Chesapeake's Spin-Off Plan Approved - Analyst Blog

Oklahoma City-based, Chesapeake Energy Corporation CHK has received the board of directors' approval for spinning off its oilfield services business unit. It was in May 2014 that the company announced the tentative strategic spilt, which was awaiting the board's approval since then. The move is in line with the company's ongoing strategy of shifting focus from natural gas drilling to liquids production.

The oilfield services unit, known as Chesapeake Oilfield Operating LLC 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 the company's total revenue. Oilfield services business has 5,200 of Chesapeake Energy's 10,800 employees and owns 118 rigs.

Post spin-off, the new unit would be named Seventy Seven Energy Inc. The new entity would be traded on the New York Stock Exchange under the symbol SSE.

Chesapeake Energy shareholders will receive one share of SSE common stock for every 14 shares of Chesapeake Energy common stock held at the close of business on the record date of Jun 19. The share distribution is expected to take place after the close of business on Jun 30, 2014. Post distribution, SSE will be an independent, publicly traded company, and Chesapeake Energy will retain no equity interest.

Chesapeake Energy's spin-off is an effort to reduce costs and debts as well as increase the market value of its assets. Overall, the company estimates funds exceeding $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 Energy expects capital expenditure in the range of $5.0–$5.4 billion. At the end of the first quarter, the company, which is the largest U.S. natural gas producer after ExxonMobil Corp. XOM, had a cash balance of just over $1 billion. Its long-term debt stood at $12.7 billion, representing a debt-to-capitalization ratio of 39.0%.

Earlier in May, 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 Energy 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 Energy 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.

At present, Chesapeake Energy carries a Zacks Rank #3 (Hold). Some better-ranked oil and gas stocks that look promising include Encana Corp ECA and Matrix Service Company MTRX. All these stocks sport a Zacks Rank #1 (Strong Buy).