Chesapeake’s FTS Stake Could Reap Big Gain

Chesapeake Energy (NYSE:CHK) is eying an opportunity to offload its stake in the oilfield services’ company FTS International Inc., previously known as Frac Tec. Chesapeake is looking to raise close to $3 billion by the sale of its holding in FTS, a stake in Chaparral Energy Inc. and some portion of its own oilfield services arm. Bidding rounds between China Petrochemical Corp., Cnooc Ltd. and Saudi Arabian Oil Co. has valued the 30 percent stake in FTS International at $2 billion. This would be a handsome return for the initial investment of $100 million Chesapeake made to fetch this stake back in 2006. ^[1]

Chesapeake Energy boasts the largest inventory of natural gas shale play leaseholds in the country (2.5 million net acres) and is the second largest producer of natural gas in the U.S. after ExxonMobil (NYSE:XOM). Chesapeake also has a services arm – Chesapeake Oilfield Services LLC, which provides drilling and other oilfield services to various oil and natural gas producers.

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Chesapeake bought about 26 percent stake in FTS in 2006 for $100 million. It invested $200 million into the company, before a consortium of Singapore’s Temasek Holdings Pte. and South Korea’s sovereign-wealth fund took up 70 percent stake in the company for $3.5 billion. In the process, Chesapeake received $200 million from the consortium and its stake was also increased to 30 percent.

FTS International has an expertise in hydraulic fracturing, a process which is used along with horizontal drilling to access the oil and natural gas trapped in deep rocks. Hydraulic fracturing and horizontal drilling will see a surge in demand going forward considering the rate at which the shale oil and natural gas extraction is picking up in U.S. The demand outlook has been the prime driver for the China Petrochemical Corp., Cnooc Ltd. and Saudi Arabian Oil Co. to value 30 percent in the company upwards of $2 billion.

FTS International is looking to offload 10 percent stake in the stock market and aims to raise approximately $1.15 billion from the initial public offering. Chesapeake may look to sell its stake before the IPO, to avoid holding shares in a possible post-IPO lock-in period.

Chesapeake is also eying an opportunity to offload some 20 percent of its shares in Chesapeake Oilfield Services the stock market in order to boost its overall valuation. ^[2] According to Chesapeake’s chief executive Mr. Aubrey McClendon, Chesapeake Oilfield Services is worth at least $10 billion, which will be realized by the market only if it is floated as a separate entity. For Chesapeake, it is inevitable to generate cash from sale of its assets as well its stock position in other ventures in order to improve its debt position.

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1. Chesapeake Energy’s Winning Investment, WSJ [↩]
2. Chesapeake Plans Oil-Field Services Spinoff in 2012, WSJ [↩]