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The Underwriting of Rice Energy

Rice Energy Inc. (NYSE:RICE), an oil and gas E&P, with operations in the Appalachian basin, plans to raise $800 million in its upcoming IPO on Friday, January 24th. See S-1 here.

The Canonsburg, Pennsylvania-based firm will offer 40 million shares (including approximately 10 million insider shares) at an expected price range of $19-$21 per share. If the IPO can reach the midpoint of that range at $20 per share, RICE will command a market value of $2.6 billion.

RICE filed on December 16, 2013.
Lead Underwriters: Citigroup Global Markets, Barclays Capital, Goldman Sachs & Co.
Underwriters: BMO Capital Markets Corp, Capital One Securities, Comerica Securities, FBR Capital Markets & Co, Johnson Rice and Co LLC, RBC Capital Markets LLC, Scotia Capital Markets, Sterne Agee and Leach, SunTrust Robinson Humphrey Inc., Tudor Pickering Holt & Co Securities Inc., Wells Fargo Securities LLC.

Business Summary

RICE is an independent natural gas and oil firm, focused on acquiring, exploring, and developing natural gas and oil properties in the Appalachian Basin. The firm attempts to identify the core of new shale plays and purchase acreage appropriate to the exploitation of the core area; it is currently in the process of developing what it believes to be the core of the Marcellus and Utica Shales.

RICE holds 43,351 pro forma net acres in the Marcellus Shale and 46,488 net acres in the Utica Shale, and operates on the majority of its properties in both regions. The firm's pro-forma net daily production was 128 Mmcf/d as of Q3 2013.

Valuation

RICE offers the following figures in its S-1 balance sheet for the six months ended October 2013:

Revenue: $60,738,000.00
Net Loss: ($20,841,000.00)
Total Assets: $751,397,000.00
Total Liabilities: $436,060,000.00
Stockholders' Equity: $315,337,000.00

RICE has been aggressively expanding its operations in its shale plays, having invested over $600 million in its operations in 2013. The firm plans to invest over $1.0 billion in its operations in 2014.

Strong and Well Financed Competitors

RICE must compete with other E&P firms operating in the Utica and Marcellus Shales for acreage, equipment, and personnel. Competitors include Chevron Corporation (NYSE:CVX), Atlas Energy LP (NYSE:ATLS), Chesapeake Energy Corporation (NYSE:CHK), Continental Resources Inc (NYSE:CLR), and Anadarko Petroleum Corporation (NYSE:APC).

Management A Family Affair

CEO Daniel J. Rice IV has served as RICE's chief executive and as a director since October 2013. Mr. Rice joined Rice Partners in 2008, initially serving as Vice President and CFO; he also served a brief stint as COO. He previously worked as an investment banker for Tudor Pickering Holt & Co., LLC and as a senior analyst of corporate planning for Transocean Inc. He holds a BS in Finance from Bryant University.

Daniel is joined by his brother, Toby Z. Rice, who has served as RICE's President and COO since October 2013. He had served as CEO from 2008 through September 2013, when Daniel J. Rice IV took over. He holds a BS in Chemistry from Rollins College.

What Should IPO Investors in RICE Consider

We rate the RICE IPO Neutral to Avoid at the current estimated price range of $19 to $21.

While the RICE IPO is fortunately timed with a rise in the price of natural gas, which has recovered in recent weeks from the brutal low prices of November and December--and while the firm has shifted away from exploration towards development of its Marcellus Shale acreage, which could lead the firm nearer to profitability, we believe better buys exist in the energy sector.

RICE has seen significant losses in recent years, and while this may be partially attributed to the firm's eye towards expansion, we are uncomfortable with companies that are losing huge amounts of money for their shareholders.

Potential Investors should also be aware that the recent energy IPOs have not performed well coming out of the gate. For example, EPE Energy (NYSE:EPE) which came public a few days ago is trading below it's offer price.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Rising Tide Of Natural Gas Might Not Be Enough To Float Rice Energy IPO