Chesapeake Energy Corp. is planning a series of moves designed to reduce its debt and financial complexity with only a minimal impact on its push to increase production.
The Oklahoma City-based oil and natural gas company laid out its plans Friday morning before company executives outlined their strategy for industry analysts who cover Chesapeake.
Chesapeake will spin off its oil-field services business and sell some of its noncore assets. The moves, as planned, would push the total value of this year’s sales and divestitures to about $4 billion.
“We expect that the transactions we are announcing today will result in a net leverage reduction to Chesapeake of nearly $3 billion, while only reducing our 2014 production by 2 percent and our operating cash flow by $250 million,” CEO Doug Lawler said Friday in a news release.
He said the moves also would cut Chesapeake’s interest expense and dividend payments by about $70 million this year, while eliminating $200 million in planned capital projects for the remainder of 2014.
Chesapeake’s stock dipped nearly 5 percent on Friday, falling $1.35 to $27.64 a share, but Oppenheimer analyst Fadel Gheit is impressed with the company’s outlook.
“I thought the CEO provided the needed leadership and vision for the future,” Gheit said. “The strategy is working and I think Chesapeake is turning the corner.”
About the strategy
Chesapeake is poised to turn subsidiary Chesapeake Oilfield Operating LLC into a standalone company called Seventy Seven Energy.
The new firm, which will be led by CEO Jerry Winchester, will include companies offering drilling, hydraulic fracturing, oil-field rentals, rig relocation and fluid handling and disposal. It has about 5,200 employees, with operations in a dozen states.
Chesapeake expects the spinoff, which could be completed by June 30, to be tax-free for shareholders.
The move will cut about $1.1 billion in debt from Chesapeake’s balance sheet, while bringing in a dividend of about $400 million to pay off shared debt.
Chesapeake also will divest its ownership of subsidiary CHK Cleveland Tonkawa LLC, which owns acreage in Roger Mills and Ellis counties, by transferring its shares to the preferred members, led by GSO Capital Partners LP.
GSO Capital was the leading investor in the $1.25 billion deal that resulted in the creation of CHK Cleveland Tonkawa. The group receives an initial annual distribution of 6 percent each quarter, plus a 3.75 percent overriding royalty interest in the first 1,000 net wells drilled by the Chesapeake subsidiary in its 245,000 acres leasehold.
“Exiting our CHKCT preferred equity arrangement will reduce Chesapeake's balance sheet complexity and future commitments,” Lawler said. “The CHKCT assets will provide more strategic value to other entities and we feel this is an opportune time to complete this transaction for all parties.”
The other deals Chesapeake announced Friday were asset sales involving noncore properties in Oklahoma, Texas, Pennsylvania and Wyoming that are expected to bring in about $600 million.
The producing assets Chesapeake is selling in east and south Texas have associated volumetric production payments that will transfer to the buyer upon closing. Such payments involve selling a specific amount of production each month.
Once those moves are completed, Chesapeake estimates that it will be able to increase production in 2015 by as much as 10 percent over this year’s reduced numbers. The company also established a five-year production growth target of 7 percent to 9 percent a year.