in with the new.”
In light of the recent investment crunch in the markets, Mark Rowland, Chesapeake’s executive VP and CFO, was asked if he thought the MLP market was as viable as it was just two short months ago. Rowland responded, “Clearly there’s been a market correction in the pricing mechanism and we’ve factored that into slightly reduced expectations perhaps from the frothy peak of the market. There’s still plenty of financial players around in our investment advisor’s opinion that are interested in a 7.5 to 8.5 or so yield on properties that will be around for a long time and can be hedged. There’s plenty of liquidity in the market still. And actually if anything this kind of long-range, low-volatility hedgeable asset base would seem to be a great alternative to some of the volatile assets that people are currently investing in the market.”
The company has engaged UBS to move forward on the MLP structuring, and it will be seeking a financial partner or partners into either a private MLP or some kind of structured lease transaction. Over the next two years, Chesapeake believes its cashflow could double and expects to handle the associated capital expenditures with the incremental use of a financial structure to avoid any net capital expenditures within the company.
Previously, Chesapeake expressed concern over governmental and conflict of interest issues associated with E&P MLPs. The company touched on the difference in the planned structure that may help avoid some of those potential pitfalls. McClendon explained, “A publicly traded MLP is just what it implies – there are separate directors and you’re out there with a separate growth plan that you have to be sharing with the public and executing on just like we do at Chesapeake. We’re going to go out and look for one or more partners to come in on a non-operating basis and put the capital up and share in the cash flows from the assets that we put in initially, and over time, to fund the growth of our midstream assets.”
Gateway Energy acquires all Gulfshore Midstream’s offshore systems
Gateway Energy Corp. has acquired offshore pipeline assets from Gulfshore Midstream Pipelines Ltd. for $3.1 million in cash, 1,550,000 shares of Gateway common stock, and the assumption of certain liabilities related to the assets estimated at $300,000. The assets extend from the western and central Gulf of Mexico in water depths ranging from 50 to 650 feet, and currently gather roughly 60,000 mcf/d of natural gas from 56 producing wells. These pipeline assets range from 6”to 16” diameter pipelines. Gateway owns and operates natural gas gathering, transportation and distribution systems and related facilities in Texas, Texas state waters, and in federal waters of the Gulf of Mexico off the Texas and Louisiana coasts.
