Monday, April 23, 2012

Chesapeake Attempting to Sell Oil-field Services Division at Laughable Valuation (CHK)

From the WSJ's Heard on the Street column, April 20, 2012:
You can say this for Chesapeake Energy's CHK -3.11% plan to sell its oil-field services business: It hired the best salesman. But even Goldman Sachs GS -1.02% —jointly leading this initial public offering and the top U.S. IPO adviser last year—could have a hard job selling this one.

While its chief executive drew attention elsewhere this week, Chesapeake filed a registration statement for Chesapeake Oilfield Services, or COS. Chesapeake hopes to raise $862.5 million by selling a minority stake this year.

Assuming a 20% float at that price implies a $4.3 billion market capitalization and an enterprise value, including net debt, of about $5 billion. Meanwhile, the midpoint of Chesapeake's November guidance implied COS making $2.25 billion of net revenue and $700 million of earnings before interest, tax, depreciation and amortization in 2012.

This all looks ambitious. IPOs usually offer a discount, but on these numbers COS is priced at 7.1 times Ebitda. Major oil-services companies such as Halliburton, HAL -2.03% Baker Hughes, BHI -1.37% Weatherford International WFT -0.40% and Key Energy Services KEG -2.91% trade at between 4.5 and 5.5 times. COS does look set to grow faster, at least according to guidance: It shows Ebitda more than tripling between 2011 and 2013. Even then, the implied multiple of 4.7 times is still above the 4 times average for its peers....MORE
...COS is the preferred supplier for Chesapeake's drilling needs, thereby benefiting from the parent's growth plans. But equally, relying on your parent for more than 90% of your revenue is another risk factor warranting a discount. That is especially so when that parent's own funding deficit is a cause for investor concern—precisely the reason for the IPO in the first place.