Must-know: Chesapeake and Exterran strike another deal (Part 2 of 3)
Chesapeake Energy (CHK) is targeting to raise ~$4 billion from asset divestment this year. The asset sales will allow CHK to streamline its operations and concentrate more on its upstream business. Freeing up its midstream and oilfield services assets is one of the ways in which CHK seeks to redeploy its upstream position.
CHK has already divested several of its midstream assets. These include the oilfield services spinoff completed in June, asset sales of compression units to Exterran (EXLP) and Access Midstream Partners (ACMP) in April, and several other non-core asset sales and non-core acreage sales.
The recent deal between EXLP and CHK is the second in the past few months. In April, CHK sold 337 compression units to EXLP for $360 million. It also sold 103 compression units to ACMP for $160 million.
It’s important to note that CHK is a component of the Energy Select Sector SPDR ETF (XLE), while EXLP and ACMP are both components of the Alerian MLP ETF (AMLP).
Asset sales to help improve CHK’s financial health
The proceeds from these transactions, as well as the latest deal, will likely be used to reduce the current debt levels of CHK, which currently stand at ~$13 billion. The proceeds of $4 billion will reduce current debt levels by approximately 30%.
Also, in their Analyst Day Presentation, and following some of the above mentioned divestitures, CHK management revised its guidance for 2014. CHK expects its 2014 production to decline by 2% and the operating cash flow to decline by $250 million.
However, despite these setbacks in the near term, the long term benefits of these transactions will offset these negative impacts because long-term benefits include reducing the financial risk of the company.
Apart from easing liquidity concerns, the asset divestitures will also help CHK focus more on exploration and production activities, which is a positive given the higher oil prices. To see why oil prices have been trading higher, read our Market Realist series Why oil prices spiked while natural gas prices hit a 7-month low.
The following section discusses how the transaction affects Exterran Partners.
Browse this series on Market Realist:
- Part 1 - Must-know: Exterran and Chesapeake reach another deal in 4 months
- Part 3 - Why Exterran benefits from its Chesapeake acquisitions
- Basic Materials Industry
- Oil, Gas, & Consumable Fuels
- Chesapeake Energy