Chesapeake Midstream Partners (NYSE: CHKM) officials are confident that the company will meet its 2012 outlook of $475 million in earnings and $660 million in capital spending despite the decision by its general partner, Chesapeake Energy Corp. (NYSE: CHK), to curtail its gross natural gas production by up to 1 billion cubic feet per day (Bcf/d).
“Our low risk business model has proven to be successful at delivering predictable cash flows, even in volatile times,” Mike Stice, Chesapeake Midstream’s chief executive, said during a Feb. 29 conference call to discuss Q4 2011 earnings. “Our contractual structure that continues to deliver on our promise of predictable cash flows includes 10-year minimum volume commitments with Chesapeake and Total in the Barnett and a three-year minimum volume commitment in the Haynesville from Chesapeake.”
He added that the company also held EBITDA (earnings before interest, taxes, depreciation and amortization) guarantees in the Marcellus shale along with redetermination provisions in the Barnett, Marcellus, Hayensville and the Mid-Continent. According to Stice, these guarantees protect the downside risks of decreased drilling in these regions.
These guarantees are also acting as protection for the company’s capital outlay, which includes its $865 million acquisition of Appalachia Midstream Services from Chesapeake Midstream Development LP. The deal made CHKM the largest gathering and processing MLP as measured by throughput volumes. The acquisition added roughly 200 miles of gathering pipeline in the Marcellus with just over 1 Bcf/d in throughput through 15-year fixed fee gathering agreements with producers.
“The added benefit of significant additional acreage dedication in the liquids-rich region in the Marcellus South coupled with the material diversification of our customer base makes this our crowning achievement to date,” Stice said. The acquisition helped the company increase its non-Chesapeake revenue from 17% in 2011 to approximately 24% in Q1 2012. CHKM hopes to eventually reach a 50/50 split between Chesapeake revenue and non-Chesapeake revenue with the Appalachia Midstream Services acquisition being a major driver towards this goal.
Stice declined to state an exact timeframe for future dropdown acquisitions, but stated that the company planned to make a annual dropdown of $500 million annually for the next decade. “Each and every year, we’re going to do a dropdown like [Appalachia Midstream Services]…We are working hard already looking for what the right next opportunity is…[T]here is likely going to be a delay on doing any that are in a dry gas play,” he said while adding that assets in the Mid-Continent and Permian are strong targets.
Chesapeake Energy Aiming To Increase Natural Gas Demand
CHKM should continue to benefit from increased midstream demand thanks to the efforts of its parent, Chesapeake Energy, to not only find new gas plays in the U.S., but its efforts to increase demand for these volumes.
This week, Chesapeake announced a partnership with GE to build new CNG refueling stations for natural gas vehicles. This announcement follows its efforts to garner $400 million in investments in Clean Energy Fuel (NYSE: CLNE).
“Clean Energy is the nation’s largest provider of natural gas as a transportation fuel and they have very strong momentum in building out the infrastructure for America’s natural gas superhighway. I can assure you that the move is underway to move the nation’s transportation sector increasingly away from imported diesel and gasoline towards domestically produced and much cheaper natural gas,” Aubrey McClendon, Chesapeake Energy’s chairman and chief executive, said during the company’s Feb. 22 conference call to discuss Q4 2011 earnings.
As gas demand increases, it should help increase demand for new midstream infrastructure development along with gas prices, which would allow for further dropdown opportunities for CHKM. McClendon noted that the company’s plan to curtail dry gas production in 2011 was down in order to stimulate gas prices.
Contact the author, Frank Nieto, at firstname.lastname@example.org.
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