Updated to reflect shareholder votes and added CEO comments NEW YORK ( TheStreet) -- Chesapeake Energy ( CHK) sold its midstream assets to privately held Global Infrastructure Partners for $4 billion in its biggest deal of 2012 as a cash crunch looms. The deal confirms previous speculation that amid an over $10 billion cash shortfall, Chesapeake Energy would look to sell the unit to raise much needed money. The move, which is Chesapeake's largest sale since questions emerged about CEO Aubrey McClendon's stewardship of the nation's second-largest gas driller, also comes amid a board shakeup that will give investors, including activist Carl Icahn, representation on its board. In two separate deals, the Oklahoma City-based driller agreed to sell its stake in Chesapeake Midstream Partners and another subsidiary, Chesapeake Midstream Development, for a total of $4 billion. While the sales will help Chesapeake Energy to repair its finances, investors and analysts still expect billions more in asset sales. "The proceeds of these transactions are an important part of our 2012 asset sales program that is on track to generate cash proceeds of $11.5-14.0 billion," said McClendon in a statement Friday. McClendon stressed that the move brings Chesapeake's divestiture total to $6.6 billion for the year, with its Permian asset sale and Mississippi Lime joint venture among other businesses that will be sold in the second half of 2012. "Importantly, the sale of
Chesapeake Midstream will also reduce previously planned capital expenditures by approximately $3.0 billion over the next three years," noted McClendon. Earlier in June, Chesapeake Energy said that following "extensive discussions" with its two largest shareholders, Southeastern Asset Management and Icahn, it had agreed to add four new independent directors to replace four existing independent directors who will resign from Chesapeake's board. Three of the new independent directors will be proposed by Southeastern and the fourth will be proposed by Icahn. Friday's asset sale also coincides with Chesapeake's June 8 annual meeting, where several large pension funds submitted proposals for shareholder representation on the board, and the New York City comptroller had specifically asked for the removal of Oklahoma State University President Burns Hargis and former Union Pacific Chairman Richard K. Davidson as directors. At Chesapeake's annual shareholder meeting on Friday, board directors Hargis and Davidson, who were part of the company's audit committee, offered their resignation after receiving less than 30% of shareholder support for their seats. Chesapeak said it would review the offers "in due course," in a statement on Friday.
For Icahn, who announced a 7.6% share stake in Chesapeake in late May, new directors and Friday's asset sale appear to be a quick answer to his activist calls for more independence on Chesapeake's board to impart better financial management as the company works to sell assets, amid decade-low natural gas prices. "
The stock price suffers because of the enormous risk associated with an ever changing business strategy, enormous capital funding gap, poor governance, and unchecked risk taking," Icahn wrote in late May letter to Chesapeake's board, adding, " What is important is that this pernicious funding gap, which we believe this board has created, must be filled." At Chesapeake's shareholder meeting, Reuters reported that CEO McClendon said the company would dedicate its oil and gas focus to just 10 basins, after previously embarking on a "land grab" of shale drilling assets across the U.S. "It will be a completely different company to invest in," McClendon said. In Friday trading, Chesapeake shares rose nearly 3% to $18.36, after the stock was bolstered by developments from its shareholder meeting and the $4 billion pipeline unit sale. Still, the company's shares are off nearly 20% in 2012 and 40% in the last 12 months, respectively, amid concerns about its finances and CEO McClendon's 2.5% personal investment in almost all of the wells that the company has drilled over the years. Underlying a board shakeup and the initiation of asset sales, it's important for investors to remember that a shoring up of the balance sheet will remain a key focus for the oil and gas company in 2012. Moody's calculates the company needs to sell $7 billion in assets to avoid a ratings downgrade and breach of its debt covenants. "Even $7 billion in asset sales could place Chesapeake's covenant compliance for its revolving credit facility in some doubt, and the company would still face a significant funding gap in 2013," wrote Moody's analyst Peter Speer on May 31. In late May, Chesapeake Energy listed 57,000 acres for sale in the Woodbine shale play of East Texas, according to a prospectus from energy asset M&A boutique Meagher Energy Advisors, said its President Matthew Meagher. Last week, Chesapeake listed a prospectus for 503,863 of net acres for sale in the DJ Basin of the Niobrara shale of Colorado and Wyoming. " For year-end debt to not exceed $12bn (4x $3.0bn), then asset monetizations must reach at least $5.0bn," noted Citigroup analyst Robert Morris in a May note to clients. "Without any asset sales, CHK would be non-compliant with its revolving bank credit facility at year end unless spending was cut sharply." Chesapeake expects to cover much of its funding gap through the sale of its Permian assets and a joint venture in the Mississippian Lime. For more on Carl Icahn, see his investment portfolio. For more on energy stocks, see the energy stocks bought and sold by hedge funds in the latest quarter. See 5 ways Chesapeake Energy can be saved from itself for more on how it can initiate a share turnaround. -- Written by Antoine Gara in New York