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Chesapeake Midstream Partners, L.P. $345mm
IPO filing February 16, 2010
See estimated market cap below, includes 12 mid-stream company comparisons |
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BACKGROUND |
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CHM is a limited partnership formed by Chesapeake Energy Corp (NYSE: CHK, $17bb market cap) and GIP (fund managers) to own, operate, develop and acquire natural gas gathering systems and other midstream energy assets. |
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. Chesapeake is the second largest natural gas producer in the U.S. by volume of natural gas produced and is the most active driller for natural gas in the U.S. by number of drilling rigs utilized |
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. GIP is a $5.6 billion independent infrastructure investment fund |
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. At the closing of this IPO, GIP will indirectly own 50% of both the general partner and incentive distribution rights through its ownership in Chesapeake Midstream Ventures. |
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CASH DISTRIBUTIONS |
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"Estimated Cash Available for Distribution for the 12 months ending Dec 31, 2010 $190.3mm" |
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CAPITALIZATION |
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Book value of $1.74bb pre-IPO. Add expected IPO proceeds to get estimated post-IPO book value of $2bb |
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TWO LARGEST CUSTOMERS |
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The two largest customers for CHM are Cheaspeake itself and and Total, Chesapeake’s upstream joint venture partner in the Barnett Shale region. |
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On January 25, 2010, Chesapeake closed its $2.25 billion Barnett Shale upstream joint venture arrangement with Total under which Total acquired a 25% non-operated interest in Chesapeake’s Barnett Shale acreage in exchange for a cash payment of $800 million and its agreement to provide funding for $1.45 billion of future drilling and completion expenditures. |
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Total S.A. is the fifth largest integrated oil and gas company in the world based on market capitalization. CHM expects that Chesapeake’s drilling activity in the Barnett Shale region will increase as compared to its 2009 drilling activity in part as a result of this joint venture. |
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CHESAPEAKE IS A LEADER |
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in unconventional natural gas technology and production. Chesapeake has been developing expertise in horizontal drilling technology since shortly after its inception in 1989 and was one of the first companies to recognize the potential of unconventional natural gas resource plays in the U.S. |
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During the past five years, Chesapeake has grown from the eighth largest natural gas producer in the U.S. to the second largest natural gas producer, measured by natural gas volumes produced, in large part as a result of its success in finding and developing unconventional natural gas assets. |
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Chesapeake currently maintains an active drilling program and the largest leasehold position in the U.S. "Big Four" natural gas shale plays (5.3 million gross acres, of which less than 10% have been dedicated to CHM). |
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CURRENT PIPELINES & GAS GATHERING SYSTEMS |
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CHM systems consist of 2,810 miles of gathering pipelines, servicing over 3,500 natural gas wells. |
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For the nine months ended September 30, 2009, CHM assets gathered 1.5 Bcf of natural gas per day, ranking CHM among the largest natural gas gatherers in the U.S. |
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REGIONS |
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CHM’s gathering systems operate in the Barnett Shale region in north-central Texas and CHK's Mid-Continent region, which includes the Anadarko, Arkoma, Delaware and Permian Basins. |
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CHM generates the majority of its operating income in the Barnett Shale region, where CHM services more than 1,500 wells in the core of the prolific Barnett Shale. |
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In CHK's Mid-Continent region, there is an enhanced focus on the unconventional resources located in the Colony Granite Wash and Texas Panhandle Granite Wash plays of the Anadarko Basin. |
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GROWTH PLAN |
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CHM’s operating areas are the core growth areas for Chesapeake. The natural gas gathered by CHM’s systems in the Barnett Shale and Mid-Continent regions represented approximately 38% and 26%, respectively, of Chesapeake’s total natural gas production during the nine months ended September 30, 2009. |
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Chesapeake’s undeveloped reserves within these regions provide CHM with significant organic growth opportunities. |
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According to their joint venture arrangement, Chesapeake and Total hold an aggregate approximate 400,000 gross acres in the greater Barnett Shale area as of January 2010, and Chesapeake expects to increase its operated rig count in its Barnett Shale acreage dedication as a result of its upstream joint venture with Total by more than 40% relative to fourth-quarter 2009 levels. |
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CONTRACTS & CASH FLOW VISIBILITY |
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CHM believes that the combination of its fixed-fee business model and contractual protections provide CHM with long-term cash flow stability and a strong platform from which to grow its business |
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According to CHM’s 20-year gas gathering agreements, Chesapeake and Total have agreed to provide CHM with extensive acreage dedications in the Barnett Shale region and, with respect to CHM’s agreement with Chesapeake, also CHM’s Mid-Continent region. |
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These agreements generally require CHM to connect Chesapeake and Total operated natural gas drilling pads and wells within CHM’s acreage dedications to CHM’s gathering systems and contain the terms that are intended to support the stability of CHM’s cash flows including |
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10-year minimum volume commitments in CHM’s Barnett Shale region, which mitigate throughput volume variability; |
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Fee redetermination mechanisms in CHM’s Barnett Shale and Mid-Continent regions, which are designed to support a return on CHM’s invested capital and allow CHM gathering rates to be adjusted, subject to specified caps, to account for variability in revenues, capital expenditures and compression expenses; and |
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Price escalators in CHM’s Barnett Shale and Mid-Continent regions, which annually increase CHM’s gathering rates.
