Chesapeake close to $4bn pipeline sale

Chesapeake Energy, the US gas producer, is close to a sale of pipeline assets for about $4bn that could be announced by the end of the week in its latest response to pressure from its largest shareholders.

The company is in talks with Global Infrastructure Partners, a private equity fund, over the sale, which could result in a deal in time for Chesapeake’s annual meeting on Friday, according to one person familiar with the situation.

Under the terms being discussed for the possible deal, Global Infrastructure would pay about $2bn for Chesapeake Energy’s 46.1 per cent stake in Chesapeake Midstream Partners, a separately listed pipeline company spun out in 2010, and a further $2bn for other pipeline assets held directly by the parent.

Global Infrastructure, which owns Gatwick and London City airports in the UK, helped found Chesapeake Midstream and held a 22.9 per cent stake as of the end of February.

The pipeline assets are the latest in a growing list of disposals planned by Chesapeake as it attempts to close the gap between its ambitious capital spending plans and its diminished cash flows, hit by the fall in natural gas prices.

The outlook for the company is further clouded by recent falls in the price of oil and natural gas liquids, such as ethane and propane, which are used for fuels and chemical feedstocks.

The company’s strategy has been pinned on reducing its reliance on natural gas, which hit a 10-year low earlier this year, and adding to its production of oil and other liquids.

It has in recent weeks announced the planned sale of leases covering about 900,000 acres across the US, in addition to its previous plans to sell 1.5m acres in oilfields in Texas and New Mexico, and to find a joint venture partner for 2m acres in Oklahoma and Kansas.

It hopes to agree all of those deals in the third quarter of the year.

Chesapeake’s pipeline assets will appeal to infrastructure investors because they have guaranteed revenues. Contracts signed by the parent company commit it to $13.8bn of payments to the midstream business to pay for using its pipelines to carry gas from Chesapeake’s fields.

Selling the pipeline assets would cut Chesapeake’s need for capital spending by about $3bn over the next three years.

On the company’s own projections, its plans would have left a gap of up to $10bn between its cash flows and its spending plans for 2012 alone, with a further shortfall next year.

Chesapeake’s leading shareholders, Southeastern Asset Management, with 13.6 per cent, and Carl Icahn, the activist investor who has 7.6 per cent, have been urging the company to scale back its investment plans and sell non-core assets such as the pipelines in order to strengthen its finances.

It emerged this week that Chesapeake had put a package of leases for oilfields in 337,000 acres in eastern Ohio up for sale. The advisory firm working on the sale said a reason for the move was Chesapeake curbing its capital spending and scaling back its plans to develop its oilfields in the region.

Mark Hanson, an analyst at Morningstar, said it made sense for Chesapeake to sell assets, particularly fields that were not yet in production and lower-return businesses such as pipelines, because it had “spread itself too thin” during its rapid expansion over the past decade.

However, he added: “When you think about what they are trying to do, in terms of reducing their dependence on gas and producing more oil and liquids, and see them now selling oilfields, it all speaks to the fact that they are having to go pretty deep into the pantry to find something they can sell.”

Chesapeake’s assets include many of the most attractive prospects in the US for oil and gas development.

However, Philip Weiss of Argus Research warned in a note on Wednesday that the fall in the oil price since March could cut the amount that prospect buyers would be able or willing to pay.

He added: “We also think that companies interested in acquiring assets from CHK [Chesapeake] will have the opportunity to drive a harder bargain because of CHK’s tenuous financial position.”

The planned sale of the pipeline business, first reported by Bloomberg, shows the growing power of the two largest shareholders over Chesapeake. Their influence was also in evidence on Monday when the company announced plans to remove five directors from its board and replace them with four new ones, three nominated by Southeastern and one by Mr Icahn.

Southeastern began to take a more hands-on role at the company, and Mr Icahn acquired his stake, after it emerged in April that Aubrey McClendon, Chesapeake’s chairman, chief executive and co-founder, had built up large debts that were not fully disclosed to the board or investors.

The company’s investor meeting at its Oklahoma City headquarters comes amid a 39 per cent fall in Chesapeake’s share price over the past year.

It has set a deadline of June 22 to appoint its new directors and an independent chairman, but the meeting could give an indication of which directors are likely to leave.

Shares in Chesapeake Energy closed 7 per cent higher at $18.21 on Wednesday and have now risen 37 per cent from their low point in May. Chesapeake Midstream was up 5 per cent at $25.28.