Chesapeake’s Workhorse Oilfield Services Unit To Be Spun Off Or Sold

Chesapeake Energy Corp. (NYSE: CHK) announced Feb. 23 that it is pursuing a potential spin-off of Chesapeake Oilfield Services (COS) to shareholders or an outright sale, part of continuing efforts to strip down the company into a more lean operator.

Chesapeake previously tried to push the unit out of the door by launching it as a standalone through an IPO.

To be sure, the company should be attractive to any potential buyers. COS is the nation’s second-largest producer of natural gas, a top 15 producer of oil and natural gas liquids and the most active driller of onshore wells in the U.S. COS 2013 revenue totaled $2.2 billion and at year-end 2013 the company owned or leased 115 land rigs, nine frac fleets with 360,000 horsepower, and a fleet of trucks/cranes associated with oilfield services.

About 35% of COS's marketable rigs are working for third parties. COS’ service offerings include drilling, hydraulic fracturing, oilfield rentals, rig relocation, and fluid handling and disposal.

To avoid bottlenecks, the COS unit was established in 2011 to handle Chesapeake’s massive drilling program.

“As Chesapeake right sizes its operations, monetizing the unit makes sense at this point,” said David Tameron, Wells Fargo Securities senior analyst. “In our view, today's news is another positive data point that reflects management's efforts to streamline the company's operations/financials while reducing capital spending obligations.”

Chesapeake continues to pare itself into a slimmer producer, lowering total capital expenditures such as drilling and completion by 57%, the company said in January. In 2013, the company exceeded $3.6 billion in divestments and continues to sell off its properties.

Chesapeake management said COS can maximize its value to Chesapeake shareholders outside of current ownership structure by, among other things, optimizing the allocation of capital and corporate resources in a manner that focuses on achieving the strategic priorities of Chesapeake and COS. Chesapeake said the unit could also grow its third-party customer base as an independent provider of oilfield services.

“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,” said Doug Lawler, Chesapeake’s CEO. “It has provided, and will continue to provide, superior service to Chesapeake’s upstream business, and we look forward to maintaining our close and valuable relationship with Jerry and his team as they pursue COS’ ventures outside of Chesapeake. A separation of COS is aligned with our strategies of financial discipline and profitable and efficient growth from captured resources.”

In April 2012, Chesapeake filed registration statements with the Securities and Exchange Commission in preparation for an IPO. However, the IPO was abandoned. In November 2013, COS reported property and equipment assets worth $1.4 billion.

COS 2012 earnings, before interest, taxes, depreciation and amortization (EBITDA), were $439 million. For the first nine months of 2013, EBITDA was $260 million.

If 2013 EBITDA amounts to $350 million, the unit could be worth $2.1 billion or $2.70 per share, Tameron said.

“We do not believe today's announcement includes CHK's minority stake in Frac Tech,” he said.

Tudor, Pickering, Holt and Co. valued the spinoff at about $2.2 billion to $2.7 billion, assuming Chesapeake achieves margins of 20% in 2014.

“The company is making hay while the sun shines as the rip-roaring run in onshore U.S. oil services stocks has likely brought back interest in a potential spin-off or outright sale of the company’s oilfield service business,” the firm wrote.