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GIP to buy over $4bn of Chesapeake pipelines

Global Infrastructure Partners has bought Chesapeake Midstream Partners, a portfolio company GIP co-founded in 2009, for $2bn and entered into an agreement to buy another $2bn plus of Chesapeake assets.

Global Infrastructures Partners (GIP) ended Friday speculation about a possible sale of Chesapeake Midstream Partners with a $2 billion deal that gave GIP full ownership of its longtime portfolio company, the firm revealed.

The transaction concluded mounting opinion that erstwhile part-owner Chesapeake Energy Corporation would put its Chesapeake Midstream Partners – a pipeline operator the company co-founded in 2009 in a partnership with GIP – in play to help pay down its debt.

The complete purchase will give the $10 billion infrastructure fund manager 100 percent general partner (GP) ownership of Chesapeake as well as 69 percent limited partner (LP) interest, and was credited to Global Infrastructure Partners II (GIP II), the second fund offering from GIP. The deal is scheduled to close on June 29.

In addition, Chesapeake Energy Corporation also entered into an agreement with GIP to sell its stake in wholly owned subsidiary Chesapeake Midstream Development and other gathering and processing assets worth a combined total of over $2 billion. The agreement gives GIP and Chesapeake Energy Corporation a 45-day exclusive negotiation period, with a 45-day extension possible.

“GIP is pleased to be able to make a new investment in CHKM [the ticker symbol for New York Stock Exchange-listed Chesapeake Midstream Partners],” said Mathew Harris, partner with GIP. Harris went on to hint that the ownership structure would offer potential for “vast growth”.

Chesapeake Energy has been plagued by internal scandal and a sagging stock price, prompting shareholder activist Carl Icahn and Southeastern Asset Management, run by value investor Mason Hawkins, to weigh in on what the company should do with its midstream business.

Seventy-six-year-old Icahn is a 7.6 percent stakeholder in Chesapeake Energy Corporation who along with 13.6 percent shareholder Southeastern successfully pressured the Oklahoma company to revamp its board and had questioned if the pipeline operator should be sold.

As general partner, GIP has helped steward Chesapeake Midstream Partners from its acclaimed 2010 initial public offering (IPO), instilling fiscal discipline in the master limited partnership (MLP), according to Chesapeake Midstream boss Mike Stice.

But in 2012, stock in Chesapeake Midstream Partners had fallen 18 percent and a company that had previously enjoyed a run as a Wall Street favourite faced a valuation backlash for the first time.

That downturn was due in large part to its connection with Chesapeake Energy Corporation, whose chief executive Aubrey McClendon has been harshly criticised for using his position for personal enrichment.

Meanwhile, the price of natural gas has hit a 10-year low.

Despite recent poor performance, analysis on Chesapeake Midstream Partners has remained bullish. The company has amassed a 4,000-mile pipeline system capable of gathering 2.7 million cubic feet of natural gas daily.

In addition, the company in the first quarter posted $52.2 million in net income, up 35 percent from a year ago, while currently trading around $23 a share on the NYSE.

“GIP has been an outstanding sponsor and owner for CHKM,” said chief executive Stice. “I look forward to the opportunity to continue that relationship”.