Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Frank's International (NYSE:FI) made its public debut on Friday, August the 9. Shares of the provider of engineered tubular services to the oil and gas industry ended their first day with gains of 19.8% at $26.36 per share.

After a successful public offering, the valuation remains attractive for this niche player in the oil and gas service sector.

The Public Offering

Frank's International provides tubular services to the oil and gas industry and has been around for a respectable 75 years. Frank's serves leading exploration and production companies both onshore as well as offshore. The company is focused on complex and technically demanding wells.

Frank's International sold 30.0 million shares for $22 apiece, thereby raising $660 million in gross proceeds. All shares will be sold by the company with no shares being offered by selling shareholders.

The public offering values the equity of the firm at $4.88 billion. The offering took place above the high end of the preliminary $19-$21 offer range. Some 14% of the total shares were offered in the public offering. At Friday's closing price of $26.36 per share, the firm is valued around $5.85 billion.

The major banks that brought the company public were Barclays, Credit Suisse, Simmons & Company, Citigroup, Morgan Stanley, Goldman Sachs and UBS, among others.

Valuation

Frank's International's tubular services play a key role in the integrity, reliability and safety of a drilling well. Specialized staff provides its services using proprietary manufacturing equipment to service complex wells, and improve overall safety. The innovation and technical distinction of operations is great, as Frank's has 104 U.S. patents and 136 international patents on book.

According to research firm Spears & Associates, the global market for tubular services will be around $3.8 billion in 2013. The market is expected to grow at an annual rate of around 11% between 2012 and 2015, according to the research firm, which can be found in Frank's International's S1-Filing. The company has a merely a few competitors and services major oil companies in over 60 countries. Some of its clients include all the usual suspects including BP, Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), Exxon Mobil (NYSE:XOM), Shell and a range of nationally owned companies.

A testament to Frank's leading positions is shown by the fact that its tubular services were used to contain BP's Macando well in the Gulf of Mexico disaster. Chevron used Franks' tubular services as well to complete the 31,866 feet deep well in the Gulf of Mexico.

For the year 2012, Franks generated annual revenues of $1.06 billion, up 42.9% on the year before. Net income more than doubled to $350.9 million. This means that the company net earns 33 cents for each dollar of revenue, a major reason to have your headquarters in the Netherlands in order to save on corporate income taxes.

First-quarter revenues actually fell by 1.6% to $236.7 million. Net income fell by 11.2% towards $73.0 million.

Frank's operates with $455 million in total debt after paying out a $484 million special dividend to previous owners in the form of notes payable. Adding the $660 million in gross proceeds from the public offering and the net cash position of the firm is estimated to be around $150 million.

As such, operating assets of the firm are valued around $5.7 billion. This values the company's assets at 5.4 times annual revenues and 16-17 times annual earnings.

Frank's International aims to pay out a quarterly dividend of $0.075 per share, for an annual dividend yield of 1.1%.

Investment Thesis

As noted above, the offering of Frank's International has been a success. Shares were offered above the high end of the preliminary offering range and ended their opening day with gains of almost 20%. At Friday's close of $26.36, shares were trading some 32% above the midpoint of the preliminary offering range.

After a soft first quarter, Frank's expects to show a much better performance in the second quarter. Second-quarter revenue is expected to come in between $288 and $298 million, up 11% on the year before. Income from operations is expected to come in between $99 and $104 million, up 14% compared with last year.

The long-term prospects remain good for the company as the world remains hungry for energy. Furthermore, the company holds leading positions in the deep water offshore market. Yet there are some risks. This includes volatile energy prices, tighter regulation, technological changes and potential liability in case of a leak or blow-up of a well.

The are some other key risks as well. This includes a complicated company structure and the fact that the Mosing family remains in tight control, holding 85.1% of the voting power.

Yet overall I am slightly optimistic. Full-year revenue for 2013 could come in between $1.1 and $1.2 billion. Net earnings could advance toward $350 to $400 million, valuing the company around 15 times expected earnings.

I think this is quite an interesting valuation for a specialized niche player in the oil service industry. On top of that is the potential for a buyout, as giant service providers like Schlumberger (NYSE:SLB) could eye further expansion, and if they manage to convince the Mosing family.

Source: Frank's International - Attractive Investment After A Successful Public Offering