An In-Depth Look at Warrior Energy's IPO (WARR)

|
Includes: CPX, SWSIP, WARR
by: Bill Simpson

Warrior Energy Services (WARR) plans on offering 7 million shares (0.6 million from insiders) at a range of $20- $22. Raymond James and Simmons & Company are lead managing the deal. Post- offering WARR will have 10.7 million shares outstanding for a market cap mid-range of $225 million. 3/4's of the IPO proceeds are being utilized to repurchase shares from other entities, 1/4 to pay down debt.

WARR has been trading on the pink sheets under the symbol WGSV. As is common with pink sheet stocks, during a more difficult energy production environment WARR sold a number of convertible stock, primarily to St James Partnerships. On the offering WARR will repurchase the convertible stock still outstanding. St. James Partnerships and affiliates will own approximately 20% of WARR post-offering.

WARR is quite similar in business scope to this week's other IPO, CPX. The main difference is WARR is more focused on one aspect of natural gas services, while CPX derives their revenue across the lifecycle of a well. The closest comparable IPO of the past 1-2 years to WARR would be SWSI.

From the S-1:

We are an oil and gas well services company that provides cased-hole wireline and well intervention services to exploration and production ("E&P") companies.

Historically nearly all of WARR's revenues have been in the wireline services area, however they've recently entered the well intervention services through the $52 million purchase of Bobcat.

Wireline Segment: Including the recent purchase of Bobcat, accounted pro forma for 72% of 2005 revenues. Nearly all revenues in this segment are derived from 'case-hole' wireline. These are services performed during/ just after completion of the well and include lowering a wire cable from a truck down into the well. The cable has various tools and instruments attached and the function is to provide specific measurements and perform retrieval & installation services. As of 3/1/06 WARR had a fleet of 53 wireline trucks and 15 offshore wireline skids.

Well Intervention Segment: Accounted for 28% of 2005 pro-forma revenue, all derived from the Bobcat purchase. This segment primarily includes 'snubbing services'. What are snubbing services? Good question - it is specialized high pressure equipment/ operators utilized to maintain consistent pressure in difficult to handle wells. Apparently this often requires a great deal of expertise. WARR currently has 25 snubbing operating bases in 10 states.

WARR has over 600 customers including; Anadarko, Apache, Burlington Resources, Chesapeake, Chevron, Denbury and El Paso. With the acquisition they now cover nearly all E&P geographic areas in the US/ Gulf outside of Appalachia.

Well services have been a very good spot to be the past 2 years. The combination of high oil/ natural gas prices coupled with E&P companies flush with cash has led to a swift pickup in exploration and drilling both on/ offshore. The beneficiaries of this pickup have been the existing oil & natural gas services companies with the equipment and expertise to handle the increased demand. Revenues and stock prices have soared for these type companies.

As mentioned a number of times, this is a cyclical industry and at some point capacity/ flow will lead to lower prices which in turn will lead to less drilling which leads to idle equipment which leads to less profits for oil/ gas services companies. It does not appear the end to this cycle is anywhere close at hand however, but always something to keep in mind in traditionally cyclical sectors. Warrior Energy themselves went public during the last energy boom in 1989, and than found themselves on the pink sheets a few years later during the bust period. Investors in the IPO lost pretty much 100% of their investment along the way.

Another factor playing into the oil/ gas services companies favor is the harder to drill basins currently being worked. Many of the easier to locate/ drill oil/ gas basins have been sucked dry over the years. Result has been a tripling of rigs/ equipment over the past decade to drill essentially the same amount of product in the US.

WARR has been increasing fleet and services to meet demand. They've doubled wireline trucks over the past 3 years and with the acquisition of Bobcat late in 2005 now offer Well Intervention Services. The plan is to continue adding as WARR expects to bring on-line 20 additional wireline trucks in 2006 and 20 more by the end of 2008. WARR also plans on adding 2 additional offshore skids and 4 snubbing units in 2006. WARR plans on offering both segment services across all geographic areas, previous to 2006, only 1 segment was offered per area as Warrior Energy and Bobcat were different entities and each operated in separate geographic regions. Finally WARR plans on entering into new well services areas in 2006 such as nitrogen and fluid pumping services. It appears the goal is to shift into complete lifespan well services, from the current niche services they offer.

Financials

  • There is a bit of debt here due to the acquisition, $27 million post-offering. However it is fairly minimal and cash flow over the next couple of years should help pay it down.
  • Due to prior issues (WARR has been on the pink sheets for a number of years) book value here post- offering is roughly $1 per share.
  • In 2005 70% of revenue was from on-shore services, 30% offshore.
  • Due to the Bobcat acquisition, pro-forma comparables are only relevant for 2004 and 2005. In 2004, WARR/ Bobcat booked $70 million in revenue. In 2005 the combined entity boosted revenues by 45% to $102 million. Gross margins were 45%, with GSA expenses pretty much even with 2004. I always like to see companies ramping revenue and keeping operating expenses under control, allows a lot more revenue to flow to the bottom line.
  • Net margins after tax and adjusted debt servicing were 13%. WARR had stronger gross/net margins in 2005 than this week's similar offering CPX. Net income for 2005 was $1.25 per share. This number assumes a 40% tax rate for 2005. At a mid-range pricing WARR would be coming public 17 X's trailing earnings.
  • Looking into 2006, I think WARR is set-up for another large revenue increase. 2 reasons: 1) With the key Bobcat acquisition, WARR can now offering multiple services over their entire geographic region where previously they offered either wireline or well integration services. 2) WARR is increasing their wireline truck capacity by 40% in 2006, offshore skids by 13% and snubbing by 15%. I think with this combination in a continued strong exploration & drilling environment, WARR can put another 30% on the top-line in 2006. I also think the combined entity will be able to post stronger gross and net margins. At $130 million in revenue and 15- 17% net margins, I can definitely see WARR posting $1.75-$2 a share in net earnings in 2006. At a mid-range pricing, WARR would be trading at 11 X's 2006 earnings.
  • A quick look at SWSI/ CPX in comparison:
    Complete Production Services (NYSE:CPX) - $1.6 billion cap at $23, 20 X's '06 estimates, 7 X's book, 2 X's trailing revenue, 15-20% top-line growth

    Superior Well Services (SWSI) - $0.66 billion cap, currently 30 X's '06 estimates, 7 X's book, 5 X's trailing revenue, 20-25% top-line growth

    Warrior Energy Services (WARR) - $0.225 billion cap, at $21, 11 X's '06 estimates, 21 X's book, 2 X's trailing revenue 30% top-line growth

    Conclusion
    This is an attractive deal. WARR is not quite coming at the discount to '06 earnings of HERO/ BAS when they debuted, but it is close. In the current E&P environment, I think WARR can trade to $30+. A big key to this deal being attractive to me is the acquisition of Bobcat, giving WARR the opportunity to now build upon its successful wireline business and become more of a complete well services company. In the midst of a strong E&P climate, I think the synergy there can grow the bottom line quite a bit. One thing to note: I fully expect WARR to run a dilutive secondary at some point their first year public.

    I like this deal and will be looking to enter under $25.