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Based in Houston, Texas, Platinum Energy Solutions (FRAC) scheduled a $140 million IPO with a market capitalization of $296 million at a price range mid-point of $10 for Friday, February 3, 2012.

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

SUMMARY

FRAC is a start-up service business in an industry where demand decreased last week, see below.

We believe FRAC's business model is seriously flawed because its customers demand short term contracts while FRAC needs to make long term purchases of equipment and machinery.

Other problems include high customer concentration - two customers account for the bulk of the business and most importantly FRAC is targeting a market where demand lessened dramatically this week.

CURRENT IPO LESS THAN 50% OF PREVIOSLY FILED

Platinum Energy in September filed IPO plans to sell up to an estimated $300 million in stock to pay down debt and redeem about $20 million of preferred shares. Refiling at 50% of the previous amount is a sign of considerably reduced demand, and is a red flag.

NEGATIVE ON FRACKING MARKET

News on January 23 and 24th

(1) "Natural gas, the worst-performing commodity this year, rebounded from a 10-year low in New York after Chesapeake Energy Corp., the second-largest U.S. producer, said it will cut production and reduce spending." Natural Gas, Bloomberg, January 23

(2) Chesapeake Energy (NYSE:CHK) Pulls Back Amid Natural-Gas Glut

"So much gas-rich shale has been found, however, that federal and private forecasters predict an oversupply will last for years.

"The glut partly stems from the U.S. energy industry's success with new techniques to recover oil and gas-notably horizontal drilling and hydraulic fracturing, or fracking, of shale formations.

"The company said Monday it will cut spending on gas drilling by more than $2 billion this year and divert that money to chase more profitable oil, which is trading near $100 a barrel."

And "EQT Corp., a natural-gas producer based in Pittsburgh, said Monday it would suspend its shale-gas drilling in Kentucky indefinitely in response to low prices; its stock jumped 8.3%, or $3.83, to $50.13." Wall Street Journal, January 23

(3) Economic Tailwind: No Sign Of The Natural Gas Glut Ending Anytime Soon

"The Energy Information Administration notes that the working gas in storage is near a record high, and thanks to a warm winter it's not falling as fast as it usually does, meaning prices are likely to remain low." SeekingAlpha January 24

CONCLUSION

FRAC is clearly going to run into some headwinds based on the above, especially because FRAC's two major customers are heavy into gas, see below. In addition, FRAC seems like an short-term equipment rental company with no sustaining competitive advantage. We don't see a bright future for FRAC.

BUSINESS

FRAC specializes in hydraulic fracturing, coiled tubing and other pressure pumping services. Hydraulic fracturing is a technique used to help unlock large reserves of shale oil and gas that weren't previously accessible.

The procedure has sparked a boom of new wells across the country, although concerns have been raised about whether the process poses a threat to ground water.

The company's major customers include Encana Corp. (NYSE:ECA), and Petrohawk Energy Corp. (NYSE:HK), where Platinum Energy is providing services in the Eagle Ford Shale in southern Texas.

CUSTOMER CONCENTRATION

Encana and Petrohawk (which represented an estimated 80% to 90% of FRAC's total 2011 revenues and which FRAC anticipates will likely represent a significant portion of total 2012 revenues.

The Encana MSA may be terminated by either party at any time, with or without cause, upon 30 days prior written notice.

REVENUE EXPECTATIONS

Based on FRAC's estimates, FRAC believes it may earn revenue of approximately $26 million per three-month period over the term of the Encana Work Order once our fleet is deployed on 24-hour operations

Based on FRAC's estimates, FRAC believes it may earn revenue of approximately $44 million per three-month period, including amounts paid by Petrohawk for raw materials, such as proppant, supplied by FRAC over the term of the Petrohawk contract once FRAC's fleet is deployed on 24-hour operations.

TERMINATION CLAUSES

The Petrohawk MSA may be terminated by either party at any time, with or without cause, upon 30 days prior written notice

The Encana MSA may be terminated by either party at any time, with or without cause, upon 30 days prior written notice.

TWO MAJOR CUSTOMERS EMPHASIZE NATURAL GAS

Encana Oil & Gas (ECA) is a south of the border chip off the block of a Canadian energy giant. The company is an exploration and production subsidiary of natural gas giant Encana Corporation. Encana Oil & Gas explores for and produces hydrocarbons in its four key natural gas resource plays (about 90% of its total US natural gas production) located at Jonah and Piceance in the U.S. Rockies (Wyoming and northwest Colorado) and the Fort Worth and East Texas/Haynesville basins.

Encanca also owns stakes in natural gas gathering and processing assets, mainly in Colorado, Texas, Utah, and Wyoming. EnCana Oil & Gas reported proved reserves of about 7.7 trillion cu. ft. of natural gas equivalent in 2010.

Petrohawk Energy (formerly Beta Oil & Gas activities include the exploration, development, and production of crude oil and natural gas in the Anadarko, Arkoma, East Texas/North Louisiana, Gulf Coast, Permian Basin, and South Texas regions.

Petrohawk Energy has estimated proved reserves of about 2.8 trillion cu. ft. of natural gas equivalent. The company is concentrating its efforts on developing key shale plays, including the Haynesville Shale, the Lower Bossier Shale, and the Eagle Ford Shale. In a move to boost its US shale assets, in 2011 BHP Billiton acquired Petrohawk Energy for $12.1 billion.

USE OF PROCEEDS

FRAC expects to net $128mm from its IPO. The money is allocated as follows:

  • $20 million to redeem the Series A Preferred Stock.
  • $28mm to repay debt
  • $60mm for fleet expansion & capital expenditures
  • $20 for working capital

Remaining proceeds for capital expenditures, working capital and other purposes.

Source: IPO Preview: Platinum Energy Solutions