Chesapeake Energy Corp. (NYSE: CHK) has taken the first steps to spin off its oilfield services unit.
The second largest U.S. natural gas producer, behind only behemoth Exxon Mobil Corp. (NYSE: XOM), reported Monday it has filed paperwork with the U.S. Securities and Exchange Commission for the possible separation. The company also confirmed Morgan Stanley (NYSE: MS) has been retained to evaluate strategic options for the business, Chesapeake Oilfield Operating LLC (COS).
While the Oklahoma City, Okla.-headquartered company didn’t provide many details, it did say in a statement that the transaction will be tax-free to its shareholders.
Also shared was that before completion of the spin-off, the unit will convert into a corporation and undergo a name change to Seventy Seven Energy Inc. The company is expected to list on the New York Stock Exchange under the ticker SSE.
A timeline wasn’t stated, but it was stated under terms of the spin-off that CHK shareholders will receive one share of SSE for every yet-to-be determined number of CHK stock held on a yet-to-be announced record date.
Chesapeake, focused on discovering and developing natural gas and oil assets onshore in the United States, reported last month it was mulling a sale or a spin-off of the unit, saying it is able to fully operate on its own.
The unit’s services include drilling, hydraulic fracturing (“fracking”), oil rentals, rig location, and fluid handling and disposal. It has 115 leased or owned land rigs and 360,000 HP of hydraulic fracturing equipment. About 35% of COS’s marketable drilling rigs are currently working for third-party operators.
While the unit posted a net loss of $19.7 million in 2013, it generated $2.2 billion in revenue. Operating income totaled $28.4 million. On an adjusted basis, the company had $368.6 million in EBITDA, down from $439.2 million in 2013.
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“COS is an outstanding business with a talented management team that we believe will offer Chesapeake and its shareholders enhanced return opportunities as a stand-alone company. It has provided, and will continue to provide, superior service to Chesapeake’s upstream business… A separation of COS is aligned with our strategies of financial discipline and profitable and efficient growth from captured resources,” Chesapeake’s Chief Executive Doug Lawler said in Feb. 24 statement.
Separating Chesapeake Oilfield Services from Chesapeake Energy will allow the company to further capitalize on its expertise and secure additional third-party work, COS Chief Executive Jerry Winchester added in the same statement.
Spin-Off Makes for Leaner Chesapeake (NYSE: CHK)
The spin-off is part of Chesapeake’s aim to pare down its $13.02 billion long-term debt load.
The immediate impact from the spin-off on CHK’s balance sheet will be to help close a funding gap of approximately $1 billion in the company’s 2014 budget.
Over the last two years, hurt by low natural gas prices, CHK has shed some $11 billion in assets to pay off debt accumulated in a rush to acquire land or other assets.
The company is also increasingly shifting focus on more lucrative oil and gas liquids.
With particulars on the spin-off limited, and shareholders uncertain of date and price, CHK was trading down nearly 1% at $24.81 just before noon.
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