On April 13th, Bill Simpson wrote an analysis of Complete Production Services, Inc. (NYSE:CPX), formerly known as Integrated Production Services, Inc. CPX shares priced at $24 a share on April 20th. The text of Simpson's original writeup follows.
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Complete Production Services plans on offering 25 million shares (11 million by insiders) at a range of $22-$24. Credit Suisse and UBS are lead managing the deal. Post-offering CPX will have 70.5 million shares outstanding for a market cap mid-range of $1.622 billion. Roughly 1/3 of the IPO proceeds will be utilized to repay debt, the remainder for general corporate purposes.
As currently structured, CPX is a rather new entity commencing operations in 9/05. CPX is a merger of 3 separate oil/ natural gas services companies all bought in the 2001-2003 period by private equity firm SCF Partners. SCF Partners has been around since 1989 and focuses exclusively on the energy and energy equipment sectors. Looking at the structure of CPX and how it was formed, it takes on a lot of the characteristics of classic 'roll-up' companies. SCF Partners has essentially been buying up small oil services companies the past 5 years and in 9/05 combined these entities into CPX.
As is typical in private equity deals SCF Partners did pay themselves a dividend of $147 million upon the merger that created CPX. Also SCF will be selling roughly 11 million shares in the offering, assuming over-allotment is exercised. Post-offering SCF will own 41% of the public CPX.
From the S-1:
We provide specialized services and products focused on helping oil and gas companies develop hydrocarbon reserves, reduce costs and enhance production.
CPX falls into the broad category of 'oil services’. While they do have a small offshore component, for the most part CPX business is onshore, in the US Rocky Mountain region, Canadian Rockies, and the Oklahoma/ Texas region. As is often indicative of roll-ups, CPX has its fingers in a lot of different niches. To compare to recent IPOs, they're almost a combination of Basic Energy Services (NYSE:BAS)/ Superior Well Services (SWSI)/ Bronco Drilling Company (NASDAQ:BRNC) with a little Hercules Offshore (NASDAQ:HERO) thrown in for good measure. Halliburton Company (NYSE:HAL) is probably the most similar currently public company, although HAL is much larger with a market cap 25 X's greater than CPX's projected initial cap.
Obviously oil/ natural gas services has been a great spot to be the past few years. Driven by high underlying commodity costs, exploration and production capacity has ramped up, leading to a boom period for those companies involved in servicing, exploration and production. Historically this has been a cyclical sector as strong demand leads higher prices brings on higher capacity, leading to more supply and lessening demand from high prices eventually....leading to lower prices. Currently the group is in a massive bull run, fueled in large part by global energy demand, especially demand from India/ China.
I often liken what is occurring in India/ China to what transpired in the United States in the years following World War II. Yes, at some point there will be a turn, whoever can predict such is an analyst with psychic gifts. Continued high oil/ gas/ natural gas prices will continue to lead to a very strong exploration and production environment and it appears that will be the case throughout 2006.
The number of drilling rigs in North America has doubled in the past 3 years and the number of well service rigs has grown by 60% the past 3 years. Easier to reach wells have been drilled over the years, the trend has become tapping tougher to reach fields. This combination of increased drilling in harder to drill fields/ reserves has been that boom cycle for the oil/ natural gas services companies.
CPX services pretty much cover the entire life-cycle of a well. The business breaks down into 3 distinct services:
1 - Completion and Production Services which accounted for 67% of 2005 revenue. Essentially this entails establishing, maintaining, and enhancing the flow of product through the entire life-cycle of a well. This includes; intervention services, downhole & wellsite services, and fluid handling. CPX intervention services are specialized equipment used to increase flow and include coiled tubing units, pressure pumping units, nitrogen units, and well service rigs. Fluid handling for the most part includes a fleet of disposal vehicles to assist in elimination of used/ waste fluid used in E&P. Direct competitors in the Completion and Production space include Haliburton (HAL), Basic Energy Services (BAS), Baker Hughes (NYSE:BHI) and Key Energy Services.
2 - Drilling Services which accounted for 17% of 2005 revenue. This segment entails drilling equipment/ rigs and the actual drilling itself. All of the CPX actually contract drilling revenue was derived in the North Texas region. Competitors here include Bronco Drilling (BRNC), Nabors (NYSE:NBR), and Patterson-UTI Energy(NASDAQ:PTEN).
3 - Product Sales which accounted for 16% of 2005 revenue. Oil and gas services equipment sold to exploration and production entities through retail stores and distributors. Competitors here are similar to those in the Completion and Production Services segment.
As a roll-up type business and to compete in each locale in which they operate, CPX has kept an operating structure akin to that of many smaller locally managed companies.
Top 10 customers accounted for 33% of revenue, with no single customer accounting for more than 10%. As is typical in this business, all revenue other than 'Product Sales' segment is derived on a contract basis for relatively short time-frames. This has really helped these type companies ramp revenues as demand has increased, historically for this reason they've also suffered during the cyclical downturns.
