IPO Preview: QGOG Constellation S.A.

| About: CQGOG Constellation (QGOG)
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Based in Luxembourg, QGOG Constellation S.A. (QGOG) scheduled a $550 million IPO with a market capitalization of $3.96 billion at a price range mid-point of $20 for Friday, February 8, 2013.

Eight IPOs are scheduled for the week of February 4. The full IPO calendar is available here.

S-1 filed January 25, 2013.

Manager, Joint Managers: J.P. Morgan/ BofA Merrill Lynch/ Itaú BBA/ Credit Suisse/ Bradesco BBI. Co Managers: Jefferies/ DNB Markets/ Banco do Brasil Securities/ BNP PARIBAS/ ING.

QGOG is a pure play in ultra deep water drilling services, offshore from Brazil.

QGOG has had one primary client since 1981: Petroleo Brasileiro SA (PETR4), or Petrobras.

QGOG itself is controlled by an established, large Brazilian conglomerate. It seems unlikely that competitors could break into the Petrobras/QGOG relationship. There are probably friendship and other relationships that go back to 1981.

As of September 30 QGOG had a backlog with Petrobras of $10.9 billion.

Negative: one client

Positive: that client expects vigorous growth

Growth is very visible because of the backlog and because QGOG's operating assets consist of five ultra-deepwater drilling rigs, the Laguna Star, Amaralina Star, Alpha Star, Lone Star and Gold Star, two of which commenced operations 2012, specifically in November 2012, September 2012. The remaining three began operations in July 2011, April 2011 and February 2010, respectively.

QGOG said it plans as much as $4.2 billion of investments from October 2012 to December 2015. The company also may consider acquisitions of drilling assets or investing in contract drilling companies.

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Glossary of financial terms

IPOdesktop is neutral. The market doesn't like the dependence on one client.

"FPSO": a floating production storage and offloading unit, a type of floating tank system used by the offshore oil and gas industry and designed to take all of the oil or gas produced from nearby platforms or templates, process it, and store it until the oil or gas can be offloaded onto a tanker or transported through a pipeline;

QGOG is a market leading Brazilian-controlled provider of offshore oil and gas contract drilling and FPSO services in Brazil.

QGOG is also one of the ten largest drilling companies globally, as measured by ultra-deepwater and deepwater drilling rigs in operation.

QGOG believes that its size and over 30 years of continuous operating experience in this industry provides QGOG a competitive advantage in the Brazilian oil and gas market.

QGOG also believes it is well positioned to benefit from the expected increase in ultra-deepwater drilling activity in Brazil, a market segment driven primarily by the recent discoveries of vast potential oil and gas reserves in the pre-salt layer offshore Brazil.

QGOG owns and holds ownership interests in a fleet of state-of-the-art offshore and onshore drilling rigs and FPSOs, including nine ultra-deepwater rigs in operation or under construction.

QGOG is part of the Queiroz Galvão Group, which through QG S.A., the group's Brazilian holding company, is one of the largest Brazilian conglomerates with $3.4 billion in consolidated gross revenues in 2011 and with a proven track record in heavy construction, energy, oil and gas, infrastructure, real estate, agriculture and steel.

QGOG has a contract backlog of $10.9 billion as of September 30, 2012, a 136.6% increase from the contract backlog as of December 31, 2008.

QGOG has a strong, long-term relationship with Petrobras, one of the world's largest integrated oil and gas companies, which has been the principal client since QGOG commenced operations in 1981.

According to the 2012 BP Statistical Review of World Energy, Brazil's oil and gas reserves are among the fastest growing in the world.

Proven oil reserves in Brazil have grown from 4.8 billion barrels at the end of 1991 to 15.1 billion barrels at the end of 2011. During the same period, proven natural gas reserves in Brazil grew from 4.0 trillion cubic feet to 16.0 trillion cubic feet.

While pre-salt activity currently comprises only 5% of Brazil's total current production, it is projected by Petrobras to increase to over 47% by 2020.

The anticipated development of the pre-salt offshore fields contributes largely to the growth prospects of the Brazilian oil and gas industry. From 2006 to 2011, 50% of new discoveries globally were in deepwater, and of those, 63% were in Brazil according to Petrobras.

In June 2012, Petrobras disclosed its five-year investment plan, which provides for an aggregate of $237 billion in capital expenditures from 2012 through 2016, up from an aggregate of $174 billion in capital expenditures in its 2009-2014 investment plan.

$142 billion (or 60%) of these capital expenditures are budgeted for E&P projects, with $132 billion to be spent in Brazil which has led to an increase in demand for QGOG's.

Petrobras expects its total production to more than double from the current 2.6 million boepd to an estimated 5.7 million boepd in 2020.

FPSO outlook in Brazil
With a plan to invest $67.7 billion and $47.5 billion by 2015 in pre-salt and post-salt exploration and FPSO services, respectively, Petrobras is committed to developing the world-class resource potential found in offshore Brazil. Brazil's exploration and production will be more focused on deepwater and ultra-deepwater areas.

Given the distances and depths involved, the construction of traditional subsea pipelines could be technically challenging and costly. These dynamics support a marked increase in FPSO demand, with Brazil poised to be the top market for FPSOs in Latin America and the leading source of FPSO orders globally.

QGOG's growth strategy is principally based on the growth in the ultra-deepwater and FPSO markets.

Operating assets consist of five ultra-deepwater drilling rigs, the Laguna Star, Amaralina Star, Alpha Star, Lone Star and Gold Star, which commenced operations in November 2012, September 2012, July 2011, April 2011 and February 2010, respectively.

Currently, QGOG derives nearly all of its revenue from Petrobras, and QGOG has a limited number of potential customers;

QGOG has a limited operating history in the ultra-deepwater sector,

We have a limited operating history in the ultra-deepwater sector, which makes it more difficult to accurately forecast our future results and may make it difficult for investors to evaluate our business and our future prospects, both of which will increase the risk of your investment in our common shares.

Drilling contracts are generally awarded on a competitive bid basis. Intense price competition is often the primary factor in the bidding process, although safety records, competency, rig availability and location are also considered in determining which qualified contractor is awarded a contract.

Competition includes international companies and Brazilian-controlled companies. In addition, the contract drilling business is subject to cyclical variations.

Global industry players include the following:
Seadrill Ltd (NYSE:SDRL)

Seadrill Partners LLC (NYSE:SDLP)

Pacific Drilling SA (NYSE:PACD)


Transocean LTD (NYSE:RIG)

Queiroz Galvão Oil & Gas International S.à.r.l, 80%
Constellation Holdings S.à.r.l, 9%
Constellation Coinvestment Fund S.à.r.l, 9%

Queiroz Galvão Family

QGOG does not plan on paying dividends.

QGOG expects to receive $518 million from its IPO.

IPO proceeds are allocated as follows:
. Capital expenditures for certain existing projects, $271 million
. Capital expenditures for new projects and general corporate purposes, $245 million.

Disclaimer: This IPO report is based on a reading and analysis of QGOG's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.