Chesapeake Services Unit Spin-off Likely - Analyst Blog

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U.S gas giant Chesapeake Energy Corporation CHK is preparing for a possible spin-off of its oilfield-services unit and has filed a Registration Statement on Form 10 with the U.S Securities and Exchange Commission. The spin-off is an effort towards reducing costs, debt as well as enhancing the market value of the company's assets.

Per the paperwork filed, the unit would be converted into a corporation and renamed Seventy Seven Energy, Inc. prior to the completion of the spin off. The transaction would be tax-free for its shareholders.

In order to reduce its funding gap by nearly $1 billion in 2014, the company intends to cut its capital spending by 20% and continue with its asset sales during the year.

Chesapeake's oilfields services unit would surface as one of the smaller players in the services market. The business is likely to fetch higher returns as companies push customers for price increases. Moreover, spending on U.S oilfield work is estimated to grow at 15% in 2014, up from the earlier estimate of about 10%.

Seventy Seven's biggest challenge will be to carry on expanding its customer base ahead of Chesapeake. This would imply utilization of 51 of the service company's 79 contracted drilling rigs.

The latest filing comes after over two years of deliberation over how to separate the unit. Originally, an initial public offering of the business was planned for the fourth quarter of 2012 by the company.

Chesapeake remains one of the industry's most active players in managing asset portfolio through a combination of acquisitions and disposals. With the biggest inventory of unconventional resource potential than probably any other domestic independent, Chesapeake boasts a leading position among the top unconventional liquids-rich plays, comprising Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa, Mississippi Lime and Niobrara and in the Marcellus, Haynesville/Bossier and Barnett natural gas shale plays.

Chesapeake carries a Zacks Rank #3 (Hold). Other stocks in the oil and gas industry worth considering include Helmerich & Payne, Inc. HP, Warren Resources Inc. WRES and Patterson-UTI Energy Inc. PTEN. All three stocks have a Zacks Rank #1 (Strong Buy).
 



CHESAPEAKE ENGY CHK: Free Stock Analysis Report

HELMERICH&PAYNE HP: Free Stock Analysis Report

PATTERSON-UTI PTEN: Free Stock Analysis Report

WARREN RSRCS WRES: Free Stock Analysis Report

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