IPO Preview: Dynamic Offshore Resources

Jan.30.12 | About: Dynamic Offshore (DOR)

Based in Houston, Texas, Dynamic Offshore Resources (DOR) scheduled a $301 million IPO with a market capitalization of $1.2 billion at a price range mid-point of $18 for Wednesday, February 1, 2012.

DOR is one of eight IPOs scheduled for this week (see our IPO calendar).

SUMMARY

DOR is an independent exploration and production company formed in 2008 to focus on the acquisition and development of producing oil and natural gas properties in the Gulf of Mexico.

During November 2011, DOR's properties had aggregate average net daily production in excess of 27,000 Boe (barrels of energy) per day. DOR has made 10 acquisitions and the valuation metrics are appealing.

PROVED RESERVES

DOR estimates that its proved reserves, net of production, increased slightly between July 31, 2011 and December 31, 2011.

As of July 31, 2011, DOR's estimated net proved reserves were 60.1 MMBoe, of which 50% was oil and 81% was proved developed, with an associated PV-10* of approximately $1.7 billion, based on SEC pricing of $88.44 per Bbl for oil and $4.19 per MMBtu for natural gas. Note: oil is now higher than $88 per Bbl and natural gas is lower than $4.19.

As of that same date, DOR's estimated net probable reserves were 16.0 MMBoe with an associated PV-10 of approximately $370.1 million. During November 2011, DOR's properties had aggregate average net daily production in excess of 27,000 Boe per day.

* PV-10 = present value of estimated future oil and gas revenues, net of estimated direct expenses, discounted at an annual discount rate of 10%. This nomenclature is most commonly used in the energy industry, and is used to estimate the present value of a company's proved oil and gas reserves.

CONCLUSION

Based on the financial ratios, proved reserves and probable reserves, we believe DOR is reasonably priced at the price range mid-point of $18. It's not a 'hot' stock but could move up in the IPO aftermarket.

NO DIVIDENDS

DOR does not anticipate paying any cash dividends on common stock. In addition, DOR's revolving credit facility places certain restrictions on its ability to pay cash dividends.

BUSINESS

DOR is an independent exploration and production company focused on the acquisition and development of producing oil and natural gas properties in the Gulf of Mexico.

DOR properties are predominantly located in water depths of less than 300 feet. In addition, DOR owns a 49% interest in and operate the deepwater Bullwinkle field and associated platform, located in approximately 1,350 feet of water. Similar to DOR's shallow water properties, the Bullwinkle field produces from a fixed-leg platform utilizing surface wellheads and blowout preventers and, consequently, is not subject to recent regulations instituted for deepwater drilling.

ACQUISTION HISTORY

A significant portion of DOR's growth has been achieved through a series of acquisitions. Since it began operations in 2008, DOR completed ten material acquisitions, financed through private equity.

Since inception, principal equity owners invested $225 million and received approximately $123 million in aggregate distributions from cash flows, for a net investment of $102 million.

Over this same period, DOR incurred a total of $555 million in debt, with $365 million of debt outstanding and $59 million of cash and cash equivalents as of December 31, 2011. As a result of these acquisitions and operations, the PV-10* of proved oil and natural gas reserves totaled approximately $1.7 billion as of July 31, 2011.

As of September 30, 2011, DOR had interests in 270 net productive wells and over 250 offshore oil and gas leases in federal and state waters of the Gulf of Mexico, representing 830,000 gross (490,000 net) acres.

RECENT DEVELOPMENTS

Preliminary 2011 Operational and Financial Results

DOR's preliminary estimated results indicate production was approximately 26,000 to 26,500 Boe per day for the three months ended December 31, 2011, an increase of 33% to 35% as compared to 19,609 Boe per day in the quarter ended September 30, 2011. The increase in production for the three months ended December 31, 2011 was primarily attributable to the inclusion of a full quarter's results of the August 2011 XTO Acquisition described below.

XTO ACQUISITION

On August 31, 2011, DOR acquired from XTO Offshore Inc., HHE Energy Company and XH, LLC, each an indirect subsidiary of Exxon (NYSE:XOM), certain oil and natural gas interests in the Gulf of Mexico for $182.5 million (the "XTO Acquisition"). The properties acquired comprise substantially all of the Gulf of Mexico assets that Exxon acquired as part of its acquisition of XTO Energy, Inc. in 2010

The XTO Acquisition Properties include 250,000 gross (130,000 net) acres and 135 gross (62 net) producing wells. At the time of acquisition, net production from the XTO Acquisition Properties during August 2011 was greater than 7,500 Boe/d. Additionally, DOR's geological and geophysical professionals have identified an inventory of over 30 potential drilling locations within the XTO Acquisition Properties. DOR operate over 90% of the XTO Acquisition Properties.

MOR TRANSACTION

On September 14, 2011, DOR acquired directly from a subsidiary of Moreno Offshore Resources, LLC ("MOR") for $68.0 million the remaining 25% working interest in the properties that DOR acquired from SPN Resources in 2008 (the "MOR Transaction").

MOR had originally acquired this interest from SPN Resources at the same time as DOR's initial acquisition. As of July 31, 2011, MOR's 25% working interest represented 3.4 MMBoe of proved reserves, of which 65% was oil, and 0.3 MMBoe of probable reserves.

DOR has accounted for the MOR Transaction as a transaction between entities under common control because of DOR's relationship with the Riverstone/Carlyle Funds, which also controls (as defined in the accounting standards codification master glossary) the Moreno Group companies

CORPORATE REORGANIZATION

Dynamic Offshore Resources, Inc. is a Delaware corporation that was formed for the purpose of making this offering.

SEASONALITY

Generally, the demand for and price of natural gas increases during the winter months and decreases during the summer months.

However, these seasonal fluctuations are somewhat reduced because during the summer, pipeline companies, utilities, local distribution companies and industrial users purchase and place into storage facilities a portion of their anticipated winter requirements of natural gas.

Tropical storms and hurricanes occur in the Gulf of Mexico during the summer and fall, which may require dor to evacuate personnel and shut in production until these storms subside.

Also, periodic storms during the winter often impede DOR's ability to safely load, unload and transport personnel and equipment, which delays the installation of production facilities, thereby delaying sales of DOR's oil and natural gas.

COMPETITION

DOR operates exclusively in the Gulf of Mexico area and competes for the acquisition of oil and natural gas properties primarily on the basis of financial strength, bidder's perceived ability to close the transaction and price for such properties.

PRIVATE EQUITY

DOR is 'sponsored' by Riverstone/Carlyle Funds

USE OF PROCEEDS

  • DOR expects to net $277 million from sale of 16.7 million shares.
  • DOR intends to repay outstanding borrowings under DOR's revolving credit facility, of which $385 million was outstanding as of September 30, 2011.
  • The borrowings to be repaid were incurred primarily to fund the recently completed XTO Acquisition and the recently completed MOR Transaction - which is a better use than repaying debt incurred to pay dividends to private equity holders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.