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Seventy Seven Gains New Customers Following Spinoff

Oilfield services operator Seventy Seven Energy Inc. (SSE), newly spun off from Chesapeake Energy Corp., saw its revenues from new customers increase by nearly one-third sequentially in the second quarter.

SSE debuted at the end of June on the New York Stock Exchange; close to 47 million shares of common stock were distributed to Chesapeake shareholders (see Shale DailyJuly 1). SSE was created by spinning off Chesapeake Oilfield Services Co., which provided services through affiliates Compass Manufacturing, Great Plains Oilfield Rental, Hodges Trucking Co., Keystone Rock & Excavation, Nomac Drilling LLC, Oilfield Trucking Solutions and Performance Technologies (see Daily GPI, Sept. 20, 2011).

As part of the spin-off, SSE distributed the compression unit manufacturing and geosteering businesses to Chesapeake, and sold its crude hauling assets to a third party. Those sales impacted the bottom line.

Total revenues were $549.5 million in 2Q2014, an 8% sequential increase, but down 6% year/year. Net income climbed to $21.7 million (46 cents/share) versus year-ago earnings of $7.2 million (15 cents) in 2Q2013 and compared to a net loss in 1Q2014 of $18.6 million (minus 40 cents).

"A lot of work has gone into getting us to this point, and we are excited about our future and our potential to deliver superior shareholder returns," said CEO Jerry Winchester. "We have a flexible balance sheet, and our objective is to pursue strategic growth opportunities while exercising financial discipline to maximize returns to our shareholders."

SSE's drilling segment contributed revenues in 2Q2014 of $189.2 million, compared with year-ago revenues of $180.4 million.

"The increase in revenues...was due to an increase in utilization and revenue days," according to Winchester. Revenue days for the second quarter were 7,396, compared with 7,142 in 2Q2013 and 7,036 in the year-ago period.

Revenues from non-Chesapeake customers increased $6.9 million from 1Q14 to 31% of total segment revenues. As of July 1, the drilling backlog was $1.3 billion, with an average duration of 17 months.

 Average revenue per revenue day was $23,219, down slightly sequentially and from $23,506 2Q2013 because of lower nondrilling revenue associated with the drilling segment. Average operating costs/revenue day totaled $13,802, net of rig rent expense and a one-time credit to stock compensation expense related to the spin-off. The decrease in average operating costs/revenue day "was due primarily to a reduction in labor related costs."

At the end of June, SSE's marketed fleet consisted of 20 Tier 1 rigs, including 10 proprietary PeakeRigs, 57 Tier 2 rigs and 13 Tier 3 rigs. SSE currently has 16 contracted PeakeRigs under construction. The systems are designed for long-lateral drilling for multiple wells from a single location.

The company is aggressively pursuing a strategy of upgrading its fleet to better align with the market's demand for multi-well pad drilling in unconventional resource plays, the CEO said. SSE plans to "upgrade or sell all of the Tier 3 rigs that it owns, and expects that its fleet will primarily include only Tier 1 and Tier 2 rigs by the end of 2014."

The hydraulic fracturing segment contributed $226.1 million in revenues during 2Q2014, compared with $250.3 million in the year-ago period. SSE completed 2,054 fracturing stages during the latest quarter, versus 1,722 sequentially and 1,873 in 2Q2013. At the beginning of July, the fracturing backlog was $1.5 billion with an average duration of 26 months.

Average revenue/stage fell to $110,084 from $133,660 in 2Q2013, primarily the result of rate differences because of a geographic relocation of a fractionation spread, said the company. The decrease from a year ago also came on industrywide pricing pressure.

Average operating costs per stage in the second quarter were $87,285, a decrease of $15,509 from the first three months of this year, on lower expendables, repairs and maintenance, and product costs. As a percentage of fracturing revenues, maintenance and supplies expense were 11% for 2Q2014 and 17% for 1Q2014.

At the start of July, SSE owned nine fracturing fleets with an aggregate of 360,000 hp. Eight were contracted by Chesapeake in the Anadarko Basin and the Eagle Ford and Utica shales. SSE has one fleet under construction, which is expected to add another 40,000 hp.

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