Will Midstream Asset Sales Hurt Chesapeake Energy?

In an effort to raise cash and reduce its leverage, Chesapeake Energy (NYSE: CHK  ) has unloaded more than $11 billion worth of noncore assets over the past two years. Most recently, the company announced plans to sell some of its midstream assets. Let's take a closer look at what impact these sales might have on the company and its shareholders.

Source: Chesapeake Energy.

Sale of midstream compression assets
On Feb. 28, Chesapeake announced that it would sell midstream compression assets to Access Midstream Partners  (NYSE: ACMP  ) and Exterran Partners  (NASDAQ: EXLP  )  for total proceeds of approximately $520 million.

The two midstream companies will purchase a total of 437 compression units and related resources from a Chesapeake subsidiary in two separate deals that are expected to close before the end of the second quarter this year.

Access Midstream will acquire 103 compression units servicing gathering systems in Ohio, Pennsylvania, and West Virginia for $160 million, while Exterran Partners will buy 334 compression units servicing gathering systems in Arkansas, Louisiana, Oklahoma, Texas, and Wyoming for approximately $360 million.

What impact will these sales have?
In my view, these sales should be a net positive for Chesapeake for a few key reasons. First, and most importantly, they will raise $520 million to improve the company's balance sheet, while having only a minimal impact on Chesapeake's expected cash flow for the year. Chesapeake anticipates generating operating cash flow of $5.1 billion-$5.3 billion in 2014, while its capital spending is expected to range from $5.2 billion to $5.6 billion.

Second, the asset sales will further streamline Chesapeake's portfolio and allow the company to focus on its highest rate of return upstream opportunities. This year, the company plans to allocate the largest portions of its capital budget toward the Eagle Ford, Greater Anadarko Basin, and the Utica shale, where major cost reductions and improved well productivity are boosting returns.

Chesapeake peer Devon Energy (NYSE: DVN  ) has also pursued strategic alternatives for its midstream assets. In October, Devon announced that it would merge its midstream assets with Crosstex Energy to form EnLink Midstream -- a decision that has unlocked a great deal of value for Devon's shareholders. Since the merger was announced, the value of Devon's ownership interest in EnLink has increased by about $3.5 billion, or $8 a share.

Integrated oil major Chevron (NYSE: CVX  ) is also conducting a strategic review of its U.S. midstream assets, which could result in a spinoff or sale of some or all of the resources, according to Bloomberg. Like many of its Big Oil peers, Chevron is looking to raise funds from midstream and downstream asset sales to invest in higher-margin upstream activities.

The takeaway
Chesapeake's announced sales of midstream assets looks to be a net positive for the company in the long term. Not only will the sales generate more than $500 million to further improve the company's balance sheet, which had $912 million in cash and cash equivalents as of year-end 2013, but they will also allow Chesapeake to refocus capital toward its highest rate of return upstream opportunities.

With funding and liquidity concerns having eased considerably thanks to a combination of drastic cost reductions, improved capital efficiency, and asset sales, Chesapeake's new challenge will be how to boost its oil production, which is expected to grow by a paltry 1%-5% this year.

Chesapeake isn't the only company benefiting from the record oil and natural gas production that's revolutionizing the United States' energy position. That's why the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.

 

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2871842, ~/Articles/ArticleHandler.aspx, 8/31/2014 4:22:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement