Chesapeake Energy Corporation (CHK - Analyst Report) is seemingly focused on divesting its assets to streamline its business and reducing debt. In this regard, this U.S. gas giant recently announced that it would dispose its crude oil trucking assets to Rose Rock Midstream, L.P. (RRMS).
Per the agreement, Rose Rock Midstream would acquire 124 trucks, 122 trailers and miscellaneous equipment operating in Texas, Oklahoma and Ohio; and take around 200 Chesapeake employees under its wings. The partnership would also provide term transportation agreement at market rates with Chesapeake Energy Marketing, Inc., a subsidiary of Chesapeake. The transaction is expected to close in the second quarter of 2014.
The trucking assets sale follows Oklahoma City-based Chesapeake Energy’s plans to separate its oilfield services unit – Chesapeake Oilfield Operating LLC – announced in May. The segment is involved in drilling, hydraulic fracturing, rig relocation and other related services. The to-be-divested business generated revenues of $2.2 billion last year – approximately one-eighth of total company revenue. Oilfield services business employs 5,200 of Chesapeake Energy’s 10,800 employees and owns 118 rigs.
Post spin-off, the new unit would be christened Seventy Seven Energy Inc. The oilfields services unit could surface as a smaller player in the services market. The business is likely to fetch higher returns as companies push customers for price increases.
The company estimates that the oilfield services business would at one go take away $1.1 billion of debt from its books. Chesapeake will also receive a $400 million dividend to write-off intercompany debt from the oilfield services segment. However, the new entity needs to be recapitalized, which, along with the spin-off process, is expected to be completed this month.
Chesapeake Energy’s divestitures are not only aimed at reducing costs and debts, but also at enhancing the market value of its assets. Overall, the company estimates funds in excess of $4 billion to be generated in 2014 from its spin-off and asset divesture plans. Year to date, the company has generated around $925 million through asset disposal. For 2014, Chesapeake expects capital expenditure in the range of $5.0–$5.4 billion. At the end of the first quarter, Chesapeake − the largest U.S. natural gas producer after ExxonMobil Corp. (XOM) − had a cash balance of just over $1 billion. Long-term debt stood at $12.7 billion, representing a debt-to-capitalization ratio of 39.0%.
In May, the company raised its full-year total production growth outlook on an adjusted basis to 9–12% from 8–10%, to reflect higher-than-expected natural gas liquids volumes. However, as the company shifts its focus to more liquid-rich plays, it expects liquids production to increase approximately 29–33% in 2014.
Chesapeake remains one of the industry’s most active players in managing asset portfolio through a combination of acquisitions and disposals. With the largest inventory of unconventional resource potential than probably any other domestic independent, Chesapeake boasts a leading position among the top unconventional liquids-rich plays, comprising Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa, Mississippi Lime and Niobrara and in the Marcellus, Haynesville/Bossier and Barnett natural gas shale plays.
Chesapeake carries a Zacks Rank #3 (Hold). Some better-ranked oil and gas stocks that look promising include Encana Corp (ECA - Analyst Report), CVR Refining, LP (CVRR - Snapshot Report) and Matrix Service Company (MTRX - Snapshot Report). All these stocks sport a Zacks Rank #1 (Strong Buy).