After the close on Monday, Chesapeake Energy (CHK) filed for an IPO of its oilfield services division. Based on initial review of the S-1, Chesapeake Oilfield Services (COS) should be avoided at best if not shorted. Naturally this will highly depend on the ultimate valuation place on the stock once it prices and starts trading.
Chesapeake intends to raise $862M in a much announced IPO of the oilfield services division that performs a big portion of the work for Chesapeake itself. The interesting part is that the sector is under pressure so a lot of investors will see this as a desperate move. Industry leader Haliburton (HAL) is around 52 week lows and last year's fracing IPO C&J Energy Services (CJES) trades near lows as well.
Additionally, Chesapeake has made it clear that it needs to raise cash so most contrarian investors might think that such an IPO might be priced to sell. Unfortunately, the funds to be raised and the past comments from the company don't suggest any discounts on the sale.
First, the company has suggested the company should be worth $10B this year which is a lofty goal for a company with only $1.3B in 2011 sales. Second, if the company sales a 20% stake, the stock would have a $4.3B market value. Either values would be considerably above the multiples of the industry as seen in the table below.
Let's look at some details from the S-1 before looking at industry comparables.
We are a diversified oilfield services company that provides a wide range of well site services primarily to Chesapeake, our founder and principal customer, and its partners. Chesapeake is the most active driller of new oil and natural gas wells in the U.S. based on rig count. We focus on providing services to Chesapeake that are strategic to its oil and gas operations, represent historical bottlenecks to those operations or provide relatively high margins to the service provider, including drilling, hydraulic fracturing, oilfield rentals, oilfield trucking and manufacturing of natural gas compressor packages. Our operations are geographically diversified across most major basins in the U.S. Specifically, we provide Chesapeake and its partners with services in the Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa, Mississippi Lime, Bone Spring, Avalon, Wolfcamp, Wolfberry and Niobrara unconventional liquids plays and the Barnett, Haynesville, Bossier, Marcellus and Pearsall natural gas shale plays.
... one of the larger U.S. onshore oilfield service companies. We currently operate 111 land drilling rigs, the fourth largest active rig fleet in the U.S., which represents our largest revenue generating service line today. We also operate (A) four hydraulic fracturing fleets with an aggregate of 140,000 horsepower; (B) one of the largest oilfield rental businesses in the U.S.; (C) one of the largest oilfield trucking fleets in the U.S., currently consisting of 227 rig relocation trucks, 57 cranes and forklifts used in the movement of drilling rigs and other heavy equipment and 157 fluid hauling trucks; and (D) manufacturing capacity for up to 150 compressor units per quarter, or approximately 85,000 horsepower in the aggregate per quarter.
Revenue increased 60% in 2011 to $1.3B. Earnings though only hit $20M due largely to low 25% gross margins. Adjusted EBITDA hit $276M due to $171M in depreciation and amortization expenses. Capital expenditures were a whopping $738M suggesting a primary reason for the IPO.
- The company is tied to the most aggressive driller and explorer possibly leading to growth without the need to expand customer base.
- Only handles 1% of Chesapeake's fracing spending and plans to triple fleet to 450K horsepower by the end of 2013.
- Chesapeake averaged using 1M horsepower per day in 2011 leaving plenty of room for growth.
- High asset utilization levels from the tie up with Chesapeake.
- The company is tied to the most aggressive driller and explorer that many analysts are concerned could face funding issues.
- Chesapeake has been cutting back on natural gas drilling and that could happen in oil as well.
- Margins appear low suggesting non competitive contracts from parent.
- The company doesn't appear focused on expanding customer base.
The pros and cons are probably evenly split leaving the deciding factor being valuation. My guess is that Chesapeake wouldn't take this division public if it only obtains market valuations. If an investor wants the growth and risk of Chesapeake, why not just buy CHK instead of the assets CHK is selling?
Below is a comparison of a few similar companies providing better valuations than Chesapeake Oilfield Services depending on the ultimate IPO pricing. Haliburton, C&J Energy Services, and Key Energy Services (KEG) all provide more suitable investments and less risk.
Table - Competitor Valuations
|Chesapeake Oilfield Services||$5-10B||$1.3B||100+||4+|
|C&J Energy Services||$856M||$758M||5.2||1.1|
|Key Energy Services||$2.1B||$1.9B||20.1||1.2|
Either one of these stocks provide more attractive valuations now instead of waiting for this IPO. Either buy Haliburton for the global presence and dominant position. Or buy C&J for the domestic shale fracing exposure of a small cap. Or buy Key Energy for the domestic land drilling growth of a mid cap. Just don't buy what Chesapeake is selling.
All financial data sourced from Yahoo Finance.
Disclosure: I am long CJES.