Seeking Alpha

Fortis Minerals Files For U.S. IPO

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About: Fortis Minerals LLC (NRI)
by: Donovan Jones
Summary

Fortis Minerals has filed to raise $100 million in an IPO, although the final figure may differ.

The firm acquires oil & gas mineral and royalty interests in the Southwestern U.S.

NRI is a medium-sized player in a region that is attracting major oil firms.

Quick Take

Fortis Minerals (NRI) has filed to raise gross proceeds of $100 million from a U.S. IPO, according to an S-1 registration statement.

The firm pursues oil and natural gas mineral and royalty interest opportunities.

NRI is a medium-sized player in a region where major oil firms are elbowing their way in.

I’ll provide a final opinion when we learn more IPO details from management.

Company & Management

Houston, Texas-based Fortis Minerals was founded in 2006 to acquire and manage a portfolio of royalty and mineral interests in resource basins primarily in the Southwestern US.

Fortis’ main business operates primarily in areas undergoing high development under ‘top-tier’ operators.

Management is headed by co-founder, President, CEO and Director Christopher H. Transier, who has been with the firm since 2016 and was previously EVP & Chief Financial Officer at Escondido Resources II.

Assets & Production

Fortis has a growing portfolio of oil and natural gas mineral and royalty interests, located in the Permian Basin of West Texas and New Mexico as well as the STACK region located within the Anadarko Basin of Oklahoma - at the conjunction of Blaine, Canadian and Kingfisher counties - whose management collectively refers to as its “Key Areas”.

The table below summarizes Fortis’ mineral and royalty interest position in its Key Areas as of the end of June 2019:

Source: Company registration statement

Management says it has chosen these locations due to their attractive characteristics, such as their known and predictable geologic properties, low economic break-evens across multiple hydrocarbon intervals, horizontal well control as well as the presence of high-quality and well-funded operators focused on multi-well pad development.

Additionally, management says that, due to the change of oil-focused activity and capital allocation by operators migrating from maturing plays, such as the Bakken Eagle Ford, to its Key Areas, Fortis has managed to demonstrate ‘outstanding’ growth, as shown by the chart below:

Source: RS Energy Group, citing data from August 1st, 2019.

The chart below shows the firm’s net production growth rate:

(2) Production growth associated with the firm’s assets is calculated based on the interests it owned as of June 30, 2019, as if it owned such interests during the entire period, regardless of the date Fortis acquired.

Source: Company registration statement

As of the end of H1 2019, Fortis had mineral and royalty interests in about 11,063 net revenue interest acres [NRIA], with an average estimated net production of about 11.9 MBoe per day during Q2 2019, or 11.9 thousand barrels of oil equivalent, calculated by converting gas to oil equivalent barrels at a ratio of 6 thousand cubic feet of natural gas [6Mcf] to One stock tank barrel of 42 U.S. gallons liquid volume [Bbl].

The interests acquired typically are perpetual and grant ownership of oil, gas, NGLs, and other minerals.

Business Strategy & Approach

Management has pursued growth through an acquisition strategy focused on identifying mineral and royalty interests in areas with ‘the most attractive development profiles for operators’ in an attempt to maximize the probability that drilling and production growth will occur at the given spot.

To further complement its acquisition strategy, Fortis intends to partner with EnCap Energy Capital Fund and open an acquisition wing named ‘Acquisitions JV’, under which EnCap will own 100% of the capital interests in the subsidiary, and NRI will own a carried interest, entitling them to a percentage of distributions by Acquisition JV upon meeting certain return thresholds.

Fortis’ financial philosophy is based on ‘returns-focused’ capital allocation and ‘the preservation of a strong balance sheet through varying commodity price environments with the goal of balancing the return of capital to investors with the risks and rewards of executing acquisitions that are accretive to shareholder value.’

The firm intends to effect this approach by returning an estimated non-fixed 80% or more of its free cash flow each quarter as capital to its shareholders - through quarterly dividends of the company’s free cash flow and allocating any remaining ‘available cash, after debt service and other needs, towards pursuing accretive acquisition opportunities.’

Financial Performance

NRI’s recent financial results can be summarized as follows:

  • Variable topline revenue

  • Fluctuating operating profit

  • Uneven cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

To June 30, 2019

$ 69,211,000

-6.3%

2018

$ 142,616,000

109.6%

2017

$ 68,046,000

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

To June 30, 2019

$ 40,542,000

58.6%

2018

$ 90,126,000

63.2%

2017

$ 36,418,000

53.5%

Net Income (Loss)

Period

Net Income (Loss)

To June 30, 2019

$ 38,133,000

2018

$ 84,811,000

2017

$ 36,227,000

Cash Flow From Operations

Period

Cash Flow From Operations

To June 30, 2019

$ 42,224,000

2018

$ 113,434,000

2017

$ 39,684,000

Source: Company registration statement

As of June 30, 2019, the company had $7.6 million in cash and $90.9 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended June 30, 2019, was $108.7 million.

IPO Details

Fortis has filed to raise $100 million in gross proceeds from an IPO of its Class A common stock, although the final figure may be higher.

Class B shareholders will include existing ownership interests and will likely have a majority voting power post-IPO. The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

We intend to contribute all of the net proceeds from this offering to Fortis Operating in exchange for Fortis Operating Units. Fortis Operating will use [i] a portion of the net proceeds from this offering to repay outstanding indebtedness under our revolving credit facility and [ii] will distribute the remaining net proceeds from this offering to all of the Existing Owners, generally on a pro rata basis (but as adjusted to take into account any debt encumbering the applicable Predecessor Company to result in the net contribution of each Existing Owner being in proportion to its interest in Fortis Operating).

Management’s presentation of the company roadshow isn’t available.

Listed underwriters of the IPO are Credit Suisse, Goldman Sachs, Barclays, JPMorgan, Scotia Howard Weil, Wells Fargo Securities, Raymond James, Tudor, Pickering, Holt & Co., Citigroup, RBC Capital Markets, UBS Investment Bank, and Simmons Energy.

Commentary

Fortis is attempting to access public capital in part to pay down debt and to buy interests in the underlying operating LLC.

NRI is backed by EnCap, a leading private equity firm to the oil & gas industry, and EnCap will be a controlling shareholder of Fortis post-IPO.

The firm’s financials show the effects of a fluctuating price environment for oil products as well as ongoing transportation challenges in the areas of its interests.

The market opportunity for Southwestern U.S. oil & gas products is notably enormous, but the area is undergoing rapid change as major oil producers move into the region and acquire supply, operations, and transport capacity.

This in turn impacts the smaller players as they are forced to scrounge for production and transportation, frequently at higher prices.

An investment in NRI is partially a play on the price of oil but also whether additional takeaway capacity can be brought on in the areas of its interests, keeping local prices higher and costs low.

I’ll provide a final opinion when we learn more IPO details.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.