Chesapeake Unveils Another Grand Plan (CHK, CHKM, TOT, CVX, KMI)

The nation’s second-largest producer of natural gas, Chesapeake Energy Corp. (NYSE: CHK), has announced a new plan to achieve what it calls “equilibrium” between its capital expenditures and its cash flow from operations. As has become typical of Chesapeake’s plans, this one involves selling off assets and establishing new joint ventures. The company also said this morning that it would issue $1 billion in senior debt due 2019.

Given the amount Chesapeake expects to raise, about $10-$12 billion, potential partners or buyers need to be pretty well-heeled. Total SA (NYSE: TOT), which formed a joint venture with Chesapeake earlier this year, is a possible partner. Chevron Corp. (NYSE: CVX) and Kinder Morgan Inc. (NYSE: KMI), among others, are performing secondary and tertiary recovery in the Permian Basin, where Chesapeake hopes to garner the biggest part of its sought-after cash.

The company’s plan includes new joint ventures in Oklahoma and Texas, selling more midstream and services assets, and the $1 billion debt offering. The company said it expects to realize $2 billion in the next 60 days on a volumetric production payment from its Granite Wash play and:

a financial transaction (similar to the company’s recent CHK Utica financial transaction) by a new unrestricted subsidiary formed to hold a portion of Chesapeake’s assets in Ellis and Roger Mills counties, Oklahoma, in the Cleveland and Tonkawa plays.

In the Utica transaction, Chesapeake sold a 25% stake in its Utica shale play in Ohio to Total for $2.32 billion. Of that amount, about $610 million came in cash and the rest represents Total’s obligation to pay for future drilling and completion costs.

Chesapeake is also considering selling all its assets in the Permian Basin of Texas, “if it receives a compelling offer.” The company estimates that it’s assets in the Permian Basin are worth $6-$8 billion. While there is no substantive offer on the table, Chesapeake says it is “targeting” a deal to close by the end of the third quarter of this year.

The company also plans to rake in another $2 billion from sales including some “portion of its midstream assets, service company assets and miscellaneous investments.” Chesapeake did not offer details, but it’s probably safe to assume a sale of a portion of its stake in Chesapeake Midstream Partners, L.P. (NYSE: CHKM) and an increase in the portion of the service company IPO the company will offer to the public when Chesapeake spins that business off.

Chesapeake’s $1 billion debt offering, though targeted for general corporate purposes, will be used in the short run “to repay amounts outstanding under its revolving bank credit facility, which it anticipates reborrowing from time to time to meet capital expenditure initiatives.” The company also reiterated its goal to cut its outstanding debt to $9.5 billion by the end of 2012.

Chesapeake reports fourth quarter and full-year earnings a week from tomorrow. The company is expected to post quarterly EPS of $0.60 on revenue of $3.08 billion. The EPS estimate is down -20% from actual EPS of $0.72 in the third quarter of 2011.

Investors like what they hear. A few minutes after the market opened this morning, Chesapeake’s shares are trading up about 3.5% at $22.91 in a 52-week range of $20.41-$35.95.

Paul Ausick