Friday, September 25, 2009

Chesapeake in Midstream Deal

The deal machine that is Chesapeake Energy announced a new joint venture arrangement, this time concerning midstream assets (gathering and pipeline).  The deal creates a new 50/50 JV entity called Chesapeake Midstream Partners, LLC with investor Global Infrastructure Partners (GIP) to cover midstream assets in the Barnett Shale and its non-shale midstream assets in the Arkoma, Anadarko, Delaware and Permian Basins.

While this transaction is not directly related to the Haynesville Shale, I note it for three reasons:

1) I believe that deals involving midstream assets will be the best way for private equity (PE) investors to invest in shale plays at this point.  PE funds have lots of cash they need to spend, but they like to invest in "leveraged transactions" - deals where they can invest alongside a big slug of debt from a bank - which can be hard to do on the E&P side.  But operators are still looking for cash to explore and produce, so PE funds are a good source of investment.   Exco Resources recently closed a transaction with BG Group for 50% of its Haynesville midstream assets.  I think there will be more deals like this. 

2) Hey look, debt funding!  A deal like this, which involves a new $500 million bank loan, shows that the credit markets are loosening, at least a little bit.  That's good news for everyone in the economy because the market depends on banks lending new money.  The $500 million loan was less than GIP's $588 million equity investment and the purchase of legacy midstream assets is not a huge stretch, but any big loan is progress.

3) It is always fun to watch the Chesapeake deal machine in action.  Stay tuned because it won't be the last one.

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