Chesapeake Proposed Spin May Unload $1 Billion Debt

Chesapeake Energy Corp. (CHK) is preparing for a possible spinoff of its oilfield-services unit as it seeks to cut costs, lighten debt and boost the market value of the company’s assets.

Chesapeake paved the way for the move with paperwork filed today that said the unit would be converted to a corporation and renamed Seventy Seven Energy Inc. before a spinoff is completed. The transaction would be tax-free for its shareholders, the Oklahoma City-based company said in a statement.

The spinoff allows Chesapeake to unload about $1 billion in debt and simplify its corporate structure. Chief Executive Officer Doug Lawler is cutting capital spending by about 20 percent and pursuing asset sales to close a funding gap of about $1 billion this year. Seventy Seven would emerge as one of the smaller players in the services market. The business is set to reap higher returns as companies push customers for price increases, said Michael Marino, an analyst at Stephens Inc. in Houston.

“It’s good timing from Chesapeake’s side of things,” Marino said in a phone interview. “The big difference is they get to put the $1 billion on someone else’s balance sheet.”

Spending on U.S. oilfield work is expected to grow 15 percent this year, up from an earlier estimate of as much as 10 percent, analysts at Raymond James & Associates Inc. said Feb. 24 in a note to investors.

Photographer: Daniel Acker/Bloomberg

A Chesapeake Energy Corp. truck sits outside a field office in Towanda, Pennsylvania. Close

A Chesapeake Energy Corp. truck sits outside a field office in Towanda, Pennsylvania.

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Photographer: Daniel Acker/Bloomberg

A Chesapeake Energy Corp. truck sits outside a field office in Towanda, Pennsylvania.

February Announcement

Chesapeake said last month it was considering the sale or spinoff of the unit, which reported revenue of about $2.2 billion last year. The company retained Morgan Stanley (MS) & Co. LLC as its financial adviser for evaluating strategic alternatives. Gordon Pennoyer, a spokesman for Chesapeake, declined to say whether the company is still considering a sale as an alternative to the spinoff.

Today’s filing with the U.S. Securities and Exchange Commission didn’t give a timeframe for a spinoff or state how many shares Chesapeake owners may get other than to say 100 percent of its common stock in the company would be distributed to shareholders.

Chesapeake’s separation of the unit would be labeled a win for investors if the company could unload debt and bring in some cash while streamlining its operations, Mike Kelly, an analyst at Global Hunter Securities, wrote last month in a note to investors.

Seventy Seven

The parent company would benefit more by selling the service unit outright and bringing cash in the door, said Phillips Johnston, an analyst at Capital One Southcoast in New Orleans who rates the shares the equivalent of a hold and owns none. The good news for Chesapeake is that with $350 million in other announced asset sales and another $650 million in assets being marketed or under contract, the company is on its way to filling its funding gap this year, Johnston said.

“It’s not like they have a gun to their head saying this is the only way to plug that gap,”he said.

Chesapeake fell 1.4 percent to $24.69 at the close in New York.

The challenge for Seventy Seven will be to continue to diversify its customer base beyond Chesapeake, which is using 51 of the service company’s 79 contracted drilling rigs, Marino said.

The business to be known as Seventy Seven had $1.06 billion in long-term debt last year, according to today’s filing. That’s not terrible for a company with $368 million in adjusted earnings before interest, taxes, depreciation and amortization, Marino said.

Delayed IPO

“It’s not an insignificant amount,” Marino said. “But I don’t think it’s a troublesome amount.”

Today’s filing is the latest disclosure after more than two years of discussion about how to separate the unit. Chesapeake had originally planned an initial public offering of the business in the fourth quarter of 2012, but that was repeatedly delayed.

In November 2011, then chairman and CEO Aubrey McClendon estimated the oilfield service unit’s value at $5 billion to $7 billion.

Analysts at Tudor Pickering Holt & Co. wrote last month that the company may be worth as much as $2.7 billion and said Chesapeake 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 services business.”

To contact the reporters on this story: David Wethe in Houston at dwethe@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Stephen Cunningham

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