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CONSERVATIVE CAPITAL STRUCTURE |
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At the closing of the IPO offering and after using part of the IPO proceeds to repay debt, CHM expects to have no outstanding debt and to have cash on hand and undrawn borrowing capacity under an amended and restated $500 million syndicated revolving credit facility. |
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COMPETITION |
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In CHM’s Barnett Shale region competitors include Energy Transfer Partners, Crosstex Energy, Quicksilver Gas Services, Freedom Pipeline, Peregrine Pipeline, XTO Energy, EOG Resources, DFW Mid-Stream and Enbridge Energy Partners. |
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In CHM’s Mid-Continent region competitors include Atlas Pipeline Holdings, L.P., DCP Midstream |
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UNDERWRITER RELATIONSHIPS |
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Affiliates of Citigroup Global Markets Inc. and Morgan Stanley & Co. Incorporated are lenders under CHMs revolving credit facility and, in that respect, will receive a portion of the proceeds from this offering through the repayment of borrowings outstanding under CHM’s revolving credit facility. |
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USE OF IPO PROCEEDS |
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Pay debt, capital expenditures, working capital |
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Estimated market cap for Chesapeake Midstream Partners, L.P. (CHM)
$345mm IPO filed February 16, 2010 |
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ESTIMATED MARKET CAP for CHM |
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Assuming
. Post IPO book value of $2bb
. $190mm available for cash dividends for the 12 months ending Dec 31, 2010
The 50% parent CHK has a market cap of $17bb |
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Esitmated martket cap range |
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$2bb post IPO net worth |
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MCap low |
Mcap high |
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Price/book-value est multiple |
low |
1.9 |
$3,800 |
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Price/book-value est multiple |
high |
2.4 |
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$4,800 |
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Esitmated martket cap range |
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$190mm of cash distributions |
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MCap low |
Mcap high |
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Dividend rate |
high |
7.50% |
$2,533 |
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Dividend rate |
low |
6.00% |
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$3,167 |
Based on the following comparisons sorted by dividend payout within category
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Mrkt |
IPO |
IPO |
Price |
Price / |
Dividend |
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Cap (mm) |
Date |
Price |
Feb 24 |
BookValue |
% payout |
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Mid-stream companies with strong 'parents' |
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Williams Partners (WPZ). |
$2,000 |
Jan 17 '08 |
$20 |
$37.84 |
10 |
6.65% |
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Kinder Morgan Energy (KMP) |
$18,220 |
1997 |
1997 IPO |
$63.03 |
2.74 |
6.65% |
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El Paso Pipeline (EPB) |
$3,390 |
Nov 15, '07 |
$20 |
$37.91 |
2.1 |
5.76% |
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CHM Barnett Shale region competitors |
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source of the major share of operating income for CHM |
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Quicksilver Gas Ser(KGS) |
$473 |
Aug 7 '07 |
$21 |
$19.85 |
4.45 |
7.90% |
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Energy Transfer Prtnrs (ETP) |
$8,100 |
Feb 23,'06 |
$23 |
$48.08 |
1.85 |
7.76% |
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Crosstex Energy (XTXI) |
$352 |
Jan 13 '04 |
$20 |
$7.57 |
1.69 |
0.00% |
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CHM Mid-Continent region competitors |
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DCP Midstream (DPM) |
$955 |
Dec 2, '05 |
$22 |
$30.10 |
2.56 |
7.93% |
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Atlas Pipeline (AHD) |
$160 |
July 21, '06 |
$23 |
$5.80 |
-16 |
0.00% |
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Mrkt |
IPO |
IPO |
Price |
Price / |
Dividend |
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Other mid-stream IPOs |
Cap (mm) |
Date |
Price |
Feb 24 |
BookValue |
% payout |
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Targa Resources Prtn (NGLS) LP |
$1,830 |
Feb 9,'07 |
$21 |
$24.59 |
1.52 |
8.49% |
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Duncan Energy Prtnrs (DEP) |
$1,460 |
Jan 31,'07 |
$21 |
$25.25 |
1.92 |
7.16% |
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SandRidge Energy (SD) |
$1,480 |
Nov 5,'07 |
$26 |
$8.06 |
1.79 |
0.00% |
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Constellation Energy P (CEP) |
$86 |
Nov 15,'06 |
$21 |
$3.80 |
0.17 |
0.00% |
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source for financials: google finance |
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