Analysts were divided Friday on a Chesapeake Energy plan to sell its midstream assets in three separate deals for total expected cash proceeds of more than $4 billion.
In a bid to raise much-needed capital, the Oklahoma City-based producer said Friday it has agreed to sell its limited partner units and its general partner interests in Chesapeake Midstream Partners to Global Infrastructure Partners for cash proceeds of $2 billion.
The company's net book value for these assets as of March 31 was about $1 billion, and Chesapeake anticipates reporting a pre-tax gain on the sale of about $1 billion.
Chesapeake also has entered into a deal with CHKM related to the potential sale to CHKM of certain Midcontinent gas gathering and processing assets and a separate deal to sell to GIP its wholly owned Chesapeake Midstream Development subsidiary.
The company said it expects total cash proceeds of more than $2 billion from these transactions, and noted that the net book value for these assets as of March 31 was about $1.4 billion.
In a conference call Friday with analysts, CHKM CEO J. Mike Stice called the series of deals "transformational."
Once the transactions are completed, which the parties expect to occur by the end of the year, CHKM will become an independent partnership, Stice said. "We will create a new name for a new company," he added, but the company's current management team will stay in place.
The midstream deals will help Chesapeake on two fronts "bringing cash in the door and also lowering capital commitments," Wells Fargo Securities analyst David Tameron said in a note to investors.
He estimated that Chesapeake's capital spending would outpace the producer's discretionary cash flow by $21 billion in 2012, 2013, and 2014. "With this deal and the previous asset monetizations this year, [Chesapeake] has filled $6.6 [billion], or about one-third, of that gap," Tameron said.
Analysts with the ISI Group in a note to investors said the midstream transactions would help Chesapeake raise money to pay off its term loan, but at a steep price for the giant gas producer.
"The midstream sales are 'rob-Peter-to-pay-Paul' transactions that are effectively financings. The seller gets cash up-front, but then 'repays' the buyer through [gathering-and-processing] fees," the analysts said.
Chesapeake will lose about $110 million in distributions for 2012 from its CHKM limited partnership units, about $10 million from its CHKM general partnership units, $75 million from its third-party Chesapeake Midstream Development assets and an undisclosed increase in fees from the CMD sale and other planned Midcontinent gathering-and-processing sales, they said.
Oppenheimer analyst Fadel Gheit said Chesapeake's divestitures of its midstream assets would close the funding gap and boost valuation for the producer.
"Chesapeake's funding gap could be $9.5 [billion] this year and $4.6 [billion] next year, to be covered by asset sales and short-term borrowing. However, borrowing at elevated rates and selling assets into a buyer's market does not create value," Gheit said in an investors note.
"The proceeds of these transactions are an important part of our 2012 asset sales program that is on track to generate cash proceeds of $11.5-14 billion," Aubrey McClendon, Chesapeake's CEO, said in a statement.
