Not Much Value in the Chesapeake Energy Spinoff

The much anticipated spinoff of the oilfield services subsidiary of Chesapeake Energy isn't going to create much value for shareholders.

Apr 7, 2014 at 2:35PM

With a high debt load, it is understandable that Chesapeake Energy (NYSE:CHK) is cutting back on spending and spinning off some of its assets. Unfortunately, the combination doesn't necessarily portend well for a separated subsidiary that depends on the previous parent for a substantial portion of its revenue.

Chesapeake Energy spent the last several years struggling with a superior asset base of leading acreage positions in most of the primary shale areas. The company's stock continues to struggle due to expenses and the high debt load that is now causing it to cut capital spending at a time of low natural gas inventories.

A few weeks back, the company submitted documents to spin off the oilfield services division in order to reduce corporate debt by $1 billion and allow the independent firm to better attract non-Chesapeake clients. The division primarily operates a land-based drilling fleet and hydraulic fracturing fleets that might compare favorably to combination of Helmerich & Payne (NYSE:HP) and C&J Energy Services (NYSE:CJES). While those two companies are trading at 52-week highs, one shouldn't expect similar peak pricing for the spinoff.

Seventy Seven Energy
Though the company had intentions of either taking the old Chesapeake Oilfield Services division public or selling it outright to fill capital holes, the only remaining option appears to be a spinoff of the assets to existing shareholders. It's hard to blame the market considering that the division was originally created as the oilfield services arm for Chesapeake, and that particular customer is currently reducing its spending by up to 20% this year. In essence, the company is unintentionally weakening the business prior to unloading it on the market.

Chesapeake has chosen to rename the oilfield services subsidiary Seventy Seven Energy, and it will trade on the New York Stock Exchange under the symbol SSE. In a somewhat surprising revelation, the division generated revenue of $2.2 billion in 2013, up from $1.9 billion in 2012. Somehow revenue has actually grown nearly 70% from 2011 levels in a difficult climate for domestic drillers. Not surprisingly in a tough pricing market, the revenue gains were obtained at the expense of margins with adjusted EBITDA dropping from $439.2 million in 2012 to only $368.6 million last year.

Seventy Seven Energy operates a land-based drilling rig fleet consisting of 85 rigs, but the company only counts 20 as Tier 1 rigs with 1,300 horsepower or greater. According to the below table, the company has 79 rigs under contract with 51 contracted to Chesapeake Energy.

Table-Contracted Rigs

Screen Shot

Source: Chesapeake

With the land-based drilling fleet of Helmerich & Payne obtaining a market valuation of over 3x revenue, Seventy Seven Energy hopes to unlock a similar value in the future. The hydraulic fracturing fleet of C&J Energy Services only trades at slightly over 1x revenue and provides a more attractive known asset than what Seventy Seven Energy provides in the near future.

Bottom line
At this point, it's difficult to place a valuation on this division or suggest that investors look into buying it. As always with any asset, price matters; that will be key to review after the spinoff.

The issue is that removing this asset isn't going to create value for Chesapeake. While other oilfield services firms like Helmerich & Payne and C&J Energy Services trade at recent highs and suggest an ideal timing for spinning off the Seventy Seven asset, the uncertainties could leave the stock trading at sub-industry valuations.

While it's true that the division will now be open to more work with other firms, it's also very possible that Chesapeake will open up a more competitive bidding process for its work. The net impact is that investors will avoid this stock for now.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Mark Holder and Stone Fox Capital clients own shares of C&J Energy Services. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers