Enduro Royalty Trust (NDRO) is trading down approximately 4% as of the close on Friday, after pricing its 13.2 million unit IPO Wednesday night at $22.00, below the indicated range of $23.00-25.00. All of the units were offered by Enduro Sponsor, which intends to use the proceeds to repay approximately $110.0 million of the borrowings outstanding under its senior secured credit agreement and to make a distribution of approximately $15.0 million to its sole member, Enduro Resource Holdings LLC. The remaining $164.8 million will be used to acquire additional oil and natural gas properties in the future for Enduro Sponsor. Based on the $22.00 pricing, the company has a market capitalization of approximately $726 million, and an estimated forward dividend yield of 7.36%. Barclays, Citigroup, Goldman Sachs, RBC and Wells Fargo led the offering.
Enduro Royalty Trust is a perpetual trust which will own 80% of the net profits interest in the underlying oil and gas properties in Texas, Louisiana and New Mexico. Enduro Sponsor has 100% working interest in the properties and will have 68% economic interest. Enduro Sponsor will own 60% of the trust and the public unitholders will own 40%. The Underlying Properties were acquired in three separate transactions and are located in two different geographic regions: the Permian Basin and East Texas/North Louisiana. As of December 31, 2010, approximately 99.3% of the wells on the Underlying Properties were operated by third party oil and natural gas companies with significant experience in the development and operation of oil and natural gas properties. Leading operators of their properties include: Petrohawk (HK), EXCO (XCO), Kinder Morgan (KMI), Apache (APA), and Occidental (OXY). The properties have 26.5 million barrels oil equivalent of proved reserves. The reserve mix is approximately 50/50 oil and natural gas. The average production for 12 months is 6598 barrels of oil equivalent per day. Approximately 50% of the production is from properties in the Permian Basin and 50% from properties in East Texas/ North Louisiana. 30% of the production, yet 70% of the cash flow, is oil. Gas represents 70% of the production, and 30% of the cash flow.
The company states that it has grown faster than its peer group from Q1 to Q2 of 2011, with a 9.9% production growth versus a decline of 1.8% for its peers (which includes Permian Basin Royalty Trust (PBT), Sabine Royalty Trust (SBR), Cross Timbers Royalty Trust (CRT), Hugoton Royalty Trust (HGT)). SBR was the only other of this group to post positive growth of 5.1%. The company also notes that this peer group has well outperformed the S&P and Exxon Mobile over the long term. The 7.3% anticipated yield for Enduro is above this peer group average of 6.3%.
Projected cash distribution for the next twelve months is $1.62. This is based on $107M of projected net profits interest on sales of 2092 MBoe. The company states that it is already ahead of its12 month forecast with July production of 6879 Boe per day versus a 12 month projection of 6598 Boe per day. It believes the plan can be implemented with its current assets, but has upside potential of 3x its proved reserves.
The discounted pricing of the IPO is no surprise, as there is typically a fair discount to the peer group expected upon an IPO. And based on demand for the deal (or lack thereof as allocations were reportedly in the 75-100% range), it is not much of a surprise that the stock has traded below the pricing. However, the question at hand is how will Enduro fair in the long term? As expected, in this field there is definite risk related to the price of the underlying commodity. Enduro has somewhat mitigated this near term with hedge contracts with respect to approximately 69%, 70% and 57% of expected oil and natural gas production for 2011, 2012 and 2013. It is currently ahead of production based on July figures, and this will be the real key. If it can continue the ahead of forecast production numbers, based on the discounted current price on a yield basis compared to the peers, Enduro may just be a longer term sleeper of an IPO.