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Summary

  • This independent exploration and production company in the Appalachian Basis saw a very disappointing public offering.
  • Its huge multi-billion market capitalization is a bet on the future, as the company still has very tiny operations.
  • There are a myriad of risks and reasons for me to avoid this offering, I will keep a close eye on production growth going forward.

Eclipse Resources (NYSE:ECR) is an independent exploration and production company which focuses on the acquisition and development of both oil and gas properties in the Appalachian Basin.

The company's operations are very tiny compared to its multi-billion market valuation which combined with a myriad of risks makes it very easy for me to avoid shares at the moment. I will keep shares on my watchlist, keeping an eye on notably production growth in the remainder of the year.

The Public Offering

Eclipse Resources went public last Friday, the 20th of June. At the moment, the company has an acreage position of 227,230 net acres in Eastern Ohio, of which 96,240 net acres in the Utica Core Area as well as holdings in the Marcellus Shale.

The company owns about 81% of the net acreage in these areas, having identified a total of 863 net horizontal drilling locations. In total it currently has commenced drilling on 75 gross wells. For now the company's main focus is the development of these areas, while Eclipse will look to opportunistically add to its drilling inventory.

Eclipse Resources sold 30.3 million shares for $27 apiece, thereby raising $818 million in gross proceeds. The company itself is selling 21.5 million shares which is raising $580 million in the proceeds while the remainder of proceeds will benefit selling shareholders.

Demand for the offering was subdued, despite the strong momentum in energy stocks in particular, given the tensions in Iraq. Shares were priced at the low end of the preliminary $27-$30 price range. Shares fell by 4.6% on their opening day to $25.75 per share, valuing equity in the business at $4.1 billion.

The company was brought public by banks like Citigroup, Goldman Sachs, Morgan Stanley, Barclays, BMO Capital Markets and Deutsche Bank, among many others.

Valuation

Eclipse began to assemble its current acreage position in 2011 after a rigorous and analytical evaluation of shale properties in the Utica and Point Pleasant formations in Eastern Ohio.

The best part of this area is called the Utica Core Area, in which the firm has accumulated a position of 96,240 net acres. From May of 2011 till March of this year, Eclipse and its partners has drilled 75 gross wells in the Utica and the Marcellus basin. 24 of these have been turned to sale while the remainder awaiting midstream, being close to completion, or are still in the drilling phase.

Total proven reserves of the company are 18.3 million barrels of oil equivalent as of March of this year, of which 37% is based in liquids. While this appears relatively low, note that reserves stood at just 13.1 million barrels a quarter before.

The company is still very much in the start-up phase. Revenues for 2013 came in at just $12.9 million compared to a negligible $0.4 million the year before. Losses roughly five-folded to $43.5 million.

For the first quarter of 2014, Eclipse generated revenues of $24.8 million, which is almost double the revenues of the entire year of 2013. The company posted an $18.5 million loss, largely on the back of $13.6 million in interest payments.

Before the offering took place, Eclipse operated with $27.3 million in cash and equivalents while operating with $432.2 million in debt, which results in a net debt position of about $405 million. Following the gross proceeds of $580 million in the offering, Eclipse is likely to operate with a net cash position of $100-150 million. The company will still have $412.2 million in 12% senior unsecured PIK (Pay In Kind) notes outstanding, which mature in 2018.

Following the offering, shares have fallen to $24.52, which values equity at $3.9 billion, or net operating assets at about $3.8 billion. This values the company at still a mind blowing 38 times annualized revenues of the first quarter of this year. Of course, much growth is anticipated, which should drive revenues up and valuation multiples down later this year.

Investment Thesis

As noted above, the public offering of Eclipse has been a huge disappointment. Shares were already offered at the low end of the preliminary offering range and after witnessing a few days of steady declines, shares are now down 14% from the midpoint of this guidance.

To be honest, the lack of information and many normal risks associated with a business in the start-up phase make this company not attractive in my eyes. I would like to point out that if Eclipse can quickly and profitably grow its business, it might very well turn out to be a great long-term investment. Yet, at the moment, you are still paying nearly $4 billion for a company with hardly any revenues.

Risks include, of course, the very limited operating history, impact of potential changes in environmental legislation, volatile oil and gas prices and concentrated activities in terms of geography. Note that despite the built-up in reserves the value of proven reserves stood at just $254 million at the end of the first quarter, although significant upgrades to this number are reasonably to be expected.

There are of course light points as well with first-quarter revenues coming in nearly twice as high as the entire year of 2013. Operating losses before losses on derivative contracts and interest payments fell to just $1.2 million in the first quarter.

Despite this light point I remain worried. Interest payments will be high going forwards, while a nearly $700 million capital expenditure budget will put the company soon into a net debt position again after the public offering proceeds have been spent.

One of the most prominent signs of a potential overvaluation is the fact that Eclipse acquired Oxford for $652 million last year, acquiring 49,000 net acres in the Utica Core area roughly half of today's total acreage in this area which is the company's prime asset. However, this entire asset is now valued at nearly $4 billion. Assuming similar quality of this acreage does it assume that the $652 million deal is now really worth $2 billion, or has the price of the public offering been too aggressive?

You get the point by now. Eclipse has so much to prove to me. I cannot reasonably take a position in the equity at the moment. I will keep a close eye on the pace of production growth in particular, but for now won't consider taking a position.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Eclipse Resources - Many Risks And Uncertainties In This Very Disappointing Public Offering