By Steve Zachritz :
IPO Preview - Liberty Oilfield Services ( LBRT ) - Not Just A Pressure Pumper - Part 1
Basic Story: Small-cap hydraulic fracturing company (pressure pumper) focused on five liquids rich basins in North America. It has organically grown from 1 fleet in 2011 in the Bakken to 19 fleets diversified about the hot shale plays in the U.S. at present with continued near-term growth plans. The company has a technical focus on the customer and on their equipment and methods, with an eye on maximum utilization and efficiency. Future growth is likely to remain demand driven and organic with capital decisions hinging on demand and returns and the balance sheet.
- 10.7 mm shares by the company expected to price between $14 and $16; green shoe of 1.6 mm shares including a small portion offered by a selling shareholder.
- Net proceeds at $15, without shoe exercise, would be ~ $142 mm.
- Proceeds will go to repay roughly a third of its term debt, to pay down the revolver to $0, and to put cash on the balance sheet ahead of further fleet growth this year.
- Post-deal liquidity will exceed $200 mm.
- Pro forma Net Debt to TTM is 0.2x.
- Morgan Stanley, Goldman, and Wells Fargo are acting as deal leads backed by a large syndicate.
The Pressure Pumping Market:
- The industry was in a downward spiral from the fall in oil prices 2H14 to mid-2016 with rigs and frac spreads stacked en masse.
- With the rebound in rig counts beginning in mid-2016 and increasingly intense completions, demand has moved ahead of supply. Demand will likely continue this upward trajectory this year with bigger fracs and more stages per well compounded by gains in rig efficiency set against a backdrop of $54 Street consensus and a strip that's now over $60 right in front of the North American upstream capex decision season.
- Halliburton ( HAL ), one of the biggest operators of frac spreads in the world, has commented on this tightness in recent quarters but so far has refused to add to its Q10 fleet helping to increase that tightness.
- This high demand combined with the fact that more intense fracs are hard on equipment has prompted pumpers to cannibalize existing previously stacked fleets making their return to service more costly and a portion of the space less than reliable.
- During the aforementioned downturn, Liberty grew capacity and remained nearly fully utilized.
- It continues to have excess demand for its services.
- Liberty is focused on the Permian, Eagle Ford, DJ Basin, Powder River Basin, and the Williston (it helped with the strong improvement in well productivity in the Basin for guys like Newfield ( NFX )).
- Liberty maintains a proprietary unconventional well database including non-public well data to help customers optimize completions and provides customers with software to help visualize production data and frac trends providing simulation abilities (helps with well spacing and frac size for a given reservoir). This helps get them in the customers' door and keep them in the door by increasing productivity and strengthening the relationship with the E&P.
- Notable customers: NFX, [[XOG]], and unowned names [[SM]], [[CLR]], [[DVN]], [[NE]], [[PDCE]], and [[APC]].
- Current: 19 fleets with 760,000 hydraulic horsepower ((HHP)) (12 fleets in the Rockies basins and 7 split between the Permian and Eagle Ford). Equipment is standardized for efficient operation and repair and logistics. As it says, "everything looks the same and everything is plug and play".
- By mid-2018: It will grow to 22 fleets with 1,030,000 HHP (one more headed to the Rockies and two to the south).
- Of this total: a) Eleven of the fleets are Liberty Standard fleets (40,000 HHP each), b) seven are Liberty Quiet fleets (can't be heard 500' away -started in DJ but will be in other areas in time and desirable in less rural settings), and c) four are high pressure fleets (50K HHP) for deeper basin completions like in the high pressure environment of the Delaware.
- All fleets utilize containerized sand for best efficiency (just a lot faster than pneumatic truck offloading).
- Looking ahead: It has initiatives underway to improve blender uptime, reduce friction wear on the equipment, improve fluid performance, and improve last mile real time sand logistics.
- Best-in-class average stages per fleet per month: 2Q17 data shows LBRT at 165 stages, up 57% to the peer average of 105 stages and 22 stages more than the #2 company ( Coras Research, LLC).
- Best-in-class ROCE (Return on Capital Employed) at 38% first nine months of 2017. Next best is [[RPC]] at 27% in the business and 28% for a non pumper, core analysis and perf guns company [[CLB]]. This is well above the industry stalwarts including HAL and [[SLB]].
- Best-in-class Cash Returns on Capital Invested (adjusted EBITDA/purchase price of capital assets) averaged ~25% for the last six years.
- Best-in-class annualized 3Q17 Revenue/Average Active Fleet of $105 mm vs. peer average that was in the upper $60 mm's.
- Best-in-class annualized 3Q17 EBITDA/Average Active Fleet of $22 mm vs. peer average of ~$12 mm.
- Best-in-class Adjusted EBITDA/HHP at > $500 in 3Q17 .
Valuation: Coming to market cheap to peers. The 2018 estimates are our back-of-the-envelope math and assume no significant pricing gains/losses or cost inflation in 2018. Pricing is likely to improve in the new year.
- Our industry channel checks came back positive.
- Legal: It is the defendant in a patent suit brought by SandBox (does not look pressing after early win). Otherwise, nothing material, normal potential for silicosis suits and other standard issues.
- We're hearing the deal book is strong.
Management: Super solid. CEO founded Pinnacle Technologies back in 1992 and five members of Pinnacle are with him today to help run LBRT . All guys here are old hands in the business.
Nutshell: We plan on owning the name. We like management in terms of how it views, runs, and explains the business. This is not the first attempt to bring this one public, and the valuation is better now with a stronger macro backdrop than it was last time around. The valuation appears attractive relative to close comps. It should price tonight. Our six-month upside target is a 6.0x multiple of our preliminary 2018 E EBITDA at $22.
See also Sears Will Be Lucky To Make It Through 2018 on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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