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    Chesapeake’s board approves spin-off of oilfield services business

    Chesapeake Energy Corp.’s (NYSE:CHK) spin-off of Chesapeake’s oilfield services business into a stand-alone, publicly traded company called Seventy Seven Energy Inc. (SSE) has been approved by the Chesapeake board of directors.

    The two companies will be separated through the distribution of SSE common stock to holders of Chesapeake common stock on a pro rata basis. Chesapeake shareholders will receive one share of SSE common stock for every 14 shares of Chesapeake common stock held at the close of business on the record date of June 19. No fractional shares of SSE common stock will be issued; however, shareholders entitled to receive a fractional share of SSE common stock in the distribution will instead receive the cash value of that fractional share. Subject to the satisfaction of the conditions to closing, the distribution is expected to occur following the close of business on June 30.

    Following the distribution of SSE common stock, SSE will be an independent, publicly traded company, and Chesapeake will retain no equity interest. SSE has applied to list its common stock on the New York Stock Exchange (NYSE) under the symbol “SSE.”

    Chesapeake has received a private letter ruling from the US Internal Revenue Service and expects to obtain an opinion of tax counsel, in each case, substantially to the effect that, based on certain facts, assumptions, representations, and covenants, and subject to certain limitations set forth therein, for US federal income tax purposes, the distribution of SSE common stock generally will be tax-free to U.S. holders of Chesapeake common stock, other than with respect to any cash received in lieu of fractional share interests, which generally will be taxable to such holders as capital gain.

    Chesapeake expects that a “when-issued” public trading market for SSE common stock will begin on the NYSE on or about June 17 under the symbol “SSE WI” and will continue through the distribution date. Chesapeake also anticipates that “regular way” trading of SSE common stock will begin on the first trading day following the distribution date.

    Beginning on or about June 17, and through the distribution date, it is expected that there will be two ways to trade Chesapeake common stock – either with or without the right to receive shares of SSE common stock in the distribution. Shareholders who sell their shares of Chesapeake common stock in the “regular-way” market (that is, the normal trading market on the NYSE under the symbol “CHK”) after the record date and on or prior to the distribution date will be selling their right to receive shares of SSE common stock in connection with the distribution. It is anticipated that shareholders may also trade their shares of Chesapeake common stock ex-distribution (that is, without the right to receive the SSE distribution) during that period under the symbol “CHK WI.”

    SSE’s capital structure is expected to consist of a new senior secured term loan, a new asset-backed lending facility, existing senior notes due 2019, and, subject to market conditions, new senior notes due 2022.

    Upon completion of the spin-off, Jerry L. Winchester and Cary D. Baetz will remain as CEO and CFO, respectively, of SSE. The board of directors of SSE is expected to consist of Jerry L. Winchester, Anne-Marie N. Ainsworth, Bob G. Alexander, Edward J. DiPaolo, Tucker Link, Marran H. Ogilvie, Ronnie Irani, and Alvin Bernard Krongard.  

    Morgan Stanley & Co. LLC is acting as financial advisor to Chesapeake in connection with the spin-off. Baker Botts LLP and McAfee & Taft are acting as legal advisors to Chesapeake in connection with the spin-off, while Wachtell, Lipton Rosen & Katz is advising the Chesapeake board of directors.

    Upon the news, analysts from Global Hunter Securities commented, “CHK’s board has approved plans to spin off the company’s OFS subsidiary into a stand-alone, publicly traded entity to be called Seventy Seven Energy (SSE). We estimate the transaction equates to 4.4x 2014E EBITDA given ~$1.5B debt reduction; expect closing by 6/30.

    “Takeaway: Neutral. CHK's OFS spin-off proceeds as planned and we think the implied valuation of SSE at ~$1.6B, which equates to ~4.4x 2014E EBITDA, is reasonable. CHK stands to shed ~$1.5B of net debt with this transaction, while only losing a net $20MM of cash flow in 2014 after capex/interest/dividdends are taken into account.”

     

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