US operations accounted for 86% of '05 revenue, Canadian operation 14%.
There is some debt here. Some was brought on through the dividend payout to SCF, the rest through the roll-up acquisitions. $426 million post-IPO is not enough to impede operations or really cause much of an issue, especially when one factors in the $200 million in cash on hand post- offering. I would expect SCF to utilized cash on hand for acquisitions, which should enable them to pay down debt levels rather swiftly from cash flow. I do fully expect CPX to continue to grow, either by adding equipment such as rig/ workover rig counts, or more likely by picking up smaller regional oil/ gas services companies. That has been the CPX modus operandi, and it has also been characteristic of the sector which is rapidly consolidating. 7 1/2 X's book value post-offering. CPX does not intend to pay dividends. Approximately 2.1 X's trailing revenue assuming mid-range pricing. Revenue comparisons year to year are not really comparable due to the roll-up nature also, CPX did not exist in its current form until 9/05. They have included consolidated numbers for 2005 as if the entire entity existed 1/1/05 so we can look at full year 2005. Revenues in 2005 were $760 million with 37% gross margins. Operating margins of 15%. Taking into account debt servicing and taxes, net margins for 2005 of 7%. CPX earned 77 cents a share in 2005. At a mid-range pricing CPX will be trading 30 X's trailing revenue.
Looking into 2006, there is no doubt CPX will add services capacity. How much? Really difficult to discern due to the complete lack of operating history as currently structured. My estimates for CPX in 2006 are much more guesswork than usual [for me within this industry]. The sector itself looks to expand 10-15% in 2006, I think CPX will do a little better than overall sector. Why?
First they're still a relatively small player so during another strong demand year they should be able to outperform sector growth on a % basis. Second I think they'll put IPO proceeds to work expanding business which should result in increased revenue back 1/2 of 2006. Gross margins should be in similar ballpark, but I do think operating margins can improve slightly due to all segments now being under one umbrella. Better operating margins should positively impact net margins, coupled with a stable debt servicing number.
So at a $900 million revenue run rate for 2006, I think CPX could book post net margins of 9% , resulting in $1.10-$1.20 in net earnings. At mid-range, CPX would be trading at 20 X's 2006 earnings.
A look at a few others in similar sectors:
Haliburton (HAL) - $39 billion cap, currently 19 X's '06 earnings, 6 X's book, 2 X's trailing revenue 5-10% top-line growth.
Baker Hughes (BHI) - $24 billion cap, currently 20 X's '06 estimates, 5 X's book, 3 X's trailing revenue10-15% top-line growth.
Basic Energy Services (BAS) - $1.1 billion cap, currently 15 X's '06 estimates, 4 X's book, 2 X's trailing revenue, 10-15% top-line growth.
Superior Well Services (SWSI) - $0.66 billion cap, currently 30 X's '06 estimates, 7 X's book, 5 X's trailing revenue, 20-25% top-line growth.
Complete Production Services (CPX) - $1.6 billion cap at $23, 20 X's '06 estimates, 7 X's book, 2 X's trailing revenue, 15-20% top-line growth.
Big risk here is CPX continuing to spend money to grow capacity and acquire business when a cyclical turn hits. That doesn't appear to be much of a short or mid-term risk but something to keep in mind. These oil/ gas servicing companies are spending quite a bit of money annually to keep up with E&P demand. It has been paying off very nicely for them and looks as if that is going to be the case at least through 2006.
If and when the E&P environment changes and slows every one of these oil/ gas services companies will be sitting on a lot of excess inventory/ employees they'll need to idle and/ or write down. It happens over and over again in this industry and it will again someday. When? I've no idea, doesn't appear to be an imminent danger.
I don't like to see debt during boom periods, although debt is a characteristic of a roll-up type operation. I'd like to see CPX utilize cash flow to pay down debt, something I think they will do. The fact they've $200 million in IPO proceeds to devote to growing the business, should allow cash flow to go towards lowering debt.
Solid offering. This is one you definitely take shares on offering in range and probably $1-$2 above range. I do think since the sector is so hot here that CPX will most likely price above range and open higher from there. Should that occur I doubt we'll see CPX outperform the sector. In fact if it opens too high initially this could be a case in which CPX underperforms the group.
Late '05 we saw 2 IPOs in HERO/ BAS actually price/ open at a significant discount to the sector really giving IPO players an opportunity for appreciation on not only the sector but also the 'multiple catch-up'. I don't see that 'multiple catch-up' being in play here with CPX as I do believe its opening prints will definitely not be at a forward discount to the sector as a whole.
Good offering in a great performing sector, one though to be careful of paying any price for in aftermarket. I would anticipate a pricing of $26 and an open around $30, at which there may be better opportunity elsewhere in the group. I do like CPX aftermarket under $27 (which is $4 above mid-range) or so and would take any allocations especially if able to flip on a lofty open.