Chesapeake Sells Marcellus Pipeline System to Subsidiary (CHK, CHKM)

As part of its efforts to raise cash and pay down debt, Chesapeake Energy Corp. (NYSE: CHK) has sold its Appalachia Midstream Services subsidiary to Chesapeake Midstream Partners L.P. (NYSE: CHKM) for total consideration of $856 million. Following the sale, Chesapeake Energy will own about 46% of the limited partnership units of Chesapeake Midstream.

Appalachia Midstream owns a gathering system in the liquids-rich Marcellus shale gas play comprised of about 200 miles of pipeline and gas processing plants. The system’s throughput totals just over 1 billion cubic feet of natural gas per day.

Chesapeake Midstream will pay $600 million in cash from its $1 billion revolving credit facility and $256 million in 9.8 million common units. The sale is expected to close by December 30th.

At the end of September, Chesapeake Energy had about $11.8 billion in long-term debt and another $5 billion in deferred long-term liability charges on its balance sheet. The company’s model consists of grabbing leases in new fields, proving that the assets exist, and then selling the assets or developing partnerships to raise cash to do the same thing over again.

Chesapeake Energy has committed to raising $7 billion in capital in 2012 by selling assets, holding an IPO for its own oil field services company, and creating joint ventures. The company also plans to increase production by 30%. The goal is to reduce its outstanding debt by 25%.

Thus far, Chesapeake Energy has managed to keep all its balls in the air, but a lot of its success depends on the availability and cost of capital. If anything should go sour with the company’s ability to get financing, it faces some pretty dangerous consequences.

Shares in Chesapeake Energy are up about 0.8% in the pre-market, at $22.85, near the bottom of the 52-week range of $22.00-$35.95. Shares in Chesapeake Midstream are unchanged at $27.12 in a 52-week range of $23.93-$29.31.

Paul Ausick