Chesapeake Energy's Oilfield Services IPO Comes up a Bit Short
NEW YORK (TheStreet) -- Chesapeake Energy's
Chesapeake Energy's underperformance may boil down to the profitability of its oil services business, which will be called Seventy Seven Energy when the spin-off occurs.
Seventy Seven Energy provides well-site services and equipment to onshore oil and natural gas fields.
The company disclosed Monday that it earned $368.6 million before interest, taxes, depreciation and amortization (EBITDA) on $2.2 billion in revenue. Overall, Seventy Seven Energy turned from a $70 million profit in 2012 to a near $20 million loss in 2013, as operating expenses rose faster than revenue during the year.
Those figures may be slightly disappointing to investors and analysts who have long-expected Chesapeake Energy to spin off its oilfield services division.
In a February valuation of the soon-to-be spun off unit, Jefferies analyst Biju Perincheril wrote that the business could be worth $2.5 billion and could also fund most of the E&P's cash flow deficit in 2014, minimizing the need for additional asset sales, particularly among its portfolio of producing oil and natural gas fields.
That valuation hinged on forecasts that the division would book $2.2 billion in revenue and $419 million of (EBITDA) in 2013. While revenues disclosed by Seventy Seven Energy were in-line with Jefferies' forecasts, EBITDA of $368.5 million fell about 12% short of forecast.
Jefferies valued Chesapeake's oilfield services business at $2.5 billion using a multiple of 5.6 times a forecast of $440 million in 2014 EBITDA. It is to be seen whether Seventy Seven Energy's lower-than-forecast 2013 EBITDA disclosure causes Jefferies to change its valuation of the business.
Jefferies also forecasts that Chesapeake will outspend its cash flows by between $800 million and $1 billion in 2014, meaning that any asset monetization could plug a shortfall for the year.
"An outright sale would be the preferred route as it will more than offset this year's expected funding gap. But finding a suitable buyer may be a challenge and the IPO route may be more plausible (perhaps private equity can come in for a portion as was the case with CHK's midstream business)," Jefferies wrote in February.
Chesapeake hinted at a disposal of the business earlier in 2014. On Monday, the company said a spinoff may help focus the operations of the oilfield business and allow the company to re-dedicate its efforts on drilling for oil and natural gas.
"We believe the spin-off, which will create two distinct businesses with separate publicly traded shares and, for each company, a dedicated board of directors and management team, will better enable our exploration and production business, on the one hand, and our oilfield services business, on the other hand, to focus exclusively on realizing their own opportunities and executing their distinct strategies in the marketplace," Chesapeake Energy said on Monday.