Will the Chesapeake Spinoff Unlock Value?

Rising demand for energy around the globe has made discovery of new sources of oil and natural gas imperative, providing a big opportunity to the oil-field services business. New resources would mean increased drilling activities and site maintenance, and increased business for oil-field services companies. Chesapeake (NYS: CHK) recently announced that it had decided to focus on its oil-field services business by spinning it off in 2012.

Enhancing value
By spinning off its oil-field services business, Chesapeake expects to increase value for investors. According to the CEO, the spin-off can increase the $5 billion oil-field services business to $10 billion in a few years. Chesapeake is expected to keep an 80% stake in the spun-off company.

The spinoff presents a perfect opportunity for Chesapeake to tap the market and may result in massive growth in its revenue from oil-field services, which currently forms less than 4% of the top line. Moreover, the business has a special place in Chesapeake's strategy whereby it first secures drilling licenses and then sells minority stakes to fund drilling.

Post-spinoff, Chesapeake, an active driller in U.S. shale fields, will become one of the biggest oil-field services company in the U.S. with 114 drilling rigs, a huge trucking fleet, and a big hydraulic-fracturing business.

The bigger picture
Depleting global oil and natural gas reserves has made it mandatory for oil companies to explore, drill, and develop new oil fields. This coupled with the high-demand scenario for oil and natural gas, especially in emerging economies, has inspired the search for new resources, especially natural gas. Natural gas requires complex drilling machines and new technologies to make the process smoother and less polluting. The presence of new reserves in North America shale plays together with the introduction of new drilling technology has boosted the oil-field services business to a great extent.

Foolish takeaway
Chesapeake has significant shale field expertise. If the oil-field services business lives up to its promise of supporting new energy reserves, Chesapeake is in a good position to increase both production and field life, and in turn unlock greater value for investors. What say, Fools? Click here to follow all the news and views on Chesapeake.

At the time thisarticle was published Fool contributor Amitabha Chakraborty does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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