Former natural gas leader Chesapeake Energy (CHK) is still haunted by the ghosts of previous CEO Aubrey McClendon. As the natural gas/fracking boom took hold, McClendon plowed CHK headfirst into a variety of the country’s newest (read: expensive) shale fields. Essentially, those moves caused CHK to outspend cash flows for 19 out the 20 years that McClendon was in charge.
It also caused CHK stock to become bloated with a hefty debt load.
In order combat that high debt load, CHK has undergone a huge divestiture of assets. In the last two years, Chesapeake has managed to sell off nearly $11 billion dollars worth of wells, midstream assets and drilling rights pay off its creditors. Many of the prime assets are now gone, and Chesapeake may have now reached “the kitchen sink” in terms of what’s going.
Which brings to the latest asset sale/spin-off: CHK is planning on selling a stake in its drilling and oil services unit. However, for CHK stock, the planned spinoff of the unit might not be all that valuable to Chesapeake or its shareholders.
Chesapeake IPO — Seventy Seven Energy
Chesapeake is making good on the promise it made last month to do something with its oil field services unit. Today, CHK filed a Form 10 with the SEC in order to begin the process of spinning off that business into a separately managed firm. Dubbed Seventy Seven Energy (SSE), the Chesapeake IPO will distribute 100% of the firm into shareholders hands via a potential tax-free spin-off.
That’s all well and good, except it may not be the panacea that CHK stock is hoping for. Overall, the new Chesapeake IPO may not be the best option for the ailing firm.
The problem is that Seventy Seven energy is kind of a lightweight in the oil services industry. The firm’s only assets are 115 conventional-style land drilling rigs and nine hydraulic fracturing rigs. The bulk of those rigs are actually leased and not fully owned outright. CHK remains SSE’s largest client by far.
Given its small stature in oil services industry, SSE as suffered recently alongside other small fry oil service stocks like Basic Energy Services (BAS) and Key Energy Services (KEG). In the filing, CHK reported that Seventy Seven’s EBITDA was only $368 million dollars on revenues of $2.2 billion. Adding in other factors, SSE managed to produce a $20 million loss for all of 2013. That compares to a $70 million profit in 2012. As with KEG and BAS, higher operating expenses at SSE were the key reason for the loss.
Early estimations of what the oil service business would be worth were north of $2.5 billion. However, many of those estimates were made before CHK announced results for the unit as standalone firm. It hadn’t reported SSE as separate unit since 2011. The reported EBITDA numbers for SSE were on average about 12% lower than first thought.
Given those new numbers, analysts now predict that the unit may only be worth around $1.2 to $1.6 billion when spun off.