Oil and natural gas exploration company Chesapeake Energy (NYSE: CHK) is grappling with how to reconcile a $22 billion shortfall in cash flow that is plaguing the company.
Natural gas prices have reached a ten-year low after the growth and development of hydraulic fracturing, or fracking, as a way to extract the resource led to a natural gas boom in the United States.
And after overspending for many of the last 21 years, the debt has finally caught up with the company. On March 31, Chesapeake reported debt of $12.6 billion, and in the first quarter of 2012 the company posted a loss of $71 million.
Moody’s Investors Service reported that the company will face a downgrade if it is unable to sell $7 billion in assets before the year end.
The company has begun discussing the possibility of selling its stake in Chesapeake Midstream Partners LP (NYSE: CHKM), its partnership with Global Infrastructure Partners that began two years ago as a joint venture.
The partnership owns pipelines in Texas, Louisiana, and Pennsylvania, among several other states. Chesapeake Energy may plan to sell its entire stake, 45.2% of the company’s shares, in these pipeline assets to Global Infrastructure Partners in a sale worth an estimated $4 billion.
David Askew, an analyst at RBC Capital Markets Corp, rated Chesapeake Midstream at “outperform,” saying:
“Chesapeake Midstream should be a fast grower with a growing stable of assets.”
And some, like Wunderlich Securities analyst John Cusick, think it would be a mistake for Chesapeake Energy to sell these assets for that reason.
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Though over the short term Chesapeake Midstream won’t provide the type of cash its parent company needs, Chesapeake Energy could really profit in the long run. The pipeline company is a master-limited partnership, which means controlling partners receive cash after spending, and dividends will increase with company profit.
Because of this, Cusick said, Chesapeake Energy could make up to $68 million annually from Chesapeake Midstream’s profits and from the asset purchases it has planned.
Chesapeake Energy provides 75% of the partnership’s revenue, with the rest coming from energy companies such as Total SA (NYSE: TOT) and Statoil ASA (NYSE: STO). Chesapeake Midstream is working to lower this revenue stream to 50% so that its profits aren’t so closely tied to its parent company.
This year, Chesapeake Energy shares fell 29.7% and Chesapeake Midstream’s followed behind, falling 18.5%.
Recently, billionaire Carl Icahn bought into Chesapeake Energy, and he and other major shareholder Southeastern Asset Management Inc. will replace half of the board of directors. CEO Aubrey McClendon will also step down as chairman once he can be replaced.
McClendon’s actions have stirred up criticism and speculation after he took out loans using company stakes as collateral, further contributing to losses this year.
Chesapeake Energy’s 45.2% stake in Chesapeake Midstream are worth roughly $1.6 billion. Chesapeake Energy was up 5% on Wednesday to $17.85, while Chesapeake Midstream rose 4.05% to $25.15.
