Chesapeake Energy Corp., Oklahoma City, has decided to proceed with spinning off its oil field services business, currently conducted through its wholly owned subsidiary Chesapeake Oilfield Operating LLC (COO), almost 3 months after reporting that a spinoff or outright sale of the business was under consideration (OGJ Online, Feb. 24, 2014). COO will also convert into a corporation and change its name to Seventy Seven Energy Inc.
Upon completion of the spinoff and an expected recapitalization, $1.1 billion of consolidated COO debt will be eliminated from Chesapeake’s balance sheet and Chesapeake will receive a $400 million dividend that will be applied to pay off intercompany debt from the oil field services business, the company said.
Chesapeake expects the spinoff and recapitalization transactions to be completed by June 30.
More divestitures
Separately, Chesapeake has entered into a nonbinding letter agreement with the preferred members of CHK Cleveland Tonkawa LLC (CHKCT), a Chesapeake subsidiary, to transfer operatorship of CHKCT properties, but provide certain transition services to the new owner group.
The proposed transaction, which is expected to close in the third quarter, would eliminate for Chesapeake $1 billion of equity attributable to third parties—in the form of a noncontrolling interest—and $160 million of balance sheet liabilities for future overriding royalty interest obligations, partially offset by the reduction in restricted cash held by the CHKCT entity.
“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,” said Doug Lawler, Chesapeake chief executive officer.
The company has agreed to sell noncore producing assets in southwestern Oklahoma, East Texas, and South Texas for $310 million. Chesapeake said the East Texas and South Texas assets have associated volumetric production payments that will transfer to the buyer upon closing.
The company has also reached an agreement to sell a noncore acreage package with minimal associated production in southwest Pennsylvania. Chesapeake has also entered into a purchase and sale agreement to divest a portion of its noncore acreage position in the Powder River basin in Wyoming. Proceeds from both transactions total $290 million.
Combined with the more than $925 million of asset sale proceeds received this year as of May 7, the most recent transactions would bring total value of sales and divestitures for the year thus far to more than $4 billion.
The company in 2012 divested $6.9 billion in assets as it sought to cut $14.3 billion in long-term debt to $9.5 billion by yearend (OGJ Online, Sept. 12, 2012).
The following year, Chesapeake reported plans to sale a 50% stake in its Mississippi Lime oil and natural gas acreage in northern Oklahoma to Sinopec International Petroleum Exploration & Production Corp. for $1.02 billion (OGJ Online, Feb. 25, 2013).
Chesapeake estimates that 2015 production will rise 7-10% compared with this year’s adjusted production, which reflects the anticipated impact of the asset sales detailed above. The company believes that it can deliver this production growth rate in 2015 with a total capital expenditure budget of $5.5-6 billion. Chesapeake has also established a 5-year production growth target of 7- 9%/year.