Chesapeake Closes Spin-off; Seventy Seven Energy Debuts - Analyst Blog


Oklahoma City-based, Chesapeake Energy Corporation ( CHK ) has spun off of its oilfield services business into a stand-alone, publicly traded company called Seventy Seven Energy Inc. ( SSE ). The new entity was earlier held under Chesapeake Oilfield Operating, L.L.C.

In May 2014, that the company announced the tentative strategic spilt, which received the board's approval in June. The move is in line with the company's ongoing strategy of shifting focus from natural gas drilling to liquids production.

Seventy Seven Energy owns 118 rigs and is involved in drilling, hydraulic fracturing, rig relocation as well as other related services. The divested business generated revenues of $2.2 billion last year - approximately one-eighth of the company's total revenue. Of Chesapeake Energy's 10,800 employees, 5,200 have been moved to Seventy Seven Energy.

Chesapeake Energy's shareholders received 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 took place after the close of business on Jun 30, 2014. Post distribution, SSE became an independent, publicly traded company, and Chesapeake Energy retained no equity interest.

Chesapeake Energy's spin-off was aimed at reducing costs and debts as well as increasing 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, this leading U.S. natural gas producer 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%.

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 include Encana Corp ( ECA ) and Matrix Service Company ( MTRX ). Both stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: CHK , MTRX , ECA

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