June 8 (Bloomberg) -- Chesapeake Energy Corp., the U.S. energy explorer facing a $22 billion cash shortfall because of falling natural-gas prices, agreed to sell its pipeline interests to Global Infrastructure Partners for $4.08 billion.
Chesapeake will sell its interests in Chesapeake Midstream Partners LP to Global Infrastructure for $2 billion, the Oklahoma City-based company said in a statement today. Chesapeake also will raise more than $2 billion by divesting its pipeline development unit and some central U.S. conduits to Chesapeake Midstream.
Chesapeake Energy Chief Executive Officer Aubrey McClendon is seeking buyers for assets from Appalachia to the Rocky Mountains to plug a cash-flow shortfall that Alembic Global Advisors has estimated may top $22 billion by the end of next year. Buying Chesapeake’s pipeline assets will add to Global Infrastructure’s more than $10 billion in gas conduits, electricity plants, ports and airports.
“It’s highly sensible for them to be selling assets to tide themselves over any short-term price squeeze,” said Timothy W.N. Guinness, founder of Guinness Asset Management Ltd. in London, which has about 432,900 Chesapeake shares among $450 million under management. “There’s a shortage of cash-yielding assets in the world, so these are relatively attractive when you can only get low rates of interest on U.S. treasuries.”
Shedding pipeline interests will allow Chesapeake Energy to cut capital spending by $3 billion over the next three years, the company said.
Chesapeake Midstream operates pipeline networks in Texas, Louisiana, Pennsylvania and other gas-producing states, and had 3,953 miles (6,360 kilometers) of pipelines as of March 31. The partnership gets about 75 percent of its revenue from Chesapeake Energy, with the remainder from energy producers such as France’s Total SA and Norwegian oil company Statoil ASA. Chesapeake Energy also owned 1,950 miles of pipelines separate from the Midstream partnership as of Dec. 31.
The announcement was made before regular trading began on U.S. markets. Chesapeake Energy rose 1.3 percent to $18.09 at 8:28 a.m. Chesapeake Midstream climbed 4.5 percent to $26.20.
The pipeline transactions, together with $2.6 billion in asset sales already completed this year, get Chesapeake about halfway to its goal of generating as much as $14 billion from its assets this year. The company also is seeking to sell its drilling acreage in Texas’ Permian Basin oil fields, and to form a joint venture for its acreage in the Mississippi Lime.
“We feel very good about our ability to meet our targeted range for 2012 asset sales,” the company said in the statement.
Chesapeake Midstream will be a “cash machine” for Global Infrastructure because it’s structured to pay an increasing dividend as profits increase, David Askew, an analyst at RBC Capital Markets Corp. in Austin, Texas said before the announcement.
The acquisition follows Global Infrastructure’s purchase of Edinburgh Airport for 807.2 million pounds ($1.25 billion) in April. Global Infrastructure’s investments in pipelines, water, waste and transport have annual revenue of more than $4 billion and employ 12,000 people, according to its website.
McClendon exited gas hedging contracts held by Chesapeake Energy in late 2011, leaving the company exposed when milder- than-normal weather across the northern U.S. slashed demand for the furnace fuel and prices plunged. Alembic Global said in a May 17 note that the company may be forced to curtail spending on drilling if McClendon fails to sell enough assets.
Selling pipelines was one of the measures that billionaire investor Carl Icahn said he would push for, along with other asset sales and reduced capital spending, in a June 4 filing with the Securities & Exchange Commission. Icahn’s 7.6 percent stake won him the right to appoint one of four new directors who will replace almost half the board by June 22 under an overhaul announced earlier this week.
Chesapeake Midstream slipped 0.8 percent to $25.07 in New York on June 7, taking its decline for the year to 14 percent. Chesapeake Energy lost 2 percent yesterday, for a 20 percent slide this year.
Chesapeake held a 45.2 percent limited partner interest in the midstream partnership as of Dec. 31, according to a regulatory filing. It also jointly owns Chesapeake Midstream’s general partner with Global Infrastructure.
McClendon, who sits on the boards of both the Midstream pipeline company and its controlling partner, has been under a cloud since a series of media reports in March and April about personal loans he obtained using minority stakes in company- owned wells that he’d been allowed to gather for his private portfolio.
Chesapeake Energy announced May 1 that he will step down as chairman of the parent company when a replacement is chosen.
Shedding the pipelines is a retreat from McClendon’s vision of so-called vertical integration, which involves owning oil and gas fields as well as ancillary assets such as gas-processing plants, drilling rigs and hydraulic-fracturing equipment.
Chesapeake Energy said in its most recent annual report that owning pipelines makes the company more efficient at managing costs involved with gathering and processing gas.
Chesapeake Energy started a pipeline venture with Global Infrastructure in 2009 when the infrastructure investment fund, led by Adebayo Ogunlesi, bought a stake in some Chesapeake pipelines. They took Chesapeake Midstream public the following year.