Chesapeake slashing debt with spin off

HOUSTON – Chesapeake Energy will wipe $1.1 billion in debt off its books when it spins off its rig business this month, but it probably won’t have any more silver bullets as it works to restore its balance sheet, analysts said Tuesday.

After the spinoff of its U.S. walking rig fleet into publicly traded Seventy Seven Energy later this month, the Oklahoma oil and gas producer may have opportunities for smaller asset sales. But for the most part, Chesapeake has to keep a steady pace to continue to pare down debt by spending within its budget, analysts told FuelFix.

Jason Wangler, an analyst at Wunderlich Securities, said Chesapeake likely didn’t find any buyers for the rig fleet, probably because it has been working to get rid of certain assets quickly.

“They probably didn’t get an offer they were happy with,” Wangler said. “I don’t think this is the option they wanted, in a perfect world. They wanted to get it out of the way as fast as possible.”

The company’s board on Monday officially approved the spin off and  it is set to start trading on June 30. In addition to the transfer of $1.1 billion in debt to the younger company, Seventy Seven Energy also will pay Chesapeake a $400 million dividend.

Gordon Pennoyer, a spokesman for Chesapeake, declined to comment on the spin off.

Chesapeake had said its rigs are well suited to the wave of horizontal drilling in the United States, and an efficient”factory-style” drilling that oil and gas producers demand in modern shale operations. Most of the rig business’s 16-percent sales growth last year came from its $897.8 million hydraulic fracturing segment and its $740.8 million drilling business.

Shareholders are disappointed the company didn’t sell the $2.2 billion rig business for about $4 billion, but the spinoff is still a good deal for investors, Wangler said. He noted  that the new company probably will be worth about $2 billion on the market. That’s about a tenth of Chesapeake’s market value, making the spin off the largest non-core asset the company can spare.

“They certainly haven’t indicated they’re teeing up” to sell more assets, he said.

But then again, Chesapeake may not have to sell much more. Rising natural gas prices have greatly helped the company’s performance, said James Sullivan, an analyst with Alembic Global Advisors.

“They’re not as strained as they were two years ago,” Sullivan said. “At this point, they probably don’t have to sell assets. They will try to make incremental decreases of debt, probably.”

Chesapeake has pared down its debt since it peaked at $15.8 billion two years ago under former chairman and CEO Aubrey McClendon, who left last April amid scrutiny over rising debt and perks he had received. It had outspent its cash flow for years, becoming the second-largest natural gas producer in the United States — before natural gas prices plummeted in 2012.

As of March 31, the company has cut its long-term debt 20 percent to $12.7 billion, after laying off 10 percent of its workforce and making asset sales and divestitures it expects will amount to $4 billion this year.

The company’s new top executive, CEO Doug Lawler, has taken the opposite approach, demanding that operations teams drilling in various shale plays compete for capital within the company’s budget — which will be about $5.5 billion to $6 billion next year. If one segment can’t compete on returns, they won’t get the capital to grow.

“They’ll spend within their cash flow,” Sullivan said. “That’s the mandate from on high. In terms of corporate management, it’s nearly a 180-degree turn.”