Seventy Seven Energy Inc. (SSE), the oilfield services unit jettisoned by Chesapeake Energy Corp., advanced Tuesday in its first day of trading as a standalone on the New York Stock Exchange.
SSE's stock ended the day trading at $25.06 after opening at $23.77. More than 5.4 million shares traded hands. The unit, which had contributed more than $2.00 to Chesapeake's share price, caused the producer’s stock to fall by nearly the same amount, closing down $1.84 (6%) for the day.
The spinoff is one of Chesapeake CEO Doug Lawler's biggest deals since coming aboard last year (see Daily GPI, June 9). The explorer expects to generate more than $4 billion in asset sales this year.
Chesapeake shareholders are to receive one share of SSE for every 14 shares they owned. Chesapeake is not retaining a stake in the driller, which provides rigs, pressure pumping, oilfield rental tools and trucking services across the United States.
CEO Jerry Winchester formerly was chief at well control company Boots & Coots, acquired by Halliburton Co. in 2010 (see Daily GPI, April 13, 2010). He has run the oilfield services company since it was created by Chesapeake in 2011 (see Shale Daily, Sept. 20, 2011). Cary D. Baetz is CFO of SSE and Karl Blanchard was appointed COO.
When it was owned by Chesapeake, the Chesapeake Oilfield Services (COO) unit was one of the top onshore providers for drilling and pressure pumping equipment. Last year the unit generated revenue of $2.2 billion.
SSE was created by combining the businesses of 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). Nomac is the fourth largest U.S. drilling contractor.
Motley Fool analyst Arjun Sreekumar said the spinoff was less attractive for Chesapeake than an outright sale, which would have raised immediate cash, but "it does have its benefits. Crucially, it will allow the company to eliminate roughly $1.1 billion of consolidated COO debt from its balance sheet and will generate a roughly $400 million dividend that will be used to pay off additional COO debt."
Chesapeake recently reached an agreement to sell its ownership in subsidiary CHK Cleveland Tonkawa to preferred members, which is expected to eliminate about $1 billion in equity to third parties and $160 million of liabilities from the company's balance sheet, Sreekumar said. The operator also is selling producing assets in southwestern Oklahoma, East and South Texas, southwestern Pennsylvania and Wyoming for total expected proceeds of $600 million.
"Combined with the $925 million in asset sale proceeds the company had received as of May 7, these transactions are expected to bring in more than $4 billion in proceeds this year," he said. "This will allow the company to reduce its debt by nearly $3 billion, lower its 2014 interest expense and dividend payments by roughly $70 million, and erase $200 million from its projected 2014 capital expenditures."
The asset sales are expected to have a minimal impact on production and operating cash flow, with 2014 output down 2% and cash flow off by $250 million, giving Chesapeake "a cash position of $1.9 billion, as compared to roughly $1 billion as of the end of the first quarter."
Combined with its $4 billion senior secured credit facility, the producer should be able to "easily cover its capital expenses in excess of operating cash flow and greatly reduce funding concerns going forward. As a result, the company should have ample flexibility to focus on its most profitable opportunities in South Texas' Eagle Ford Shale and Ohio's Utica Shale.”