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Based in Southlake, TX, Emerge Energy Services LP (EMES) scheduled a $150 million IPO with a market capitalization of $464 million at a price range mid-point of $20, for Thursday, May 9, 2013.

Nine other IPOs were scheduled for the week of May 6th. The full IPO calendar is here.

  • S-1A filed April 30, 2013
  • Manager, Joint Managers: Citigroup/ BofA Merrill Lynch/ JPMorgan/ Wells Fargo Securities
  • Co Managers: Stifel/Baird/PNC Capital Markets/Wunderlich Securities.

SUMMARY

EMES is a growth-oriented limited partnership recently formed by management and affiliates of Insight Equity to own, operate, acquire and develop a diversified portfolio of energy service assets. Operations are organized into two service oriented business segments:

• 65% of EBITDA - Sand, which primarily consists of mining and processing frac sand, a key component used in hydraulic fracturing of oil and natural gas wells; and

• 35% of EBITDA - Fuel Processing and Distribution, which primarily consists of acquiring, processing and separating the transportation mixture, or transmix, that results when multiple types of refined petroleum products are transported sequentially through a pipeline.

YIELD

Estimated yield for the year ending March 2014 is 14%, but two customers account for 83% of the sand divisions sales: Schlumberger Technology Corporation and a wholly owned subsidiary of Baker Hughes Oilfield Operations.

Baker Hughes is the firm that stiffed High Crush Partners (HCLP) last fall and cancelled its firm orders. That raises uncertainty about the long term commitment of Baker Hughes.

Valuation Ratios

IPO Mrkt

Price /

Price /

% offered

annualized Q1 '13 estimate

Cap (MM)

BkValue

TangibleBV

in IPO

Emerge Energy Services LP

$464

2.8

6.1

32%

Glossary

VALUATION
A price to tangible book value of 6.1 is quite high for this kind of L.P. The projected yield of 14% appears attractive but two customers account for 83% of the business that accounts for 65% of EBITDA, and Baker Hughes has a history of pulling out of "take of pay" contracts.

CONCLUSION
A high percentage of customer concentration is a red flag that is dangerous. Therefore the risk assumed to get a 14% projected yield seems to high. Pass on the EMES IPO.

Estimated Cash Available for Distribution
EMES forecasts that its estimated cash available for distribution for the twelve months ending March 31, 2014, will be approximately $65.0 million.

COMPETITION
Hi-Crush Partners LP offers 9.9% yield with a more diversified customer base.

PRIVATE EQUITY CREATED DEAL
All of the equity interests in Emerge GP will be owned by Emerge Energy Services Holdings LLC, which is 80% owned by affiliates of Insight Equity Holdings, LLC and 20% owned by Ted W. Beneski.

Insight Equity is the direct or indirect owner of 49.8% of EMES's outstanding common units.

FORMATION, pre-IPO And IPO-RELATED TRANSACTIONS

EMES was formed in April 2012 as a Delaware limited partnership. At or prior to the closing of this offering, the following offering-related transactions will occur (the transactions seem overly complicated, which is not good in general for public investors):

•Superior Silica Resources, LLC, which currently owns EMES's general partner, will convey its member interest in EMES's general partner to SSH as a capital contribution, and SSH in turn will convey its member interest in EMES's general partner to Emerge Holdings as a capital contribution;

•Insight Equity and Ted W. Beneski will purchase the member interests in Emerge Holdings from SSH;

•Direct Fuels will convert from a Delaware limited partnership into a Delaware limited liability company named Direct Fuels LLC;

•SSH will convey its remaining interest in SSS to EMES in exchange for (I) 11,276,700 common units, representing a 48.6% limited partner interest in EMES, and (II) the right to receive $34.1 million in cash, in part, as reimbursement for certain capital expenditures;

•AEC Holdings will convey its remaining interest in AEC to EMES in exchange for 1,299,044 common units, representing a 5.6% limited partner interest in EMES, and EMES's assumption of $31.2 million of AEC Holdings' indebtedness;

•DF Parent will convey its remaining interest in Direct Fuels to EMES in exchange for 3,143,936 common units, representing a 13.5% limited partner interest in EMES, and the right to receive $25.0 million in cash, in part, as reimbursement for certain capital expenditures;

•EMES's general partner's interest in us will be recharacterized as a non-economic interest;

•EMES will issue common units to the public, representing a 32.3% limited partner interest in EMES;

•EMES will convey its interests in SSS, AEC and Direct Fuels to Emerge Energy Services Operating LLC, to the EMES operating subsidiary;

EMES's operating subsidiary will enter into a new $150.0 million revolving credit facility, from which it will borrow $102.8 million.

ORGANIZATION CHART

USE OF PROCEEDS

•Contribute $58.5 million to SSS to repay $58.5 million of SSS's existing debt;

•Repay all $31.2 million of AEC Holdings' existing debt;

•Contribute $16.4 million to Direct Fuels to repay all $16.4 million of Direct Fuels' existing debt

•Contribute $11.5 million to the operating subsidiary;

•Pay $10.3 million of cash-based compensation awards to senior management at SSS, AEC and Direct Fuels; and

•Pay estimated offering expenses of $9.0 million.

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

Source: IPO Preview: Emerge Energy Services