Seventy Seven Spinoff Could Have Chesapeake's Investors Gushing

NEW YORK (TheStreet) - Chesapeake Energy  (CHK) plans to spin off its oilfield services business, and this could be a boon for investors.

Spinning off this business allows Chesapeake to unload around $1 billion in debt and raise cash. Moreover, since Chesapeake won't retain any interest in the unit after the spinoff, it will not be responsible for its capital expenditure.

The unit will be converted into a new company called Seventy Seven Energy, which is currently valued at between $2.5 billion and $7 billion. It will be listed at the New York Stock Exchange under "SSE."

Chesapeake's oilfield services unit, which has reported double-digit revenue growth, will have the fifth-largest land-based rig fleets in the United States, with operations in the leading shale plays including Eagle Ford, Utica, Permian Basin and Marcellus.

Chesapeake's shares have risen by 21.5% in the last 12 months and currently trade around $25. The company has outperformed the S&P 500, which has risen by 19.6% in the corresponding period.

Chesapeake's decision is in line with the company's broader objectives to cut costs, reduce debt and increase the value of its assets.

Last year, Chesapeake reported a 14% increase in revenue from oilfield services unit to $2.2 billion, most of which came from hydraulic fracturing and drilling businesses. The unit, however, swung to a loss of $19.7 million from a profit of $69.6 million in 2012 on the back of pricing pressure and higher operating costs.

In drilling, hydraulic fracturing and oilfield rental businesses, Chesapeake's oilfield services arm operated through its wholly owned subsidiaries Nomac Drilling, Performance Technologies and Great Plains Oilfield Rental, respectively.

On average, over the last three years the natural gas giant's contribution to the unit's revenue has been 92.7%. The spinoff, however, will give Seventy Seven an opportunity to diversify its customer base to other exploration and production companies.

The spinoff allows Chesapeake to simplify its structure while unloading around $1 billion debt. According to Chesapeake's official filing, the total long-term debt of its oilfield services unit stands at $1 billion.

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