Chesapeake Energy (CHK) Issues Update on Divestitures; Will Spin Oilfield Services Business

Chesapeake Energy Corp. (NYSE: CHK) updated its currently anticipated 2014 asset sales and divestitures and the projected impact of such transactions on its 2014 Outlook. The company also introduced preliminary estimated ranges for its 2015 adjusted production growth and total capital expenditures. These items will be discussed in more detail at the company's 2014 Analyst Day event, to be held in Oklahoma City this morning.

Chesapeake continues to divest of noncore assets in order to focus its resources on its highest rate of return opportunities and reduce balance sheet leverage and complexity. The company currently anticipates the following transactions will be completed during the 2nd and 3rd quarters of 2014.

Chesapeake to Proceed with the Spin-off of its Oilfield Services Business

Chesapeake previously announced on February 24, 2014, that it is pursuing strategic alternatives for its oilfield services business, which is currently conducted through its wholly owned subsidiary Chesapeake Oilfield Operating, L.L.C. (COO). Chesapeake announced today, after completing its review of strategic alternatives, that it intends to proceed with a spin-off of COO to Chesapeake's shareholders. COO has filed a Registration Statement on Form 10 with the SEC and expects to update it in the coming weeks. Chesapeake intends for the potential spin-off to be tax-free to its shareholders for U.S. federal income tax purposes and, to that end, has obtained a private letter ruling from the Internal Revenue Service.

Upon completion of the spin-off, and an expected recapitalization, approximately $1.1 billion of consolidated COO debt will be eliminated from Chesapeake’s balance sheet and Chesapeake will receive an approximate $400 million dividend that will be applied to pay off intercompany debt from the oilfield services business. COO will also convert into a corporation and change its name to Seventy Seven Energy Inc. Chesapeake anticipates that the spin-off and recapitalization transactions will be completed by June 30, 2014.

Chesapeake to Divest Ownership of CHK Cleveland Tonkawa, L.L.C.

Chesapeake has entered into a non-binding letter agreement with the preferred members of CHK Cleveland Tonkawa, L.L.C. (CHKCT), a Chesapeake subsidiary, for a proposed transfer of Chesapeake's common shares in CHKCT to the preferred members and the termination of the existing agreements between Chesapeake and CHKCT. The agreement contemplates that Chesapeake would transfer operatorship of the CHKCT properties, but would provide certain transition services to the new owner group. The proposed transaction, which is expected to close in the third quarter of 2014, would favorably impact Chesapeake’s balance sheet by eliminating approximately $1.0 billion of equity attributable to third parties (in the form of a non-controlling 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.

Chesapeake's Chief Executive Officer Doug Lawler commented, "Exiting our CHKCT preferred equity arrangement will reduce Chesapeake's balance sheet complexity and future commitments. 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."

Chesapeake Announces Additional Noncore Asset Sales

The company has agreed to sell, subject to execution of mutually acceptable purchase and sale agreements, noncore producing assets in Southwestern Oklahoma, East Texas and South Texas. The East Texas and South Texas assets have associated volumetric production payments (VPP #5 and #6, respectively) that will transfer to the buyer upon closing. Chesapeake expects to receive approximately $310 million in cash proceeds combined for these three asset sales.

Additionally, the company has reached an agreement to sell, subject to the execution of a mutually acceptable purchase and sale agreement, 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 these transactions are anticipated to be approximately $290 million.

Combined with the more than $925 million of asset sale proceeds received year to date as of May 7, the transactions listed above, if completed, would bring total value of sales and divestitures in 2014 to more than $4 billion.

Lawler noted, "We expect that the transactions we are announcing today will result in a net leverage reduction to Chesapeake of nearly $3.0 billion, while only reducing our 2014 production by 2% and our operating cash flow by $250 million. Further, these transactions would reduce Chesapeake's 2014 interest expense and dividend payments by approximately $70 million and eliminate $200 million of projected capital expenditures for the remainder of 2014."

A revised 2014 Outlook is attached to this release and provides additional detail regarding the financial impact of these proposed transactions.

Chesapeake Provides Preliminary Estimate Ranges for 2015 Adjusted Production Growth and Capital Expenditures; Establishes Five Year Annual Production Growth Target

Chesapeake estimates that 2015 production will grow 7-10% compared to its 2014 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 (including capitalized interest) of $5.5 to $6.0 billion. Chesapeake has also established a five year annual production growth target of 7-9%.

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