2 Promising Oil Equipment IPOs

Includes: FET, MRC
by: Stone Fox Capital

On Wednesday night, 2 oil equipment companies priced IPOs. While solid companies in a booming oil and gas shale sector, neither has been hyped a lot by the IPO buzz network.

For one, MRC Global (MRC) priced at the low end of the range at $21. Also on Wednesday, the Natural Gas spot price closed below $2 for the first time in 10 years. This is clearly not the ideal time to price an IPO for the energy sector.

The other stock is Forum Energy (FET) that provides products and services for the oil sector. Neither stock has gotten much fanfare. For example, both companies have under 30 email alerts followers on Seeking Alpha, while Splunk (SPLK) already has 52 followers, yet it won't go public until next week.

Key Driver

Though natural gas prices are historically low, leading to reduced demand for services and equipment, investors need to understand that the revenue generated on unconventional shale areas is typically three to five times larger than a conventional well, due to the greater length and the higher quality of pipe and related PVF products required.

As these low natural gas prices drive up demand it should only help the pick and shovel suppliers of the industry such as MRC and Forum. More demand will only increase drilling activity in the future.

MRC Global

The largest global pipes, valves, and fitting (PVF) and services supplier to the energy industry raised $361M by offering 17.25M shares. Insiders also sold 5.7M shares The stock was priced at $21 which was at the low end of the range of $21 to $23. See S-1 here.

Business Highlights

The company serves the global oil and natural gas industry by supplying products and services to customers throughout the energy industry. It is the leading distributor of PVF to the energy industry with nearly twice the sales of the nearest competitor in 2011.

The company has an amazing average relationship of over 20 years with their largest 25 customers. Also, it has a 95% retention rate with their customer base. Business is primarily focused on North America with only 7% coming from Asia and Europe.

It has over 175 branch locations with over 4M customer part numbers. The size and scope of its operations give them a competitive advantage over smaller companies.


The company reported $4.8B in sales in 2011 while reporting only $29M in net income. Adjusted EBITDA came in at $361M partly due to $137M in interest expense and $51M in intangibles expense. Notably though, sales were still below the $5.3B peak from 2008.

At 101M shares outstanding or nearly 105M assuming the over allotment shares are purchased, MRC will have a market cap of $2.2B.

Based on the below Q112 preliminary adjusted EBITDA numbers, the stock will trade in the 5-6x range.

Preliminary First Quarter 2012 results:

Sales. We expect to report sales of between approximately $1.30 billion and $1.34 billion for the three months ending March 31, 2012, as compared to sales of $991.8 million for the three months ended March 31, 2011.

Net income. We expect to report net income of between approximately $30 million and $36 million for the three months ending March 31, 2012, as compared to a net loss of $(1.1) million for the three months ended March 31, 2011.

Adjusted EBITDA. We expect to report Adjusted EBITDA of between approximately $101 million and $111 million for the three months ending March 31, 2012, as compared to Adjusted EBITDA of $60 million for the three months ended March 31, 2011.

Total indebtedness. We expect that our total indebtedness outstanding at March 31, 2012 will be approximately $1.6 billion to $1.7 billion, as compared to $1.53 billion of total indebtedness as of December 31, 2011.

Forum Energy

A global products and services provider for the oil and natural gas industries raised $278M by offering 13.9M shares at $20. Private equity firm SCF Partners sold 5M shares, but the firm will still maintain a controlling interest. This pricing was actually at the high end of the range of $18 to $20 and increased raised the shares offered from the original 15.8M.

Business Highlights

Roughly 40% of revenue comes from the sale of capital products, while approximately 53% was derived from consumable products or spare parts. The remaining balance comes from rental and other sources. The company has a decent international business with 39% of 2011 revenue derived outside of the US.

The company is focused on two segments. The Drilling and Subsea segment designs and manufactures products and provides services to the drilling, well construction, completion, intervention and subsea construction markets. This segment contributed $755M revenue in 2011.

The other segment, Production and Infrastructure, designs and manufactures products and provides related equipment and services to the well stimulation, completion, production and infrastructure markets. This segment contributed $891M to 2011 revenues.

Industry trends that will benefit the company:

  • Increasing complexity of well construction
  • Growing service intensity with unconventional wells
  • Increasing investment in subsea equipment and related services
  • Heightened focus on product maintenance and certification
  • Increased capital spending in the oil and gas industry
  • Recovery in global drilling and new rig replacement cycle
  • Development of heavy oil reserves in Canada


The company will have roughly 87M shares outstanding giving it a $1.74B market cap.

Pro forma revenue for 2011 came in at $1.25B with net income of $119M. Assuming no benefits from the IPO proceeds, the company would've earned $1.37 per share based on the current outstanding shares.

Pro forma adjusted EBITDA came in at $264M giving the stock a 7x multiple.


Both stocks offer the ability to invest in the domestic shale boom requiring more equipment and services per well. MRC provides more domestic exposure while Forum provides a 20% focus on subsea work.

Either way, the companies are relatively cheap and riding a global wave of more complex drilling needs whether onshore or subsea.

IPO Pricings

After this article was written, but prior to submission both companies opened for trading.

MRC was recently trading just over $21, or right above the IPO price.

Forum was trading at $22, or just around 10% above the IPO price.

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

Disclaimer: Please consult your financial advisor before making any investment decisions.