Chesapeake Slides on Oilfield Spinoff Plans - Analyst Blog

U.S. gas giant Chesapeake Energy Corporation CHK ended last week on a slippery note, as the spin-off announcement for its oilfield services business dragged its shares down by almost 2.5% on May 16. However, the proposed restructure is in line with the company's ongoing strategy of shifting focus from natural gas drilling to liquids production.

The Oklahoma City-based company announced that it plans to separate its oilfield services unit, known as Chesapeake Oilfield Operating LLC. The segment is involved in drilling, hydraulic fracturing, rig relocation, and other related services. The to-be-divested business generated revenues of $2.2 billion last year – approximately one-eighth of total company revenues. Oilfield services business employed 5,200 of Chesapeake Energy's 10,800 employees and owns 118 rigs.

Post spin-off, the new unit would be christened Seventy Seven Energy Inc. The oilfields services unit could surface as a smaller player in the services market. The business is likely to fetch higher returns as companies push customers for price increases.

Per company estimates, the oilfield services business would at one go take away $1.1 billion of debt from its books. Chesapeake will also receive a $400 million dividend to write-off intercompany debt from the oilfield services segment. However, the new entity needs to be recapitalized, which, along with the spin-off process, is expected to be completed by Jun 2014.

Chesapeake Energy's spin-off is an effort to reduce costs, debts as well as to enhance the market value of its assets. Overall, the company estimates funds in excess of $4 billion to be generated in 2014 from its spin-off and asset divesture plans. Year to date, the company has generated around $925 million through asset disposal.

For 2014, Chesapeake expects capital expenditure in the range of $5.0–$5.4 billion.  At the end of the first quarter, Chesapeake − the largest U.S. natural gas producer after ExxonMobil Corp. XOM − had a cash balance of just over $1 billion. Long-term debt stood at $12.7 billion, representing a debt-to-capitalization ratio of 39.0%.

Earlier this month, the company raised its full-year total production growth outlook on an adjusted basis to 9–12% from 8–10%, to reflect higher-than-expected natural gas liquids volumes. However, as the company shifts its focus to more liquid-rich plays, it expects liquids production to increase approximately 29–33% in 2014.

Chesapeake remains one of the industry's most active players in managing asset portfolio through a combination of acquisitions and disposals. With the largest 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 #2 (Buy). Other stocks in the oil and gas industry worth considering include Athlon Energy Inc. ATHL and Encana Corp. ECA. Both stocks have a Zacks Rank #1 (Strong Buy).