Chesapeake Energy Corp. (CHK) on Sunday disclosed plans to sell or spin its diversified oilfield services unit, created two-plus years ago, whose revenues in 2013 were $2.2 billion.
Chesapeake Oilfield Services (COS) was created in 2011 to handle drilling, hydraulic fracturing (fracking), oilfield rentals, rig relocation and fluid handling/disposal (see Daily GPI, Sept. 20, 2011). COS CEO Jerry Winchester, a Boots & Coots Inc. veteran, now runs the unit.
Given its suite of services, COS mostly likely could be compared to Patterson-UTI (PTEN), according to Wunderlich Securities Inc.'s Jason Wangler. "PTEN had $2.6 billion in revenues in 2013 and has a market cap of $4.3 billion." Using those metrics "of about 1.8 times price-to-historical sales, CHK's arm would be worth about $4 billion. With CHK's EV of $30 billion we would argue this is quite meaningful."
This isn't the first time CHK has considered selling or spinning off the services business, which had been several separate units until COS was formed. However, market conditions faltered and the company subsequently fell into a debt-laden abyss. Today, oilfield services businesses are hot, both for the onshore and offshore, a fact that has not gone unnoticed.
As a stand-alone company, COS would offer CHK and its shareholders "enhanced return opportunities," said CEO Doug Lawler. "It has provided, and will continue to provide, superior service to Chesapeake's upstream business...A separation of COS is aligned with our strategies of financial discipline and profitable and efficient growth from captured resources."
More than one-third (35%) of COS services are provided to third-party operators. At the end of last year the unit owned or leased 115 land drilling rigs, including 10 fit-for-purpose PeakeRigs proprietary rigs with advanced electronic drilling technology. It has nine fracking fleets with an aggregate 360,000 hp and also includes a diversified oilfield rentals business, an oilfield trucking fleet with 260 rig relocation trucks, 67 cranes/forklifts used to move heavy equipment and 246 fluid hauling trucks.
In one way or another, COS intends to grow the third-party business, said Winchester.
"We believe that our separation from Chesapeake will position us to further capitalize on our expertise and capture additional third-party work," he said.
COS subsidiaries include Nomac Drilling LLC and Bronco Drilling Co. (see Daily GPI, April 27, 2011). Performance Technologies LLC, a pressure pumper, is a COS unit, as is Thunder Oilfield Services LLC, a holding company for trucking, equipment rental and rock excavation businesses.
The separation is subject to market conditions, management noted. It also would require regulatory approvals. No timeline on the separation was detailed.
Some energy analysts viewed the news as a positive for the cash-hungry operator.
The spin/sale allows CHK to "make 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,” said Tudor, Pickering, Holt & Co. Inc. (TPH) analysts. “We like the continued rationalization of noncore assets, but valuation likely is neutral to current multiples…
“Assuming CHK in ‘14 achieves low-end of peer margins (20%), business would be worth TPH estimate of $2.2-2.7 billion."
"This was an idea a few years ago that was pulled back after the services market got so tough, but it makes good sense as we believe minimal (if any) real value is given to CHK for the ownership of such a sizeable oilfield services business," said Wangler. "By spinning off or selling the asset, it could unlock considerable value for shareholders.
Winchester is "an experienced and proven CEO," with experience also at Halliburton CO., noted the analyst. "Winchester has proven himself as a capable CEO in the public markets and with a larger company like COS feel that this experience would become even more evident."
CHK is issuing its 4Q2013 and full-year results on Wednesday.
"Given the moves CHK has made to shore up its financials in the past year, we feel that this is the right time to explore the best way to unlock the value of COS," said Wangler. "While a sale would add ample cash to the company and allow it to pay down some of its $12-plus billion in debt as well as fund operations, the company should be essentially cash flow neutral in 2014 so this isn't as big of a necessity as it was a few years ago.
“Therefore, the timing makes sense as CHK can make the best decision from a value perspective as it can simply spin-off the valuable entity to shareholders if it doesn't get the right price from a buyer."
David Tameron of Wells Fargo Securities said the news "is another positive data point that reflects management's efforts to streamline the company's operations/financials while reducing capital spending obligations. CHK established COS in 2011 partly to avoid bottlenecks in CHK's massive drilling program" and as it “right sizes its operations, monetizing the unit makes sense at this point."