--Chesapeake Energy will sell pipelines and infrastructure for
$4 billion in cash
--The divestitures are expected to reduce capital expenses by $3
billion over the next three years
--The company has come under fire for mounting debt and
corporate-governance issues
(Adds details, analyst comment, information about the company's
shareholder meeting, in the sixth and 12th through 14th
paragraphs.)
By Ben Lefebvre and Kristin Jones
Chesapeake Energy Corp. (CHK) plans to sell pipeline assets
totaling more than $4 billion in cash, a boon to the embattled
natural-gas company as it seeks to finance its expensive journey
towards more-profitable oil production while weighed down by a
large debt-load and tight cash flow.
The sale of the pipeline and gathering assets to private-equity
fund Global Infrastructure Partners LLC will help Chesapeake as it
strives to bring its debt level down to $9.5 billion by the end of
the year and make up for a $10 billion cash shortfall. At the end
of the first quarter, the company said, its long-term debt totaled
$13.1 billion, the product of epic land purchases and an ambitious
oil-drilling program at a time when its income was eroded by
plummeting natural-gas prices.
Chesapeake said it will receive $2 billion by the end of June
for the sale of some mid-continent gathering-and-processing assets
of Chesapeake Midstream Partners LP (CHKM). At the same time,
Chesapeake Energy agreed to sell its interests in Chesapeake
Midstream Development LP, its wholly owned subsidiary, for a
possible additional $2 billion.
Friday's deals will bring Chesapeake's disclosed asset sales so
far this year to $6.6 billion. The company is trying to sell
additional land, including acres in the oil-rich Permian Basin in
West Texas, the Utica shale in Ohio, and other parcels in east
Texas, Colorado and Michigan. It also seeks to sell a stake in a
joint venture in the Mississippi Lime, a formation in Kansas and
Oklahoma. The acres could earn the company more than $10
billion.
The divestiture program is designed to alleviate a finance
crunch brought about by a glut in natural-gas production, which
recently drove prices to their lowest level in a decade.
Chesapeake, the second-largest natural-gas producer after Exxon
Mobil Corp. (XOM), is one of the many U.S. energy companies now
focusing on extracting crude oil, which is more profitable but
which also requires massive investments to produce in the
quantities Chesapeake wants.
The sale of the pipeline assets will reduce the amount of
capital outlays Chesapeake has to make. Between the sale proceeds
and the capital-spending savings, the deals would bring Chesapeake
Energy a much-needed $7 billion cash surplus during the next three
years, analysts said. The assets bring annual earnings of about
$500 million.
"That's a fair trade in my opinion," Morningstar analyst Mark
Hanson said. "With its spate of announced and contemplated assets
sales, the company should be able to scare up enough cash to bridge
its funding gap."
But jettisoning its pipelines could eat into the company's
profit margins in the long term. Chesapeake will now have to depend
on a separate company to move the oil and gas it produces to
market, which might increase its transportation costs, Simmons
& Co. said in a note to investors.
The acquisitions will result in Global Infrastructure Partners
owning 69% of Chesapeake Midstream's limited-partner units and all
of its general-partner interest. The fund, led by Credit Suisse
Group AG (CS) and General Electric Co. (GE), joined with Chesapeake
Energy to form Chesapeake Midstream Partners, an entity that went
public in 2010 and operates gas-gathering and processing systems in
the Marcellus Shale, Barnett Shale and other U.S. locations.
"These transactions will preserve the strategic relationships we
have" with Chesapeake Midstream Partners and Chesapeake Midstream
Development, Chesapeake Energy Chief Executive and co-founder
Aubrey McClendon said.
Chesapeake disclosed the deals on the day investors gathered in
Oklahoma City to attend the company's annual shareholders
meeting.
Under pressure from shareholders, Chesapeake is expected to
replace more than half of its board with new directors, limiting
the power of Mr. McClendon. Two directors--Richard Davidson and V.
Burns Hargis--resigned after less than 30% of shareholders endorsed
their re-election.
Shareholders voted Friday to reincorporate Chesapeake in
Delaware, a move that will put the entire board up for election
annually, instead of the company's current system of staggered
board votes. Shareholders also voted against a non-binding proposal
that approved the compensation packages received by Chesapeake
executives, among the highest paid in the industry.
The Chesapeake board also said Friday that, effective
immediately, a simple majority of shareholder votes would be needed
to pass proposals, replacing a rule requiring approval from
two-thirds of shareholders.
Chesapeake Energy shares recently were up 1.8% at $18.17.
Write to Ben Lefebvre at ben.lefebvre@dowjones.com.