Will Midstream Asset Sales Hurt Chesapeake Energy?

Chesapeake Energy’s decision to sell midstream assets will further improve its balance sheet, while having a minimal impact on this year’s cash flow.

Mar 12, 2014 at 1:00PM

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.

Chesapeake Energy Drilling Rig

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.


Arjun Sreekumar owns shares of Chesapeake Energy and Devon Energy. The Motley Fool recommends Chevron. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information