Sparks Could Fly For Spark Energy IPO Given Projected Yield

Jul.22.14 | About: Spark Energy (SPKE)

Summary

SPKE, an independent retail energy services company, with principal offices in Houston, Texas, plans to raise $60.0 million in its upcoming IPO.

SPKE has proven its ability to turn a profit, and should be able to continue to grow its operations as more states authorize alternative electricity and gas providers.

SPKE’s Q1 earnings were down 55% and the firm does not boast the strongest underwriters.

Still, we are generally positive on the firm and suggest investors consider buying in as the firm plans to pay a 7.25% dividend.

Spark Energy (Pending:SPKE), an independent retail energy services company with principal offices in Houston, Texas, plans to raise $60.0 million in its upcoming IPO.

The firm will offer 3.0 million shares at an expected price range of $19-$21 per share. If the IPO prices at the midpoint of that range at $20 per share, SPKE will command a market value of $275 million.

Filing, Underwriting

SPKE filed on May 29, 2014

Lead Underwriters: Robert W. Baird & Co. Incorporated; Stifel Nicolaus & Company, Incorporated

Underwriters: BB&T Capital Markets; Drexel Hamilton, LLC; Halliday Financial LLC; J.J.B. Hilliard, W.L. Lyons, LLC; Janney Montgomery Scott LLC; Natixis Securities Americas LLC; RB International Markets (USA) LLC; SG Americas Securities, LLC; USCA Securities LLC; Wunderlich Securities, Inc

Summary: SPKE's Offerings of Alternative Sources of Natural Gas and Electricity

SPKE is a retail energy services firm that offers energy customers in competitive U.S. markets with an alternative source of natural gas and electricity; the firm purchases resources from wholesalers and then distributes them to customers through the existing infrastructure of local utility companies. The firm bills customers on a monthly basis at a fixed or variable rate. For calendar 2013, the firm derived some 60% of its retail revenues from the sale of electricity and the rest from the sale of natural gas.

SPKE had approximately 237,600 residential customers and 17,800 commercial customers as of May 31, 2014, including a net 44,800 customers added during the first five months of the year. These customers were spread across 16 states and 46 utility service territories; however, 86% of its customers were concentrated in Illinois, California, Texas, New York and Pennsylvania. The firm has a significant ability to optimize its customer base by shifting its customer acquisition resources towards more appealing markets, allowing SPKE to respond to market shifts such as regulatory or competitive changes more dynamically than traditional energy providers.

SPKE maintains a relatively conservative balance sheet; as of the completion of the IPO, the firm expects to have some $10.0 million in outstanding indebtedness under a $70.0 million revolving credit facility. The firm also will have access to some $15.0 million outstanding in letters of credit. This liquidity should facilitate SPKE's efforts to place itself in the most advantageous markets.

Valuation

SPKE offers the following figures in its S-1 balance sheet for the three months ended March 31, 2014:

Revenue: $105,976,000.00

Net Income: $6,508,000.00

Total Assets: $127,833,000.00

Total Liabilities: $99,768,000.00

Stockholders' Equity: $28,065,000.00

SPKE has seen falling revenues over the past two years, posting total revenues of $379.1 million for calendar 2012 and $317.1 million for calendar 2013. However, the firm's income numbers have improved over the same period, from a net income of $26.1 million in 2012 to a net income of 34.2 million in 2013.

Competitors: Other Retail Energy Providers & Alternative Sources of Energy

SPKE competes or may compete with both other retail energy providers and with local regulated utilities. Some of these competitors have access to greater financial and marketing resources than SPKE. Competitors and potential competitors include AEP Energy, Champion Energy Services, LLC, ConEdison Solutions, Homefield Energy, and NRG Energy, Inc. (NYSE:NRG).

The firm may also compete with other alternative sources of energy as they become more common, like solar panel energy.

Management Highlights

Nathan Kroeker has served as president of SPKE since April 2012, and was appointed as the firm's CEO in April 2014.

He previously served as SPKE's CFO and as the CFO of Marlin Midstream Partners, L.P., a midstream energy company that affiliated with SPKE. Before joining SPKE, Mr. Kroeker was senior vice president, Finance, for Macquarie Energy and the CFO of the retail business division of Direct Energy. He also worked in various other management positions in Direct Energy's finance group.

Mr. Kroeker received a Bachelor of Commerce degree from the University of Manitoba and is a licensed Chartered Accountant in Canada and a Certified Public Accountant in the state of Texas.

Conclusion: Investors Should Consider Buying In

We rate this IPO a buy given the company's plan to pay a 7.25% dividend at the midpoint of the range.

SPKE has proven its ability to turn a profit, and should be able to continue to grow its operations as more states authorize alternative electricity and gas providers. The firm's well-managed balance sheet and significant flexibility to determine where it will offer its services compared to its traditional competitors are both positive signs, as is its highly experienced management team.

Though the firm's declining revenues from 2012 to 2013 might be a red flag in other circumstances, SPKE's simultaneously growing incomes denote its ability to successfully manage change and to get the most out of its business.

SPKE does not have the most illustrious underwriters-although the list is numerous, which should provide solid support for the company.

Unfortunately, Q1 earnings were down 55%.

We still suggest investors consider getting a piece of this IPO.

We invite readers wishing to join the discussion on IPOs to click the +FOLLOW button above the title of this article -- and those looking for the latest developments to click +Get real-time alerts.

Note: As a large sample of information sources does not yet exist for SPKE, we have taken much of the information for this article directly from SPKE's S-1 filing.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SPKE over 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.