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Chesapeake to slash debt with spinoffs

Jay F. Marks Modified: May 16, 2014 at 7:30 am •  Published: May 16, 2014

Chesapeake Energy Corp. is poised to spin off its oil-field service division and other assets to help reduce debt. The Oklahoma City-based oil and natural gas producer announced the moves Friday morning ahead of its Analyst Day event.

“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. “Further, these transactions would reduce Chesapeake’s 2014 interest expense and dividend payments by approximately $70 million and eliminate $200 million of projected capital expenditures for the remainder of 2014.”

Chesapeake said it will proceed with plans to spin off its service business into a separate company, a move that is intended to be tax-free for the company’s shareholders. The new company will be called Seventy Seven Energy, headed by CEO Jerry Winchester. Chesapeake also will divest ownership of subsidiary CHK Cleveland Tonkawa LLC, while selling additional non-core assets.

“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.”

Chesapeake has agreed to sell producing assets in southwestern Oklahoma, East Texas and South Texas. The  Texas assets have associated volumetric production payments that will transfer to the buyer upon closing. Chesapeake expects to receive about $310 million in cash proceeds combined for these three asset sales. The company also will sell acreage in southwest Pennsylvania and Wyoming’s Powder River Basin for about $290 million. Those deals will push the total value of Chesapeake’s sales and divestitures this year to more than $4 billion.