IPO Preview: New Source Energy Partners L.P.

| About: New Source (NSLPQ)

Based in Oklahoma City, OK, New Source Energy Partners L.P. (NSLP) scheduled an $80 million IPO with a market capitalization of $150 million for Friday, February 8, 2013.

Eight IPOs are scheduled for the week of February 4. The full IPO calendar is available here.

S-1 filed January 30, 2013.

Manager, Joint Managers: Baird/ Stifel Nicolaus Weisel/ BMO Capital Markets/ Oppenheimer & Co.
Co Managers: Janney Montgomery Scott/ Stephens/ Wunderlich Securities.

NSLP is run by the same people as New Source Energy, which is spinning off its most productive assets.

New Source Energy aborted its IPO in May 2012. Here is a summary pre-IPO report at the time.

NSLP's reserves have a reserve to production ratio of only 12.3 years.

NSLP expects to pay out at a rate of 10.5% (at the price range mid-point of $20) for 2013.

Valuation And income statement problems.
. High price to book value: almost 3x tangible book value is too high
. Costs out of control: G&A percent of revenue jumped from 9% to 41% for the September 2012 nine months, 2011 vs 2012.
. Operating loss of -$1.3 million for the nine months ended September 2012.
. Gain from derivatives up from $1.3 million to $6.9 million comparing the September mine months results, 2011 vs 2012 - this the only way NSLP showed a profit for the September 2012 nine months.
. Reserve to production ratio is only 12.3 years.

NSLP may increase a bit from its IPO price based on the expected 10.5% return, but the reserve to production ratio is only 12.3 years.

As the stock market recognizes the limited production window, the stock likely will decline.

NSLP is a Delaware limited partnership formed in October 2012 by New Source Energy to own and acquire oil and natural gas properties in the United States.

Properties consist of non-operated working interests in the Misener-Hunton formation (the "Hunton Formation"), a conventional resource reservoir located in east-central Oklahoma. This formation has a 90-year history of exploration and development and thousands of wellbore penetrations that have led to more accurate geologic mapping.

The estimated proved reserves on the properties were 14.2 MMBoe, as of June 30, 2012, of which 58% were classified as proved developed reserves and of which 71.7% were comprised of oil and natural gas liquids.

Average net daily production from properties during the nine months ended September 30, 2012, was 3,169 Boe/d, which is comprised of 171 Bbl/d of oil, 6,242 Mcf/d of natural gas and 1,958 Bbl/d of natural gas liquids.

Based on net production from the properties for the six months ended June 30, 2012, the total proved reserves associated with properties had a reserve to production ratio of 12.3 years.

The decrease in revenues in the 2012 period was largely the result of lower average prices of natural gas and natural gas liquids, which were 35% and 29% lower, respectively, than those of the 2011 period.

Average oil prices were 1% higher in the 2012 period than the 2011 period. Crude oil production was higher in the 2012 period by 31% and natural gas production volumes were lower by 5%.

To mitigate the impact of commodity price volatility and thereby increase the predictability of cash flow, New Source Energy will contribute to NSLP, at the closing of this offering, commodity derivative contracts covering 79% of estimated total production for each of the years ending December 31, 2013 and 2014, based on production estimates contained in the reserve report.

After giving effect to the formation transactions, New Source Energy had

((NYSE:I)) total estimated proved reserves of 6.8 MMBoe as of June 30, 2012, of which approximately 85.1% were classified as proved undeveloped reserves, and

(ii) interests in over 24,670 gross (12,368 net) acres of undeveloped properties. After additional capital is invested, NSLP believes that many of these properties will become suitable for NSLP, based on NSLO's criteria that suitable properties consist of mature onshore oil and natural gas reservoirs with long-lived, predictable production profiles.

New Source Energy aborted its IPO in May 2012. Here is a pre-IPO summary.

NSLP expects a minimum quarterly distribution of $0.525 per unit per quarter on all common, subordinated and general partner units, which is $2.10 per unit on an annualized basis: 10.5% distribution annualized at the price range mid-point of $20.

NSLP's general partner, New Source Energy GP, LLC, will be owned 50% by New Source Energy and 25% by each of the David J. Chernicky Trust and Deylau, LLC, entities controlled by David J. Chernicky and Kristian B. Kos, respectively.

Mr. Chernicky and Mr. Kos are the Chairman of the Board of Directors and the President and Chief Executive Officer, respectively, of the general partner. Mr. Chernicky is also the Chairman and controlling shareholder of New Source Energy. Mr. Kos is the President and Chief Executive Officer of New Source Energy.

NSLP expects to net $72 million from its IPO.

Gross proceeds from this offering: $80mm
Borrowings under the new credit facility: $15mm
Total: $95mm.

Consideration for the Partnership Properties and commodity derivative contracts: $15.8mm
Repayment of debt assumed from New Source Energy: $70mm
General partnership purposes: $0.8mm
Underwriting discounts, structuring fees and other expenses: $8.40mm
Total: $95mm.

Disclaimer: This IPO report is based on a reading and analysis of NSLP's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.