Keeping an Eye on the Seventy Seven Energy Spin-Off

The possibility of more downside from Chesapeake Energy will keep new spin-off Seventy Seven Energy from prospering in the current strong market for oilfield services, but investors should keep an eye on it for the future.

Jul 14, 2014 at 11:38AM

With the spin-off from Chesapeake Energy (NYSE:CHK) finally here, investors can start watching Seventy Seven Energy (NYSE:SSE). The oilfield services firm has had limited publicity typical of spin-offs, providing the opportunity for an attractive valuation.

One important thing investors need to understand about spin-offs is that the new companies typically come out in disarray. The parent company wouldn't typically perform the split up if it weren't for a desire to unload an underperforming unit, or at least one viewed as undervalued. In the case of Chesapeake Energy, the natural gas exploration and production firm was originally hoping to sell the company for several billion to help reduce debt at the corporate level. The spin-off was the last option.

Though the company relies very heavily on the former parent company that is cutting capital spending, Seventy Seven Energy is in the attractive oilfield services business in North America that might provide some opportunity eventually. Schlumberger (NYSE:SLB) recently upped guidance for profit growth, suggesting the industry is starting to fire on all cylinders.

Business
As of the first quarter, Seventy Seven Energy operated a fleet of 114 land drilling rigs, nine hydraulic fracturing fleets with 360,000 horsepower, a fleet of oilfield trucks, cranes, and forklifts, and an oilfield tool rental business.

First quarter revenue came in at $510 million, with the majority focused on the drilling rigs and hydraulic fracturing fleet with combined revenue of over $380 million. Revenue for the first quarter of 2013 was $544 million. Total revenue from Chesapeake Energy hit $431 million, down from $513 million in 2013. More importantly, revenue from third parties more than doubled to nearly $79 million from only $30 million in the prior year period.

Valuation metrics
The spinoff from Chesapeake Energy involved issuing one share for every 14 shares of Chesapeake stock outstanding. With the company listed as having roughly 650 million shares outstanding, it would place Seventy Seven Energy somewhere in the range of 46 million shares outstanding after the split. At the current stock price around $25, the new stock is worth in the range of $1.2 billion.

Even the weakest oilfield services stocks trade at roughly 1x sales, so Seventy Seven Energy is worth an extremely low valuation due to the reliance on Chesapeake Energy. Any stability in revenue from the previous parent combined with sustaining the fast growth from other energy customers would make this new stock extremely attractive. Unfortunately, the agreement with Chesapeake suggests that the former parent can release rigs when external customers are found, suggesting stability might not exist for a while.

Leading oilfield services firm Schlumberger trades at over 3x revenue even with revenue approaching $50 billion. Back at the end of June, the services giant upped annual earnings growth guidance to 20% on the high end. For the large firm to obtain that type of growth, it suggests a strong underlying business that could provide opportunities for a new independent firm like Seventy Seven Energy.

Bottom line
Any investor looking at Seventy Seven Energy must review the results with a grain of salt. The extreme reliance on a customer pulling back on spending is both a major concern about growth potential, but also a possibility that Chesapeake has reduced capital spending to the point the oilfield services spin-off is left with outdated equipment. With a revenue run rate of $2 billion, the company offers value worth keeping an eye on it once the threat of more downside from the previous parent wears off.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Mark Holder has no position in any stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers