April 28, 2011, 10:45 am

TLLP - Tesoro Logistics

Report was available to subscribers 04-13-2011
TLLP - Tesoro Logistics LP

TLLP - Tesoro Logistics LP plans on offering 14.375 million units at a range of $19-$21. Citi, Wells Fargo, BofA Merrill Lynch and Credit Suisse are leading the deal, Barclays, Deutsche Bank, JP Morgan, Raymond James and RBC are co-managing. Post-ipo TLLP will have a 31.1 total units outstanding for a market capo of $622 million on a pricing of $20. Nearly all the ipo proceeds will go to parent Tesoro(TSO). In addition, on ipo TLLP will borrow $50 million which go to TSO as a cash distribution.

Refiner Tesoro(TSO) will own all non-floated shares, the general partnership and incentive distribution rights.

Yield - As an MLP, TLLP will distribute all net cash flows quarterly to unitholders. The initial distribution is expected to be $0.3375 quarterly. On an annualized $1.35, TLLP would yield 6.75% annually to unitholders.

Lets not bury the lead here. We all know by now that these energy MLP's trade based on cash flows ans yield. TLLP derives revenues based on fees from Tesoro, not based on the underlying price of the commodity. As long as TSO's refineries are operating at or near capacity, TLLP's cash flows should be consistent and predictable.

The business here, terminals and pipelines for refineries, is ideal for an MLP structure. Not a growth sector, but one in which cash flows are consistent and predictable. Growth comes from either dropdowns from the parent or acquisitions. The debtload of the ipo comes into play here. The better the balance sheet, the easier to fund acquisitions and flow those cash flows to the bottom line and unitholders.

In order to pay the full $1.35 per unit distribution and fund capital expenditures TLLP will need to borrow approximately $3 million the first 12 months public. This is not an issue as it amounts to just $0.10 per unit in a 12 month period in which TLLP plans more than normal expansion capital expenditures. This is something to keep an eye on going forward however. Ideally you want the entity(TLLP) structured so that cash flows are sufficient to pay both the full distribution and fund capital expenditures.

There are at least 4 publicly traded refined products pipeline & terminal MLP's.

SXL - Yields 5.3% annually, average debt load for the group.

PAA - Yields 6% annually, above average debtload for the group.

HEP - Yields 5.9% annually, average debtload for the group.

MMP - Yields 5.1% annually, less than average debtload for the group.

Not exactly apples to apples, the strength of the parent and the location and scalability of operations also come into play.

Based purely on yield and balance sheet, TLLP looks quite attractive in this space.

TLLP - On a $20 pricing, would yield 6.75% annually with minimal debtload.

From the prospectus:

'We are a fee-based, growth-oriented Delaware limited partnership recently formed by Tesoro to own, operate, develop and acquire crude oil and refined products logistics assets. Our logistics assets are integral to the success of Tesoro’s refining and marketing operations and are used to gather, transport and store crude oil and to distribute, transport and store refined products.'


*Crude oil gathering system in North Dakota/Montana. Includes 23,000 barrels per day truck-based crude oil gathering operation and approximately 700 miles of pipeline and related storage units.

*Eight refined products terminals in the midwest and west with capacity of 229,000 barrels per day. Distribution for refined products from TSO's refineries in Los Angeles and Martinez, CA, Salt Lake City, Utah; Kenai, Alaska; Anacortes, Washington; and Mandan, North Dakota.

*Crude oil and refined products storage facility in Salt Lake.

*Five related short-haul pipelines in Utah

Growth plans include constructing new assets and by acquiring dropdowns from parent TSO and third parties. TSO plans on growing their logistics segment, with a focus on increasing yield for TLLP. TSO recently announced a refining expansion of 64,000 bpd at their North Dakota refinery.

As noted above revenues are derived from fees charged for gathering, transporting and storing crude oil and for terminalling, transporting and storing refined products.

Parent TSO accounts for nearly all revenues.

Tesoro(TSO) - Tesoro is the second largest independent refiner in the United States by crude capacity and owns and operates seven refineries that serve markets in Alaska, Arizona, California, Hawaii, Idaho, Minnesota, Nevada, North Dakota, Oregon, Utah, Washington and Wyoming. Tesoro also sells transportation fuels and convenience products through a network of nearly 1,200 retail stations under the Shell, Tesoro and USA Gasoline brands.


$50 million in debt post-ipo. Balance sheet is set-up here nicely for future dropdowns from parent TSO.

12 months ending 3/31/12: $97.3 million in revenues, 45% operating margins. Debt servicing will eat up just 5% of operating profits. Net margins of 42.5%. Factoring in capex, cash flows will be $1.25, $0.10 short of the expected distribution. Capex is expected to be $15 million, far higher than 2010's $1.7 million.

Conclusion - solid MLP deal coming attractively valued in range on a yield basis. We want to keep an eye on borrowings going forward as ideally cash flows should be sufficient to cover distributions and capex. For the first twelve months public TLLP plans on borrowing $0.10 per unit to fund distributions and capex. Slight negative that. Strong 6.75% yield though and very good balance sheet which should lead to acquisitions and increased yield going forward. Recommend.

April 17, 2011, 12:24 pm

ZIP - ZipCar

ZIP - Zipcar plans on offering 9.6 million shares (assuming overs) at a range of $14-$16. Goldman Sachs and JP Morgan are leading the deal, Cowen, Needham and Oppenheimer are co-managing. Insiders will be selling approximately 3 million shares in the deal. Post-ipo ZIP will have 38.6 million shares outstanding for a market cap of $579 million on a pricing of $15. Ipo proceeds will be used to repay debt taken on during an acquisition and for working capital.

From the prospectus:

'Zipcar operates the world’s leading car sharing network.'

560,000 car sharing 'members.' 8,250 Zipcars total. 68 members per auto currently. an oddity here - Over the past 2 quarters, ZIP has grown members from 470,000 to 560,000. However the number of available autos has dropped from 8,860 to 8,250. More people, less autos available.

Self service vehicles located in reserve parking spaces throughout neighborhoods in large metro areas as well as college campuses. Target demographic is 1) urban dwellers needing a car a few times a month for either day or shopping trips; 2) college students without a vehicle.

Web and mobile app based reservation model.

Vehicles available for use by the hour or day. Fuel and insurance are covered in the price. Note however that there appears to be substantial evidence on the web of customers being charged by ZIP for damages done to cars. Prices average $6-$12 by the hour and $60-$80 by the day, with some busy weekend being up to $150 per day. ZIP appears to be attempting to manage auto inventory by shifting price based on demand, very similar to car rental agencies. 180 miles are covered in the price, additional miles are $0.45 per mile. Did a quick search in major metro areas and ZIP's rates are not really a bargain at all compared to the average auto rental. One day rates usually vary from $15-$45 in various metro areas. That does not include gas or insurance, although insurance is offered through major credit card programs. Plugging in $20 for gas (180 mile limit), one day auto rentals from car rental agencies run about $35-$65 with ZIP's all inclusive rates being $60-$70. With car rental agencies offering various reward programs for loyal and often users, there really is not much of an incentive currently for use of ZIP outside of college students too young to rent via auto rental agencies. ZIP is an alternative to renting a car from an agency, however not really a cost effective alternative.

The above is probably why ZIP operates on 230 college campuses throughout the US, but in just 14 non-university focused metro areas in the US, Canada and Europe. To me, ZIP's core user and growth niche would appear to be college students and those simply needing a vehicle for an hour or two once in a while. Not a bad alternative if seeking that timeframe, however not really a deal on price for much above that need.

Note also that cars are not generally cleaned between use. Often one driver drops off a car and another has it reserved soon after.

ZIPS slogan is a 'cost saving alternative to car ownership'. If one used ZIP's service for 5-6 days a month, one is looking at $350+ in monthly costs. Note that ZIP does not claim to be a cost saving alternative to traditional auto rentals.

Not knocking the service, simply pointing out on a cost basis, ZIP is rather pricey from all angles. The exception would be college students or others that needed a car for just 5-6 hours a month, not days.

Locations include New York, Boston, DC, San Francisco, Chicago, Baltimore, Toronto, Vancouver and London. In '07 ZIP merged with Flexcar and added Seattle, Portland, Atlanta Philadelphia and Pittsburgh.

In April of 2010, ZIP acquired Streecar, a car sharing service in the UK. Plan is to expand into other European metro areas. Actually the plan is to rapidly expand into 100+ metro markets worldwide down the line.

ZIP utilizes each auto for 2-3 years.

Competition - Note that car rental companies have recently announced car sharing programs. As they've the inventory and the locations, they would seem to be a natural competitor. In addition some auto manufacturers such as BMW are rolling out car sharing programs.


$88 million in cash post-ipo, $20 million in debt. ZIP is intent on fast growth, expect the debt to stay on the books as the cash is used to fund growth.

ZIP has never posted a GAAP profit or positive cash flows.

2010 - Pro forma, assuming the purchase of Streetcar has occurred 12/31/09. $194 million in revenues, an increase of 25%+ from 2009. GAAP growth is stronger due to the acquisition. Fleet operations are the big expense here. They are dropping slowly as a % of revenues, however they are still in an area in which profitability will be very difficult. In 2010, fleet operation ratio was 66%. This is simply the cost of the vehicles in the fleet in 2010. Total operating expense ratio was 104%, net loss $0.25.

2011 - Much depends on rollouts in new areas. I would expect 20% topline growth to $233 million. Operating expense ratio should still be at least slightly negative. The combination of auto fleet expense and sales/marketing expense are making it impossible for a positive bottom line currently. Would expect a loss in the $0.15-$0.20 area.

Throughout the prospectus, ZIP attempts to position themselves as part of the new age/era of on-demand services. The difference here between ZIP and online and mobile operations is that ZIP is not running that sort of business model. ZIP is in reality an 'old-school' hefty inventory car rental service with a twist. The twist however does not mean ZIP operates on an inventory model any different than the large car rental agencies. As ZIP grows areas and members, they will need to grow inventory at roughly the same rate in order to fulfill members demands for autos. A recent magazine article compared ZIP to OpenTable, the reservation system. Yes both tend to operate in major metro areas, but that is the extent of the similarity. OpenTable is an online service easily scalable without much additional investment, and no capital investments. ZIP is not, for reasons stated immediately above. ZIP has done a nice PR job attempting to position themselves as something different than their actual business model suggests.

Market leader in car sharing has a value. This deal is garnering some hype and honestly I've no idea if this ipo works initially or not. I have serious doubts however whether ZIP will ever be able to put much on the bottom line anytime in the mid or long term. ZIP is simply a different way to paint an auto rental company. Not a bad thing, however I'm not thrilled with either the financials or the hype here. Organic growth is not that impressive in mature markets(about 10% annually) and to date there really has not been much margin improvement. I foresee years GAAP losses ahead here, not a deal I can recommend simply on that basis.

First mover, market leader. Could be a short term trade based on hype, however I question the longer term sustainability of the business model.

As a side note, one of the most annoying prospectus I've ever read in regards to hype and 'new agey' catch words. ZIP, you are running a car rental operation with a small twist you are not redefining modern living in a 'socially conscious environmentally aware' way...and yes the latter is their claim.

April 7, 2011, 11:56 am

SDT - SandRidge Mississippian Trust

Disclosure - on blog post date(4/7/11), tradingipos.com is long SDT.

SDT - SandRidge Mississippian Trust

SDT - SandRidge Mississippian Trust plans on offering 14.375 million units(assuming overs) at a range of $19-$21. Raymond James and Morgan Stanley are leading the deal, Wells Fargo, RBC, Oppenheimer, Baird, Madison Williams, Morgan Keegan and Wunderlich are co-managing. Post-ipo SDT will have 28 million units outstanding for a market cap of $560 million on a pricing of $20. Ipo proceeds will go to parent SandRidge Energy(SD).

SandRidge Energy(SD) will own 49% of SDT post-ipo. SD will control SDT via a separate unit class. SD is an independent oil and natural gas operation focused on West-Texas, Oklahoma and Kansas. Market cap of $5.1 billion. Proved reserves of 545.9 MMBoe.

Initial distribution is expected to be made 8/30/11. Note that this distribution will include both the first and second quarter of 2011 even though SDT was not a public company in the first quarter of 2011. This initial distribution is expected to be $1.01 per unit.

From the prospectus:

'SandRidge Mississippian Trust I is a Delaware statutory trust formed in December 2010.'

SDT will own 1)royalty interests in 37 horizontal wells producing in the Mississippian formation in Oklahoma, and 2)royalty interests in 123 horizontal development wells to be drilled in the same formation. Wells are required to be drilled by 12/31/14.

Parent SD holds 64,200 acres in the formation. Until SD drills the 123 wells for the royalty trust they will not be able to drill in the formation for themselves.

SDT will receive 90% of all SD's proceeds from the currently producing wells and 50% of SD's proceeds in the yet to be drilled wells. The lower % in the yet to be drilled wells reflects parent SD's costs to drill these wells.

***Note that parent SD owns on average a 56.3% interest in the producing wells. SDT will receive 90% of Sd's 56.3% average interest in these wells, or 50.7% of all revenues from these wells. In the yet to be drilled wells SD owns on average a 57% interest, putting SDT's total interest in these wells at 28.5%.

SD operates 73% of the producing wells and owns a majority interest in 75% of the yet to be drilled wells.

Note that the Trust will not be responsible for any drilling costs or other operating or capital costs. The Trust simply receives revenues from the wells.

Hedges - SD will hedge 60% of SDT's expected revenues through 12/31/15. 2011 hedged prices are $103.60 for oil and $4.61 for natural gas.

Total reserves attributable to SDT are approximately 19,276MBOE, with approximately 2/3's of that expected to come from the yet to be drilled wells.

48% of reserves oil, 52% natural gas. Oil will account for approximately 79% of 2011 revenues.

Risk here is quite similar to recent ipo ECT - 2/3's of SDT's expected revenues over the life of the trust are expected to come from wells yet to be drilled. If parent SD runs into any difficulty in drilling these wells, SDT's distributions would dry up quickly....even a short term event delaying drilling would impact the expected distributions listed below.

Mississippian Formation - Anadarko shelf in Northern Oklahoma and south-central Kansas. Thousands of vertical wells have been drilled over the past 70 years. Horizontal drilling and fracturing began in 2007. 140 horizontal wells drilled just since 2009 in the formation. Currently 20 horizontal rigs drilling in the formation with eight drilling for SD. SD has a total of 880,000 acres leased in the formation.

Distribution - Set up much like recent ipo ECT, production will ramp up through 2014 as new wells are drilling. After the peak in 2014/2015, production will decline annually as the reserves targeted for SDT begin to dry.

Yield assumes a $20 pricing and average 2011 selling prices of $98 for oil and $4.50 for natural gas with similar estimates through 2013. Oil hedges are $100+ through 2015, natural gas collared between $4 and $8.55 through 2015.

2011 - Total distributions of $2.31, yielding 11.55%.

2012 - $2.82, yield of 14.1%

2013 - $3.03, yield of 15.15%

2014(peak yield) - $3.36, yield of 16.8%

2015 - $3.01, yield of 15.05%

First five years public SDT estimates unitholders will receive $14.53 in distributions. This compares favorably to ECT's distributions first five years of $13-$14 per unit.

ECT currently trades at $31.26 and relies on natural gas for the majority of revenues. ECT's 2012 expected yield is 10%, SDT's 14.1% at $20. 2013, ECT 11.6%, SDT 15.15%. 2014 ECT 9.4%, SDT 16.8%. If looking for a trust yield to buy, SDT in pricing range is the one to go for over ECT at $31+.

***Note that distributions will begin declining significantly beginning in 2016. Assuming a $20 price, SDT would yield 12.2% in 2016 and dip to 7 3/4%. Still not a bad yield nearly 10 years in.

Trust termination date is 12/31/30. Upon termination, any royalty interest retained will be sold be the Trust with proceeds going to SD and shareholders. SD has right of first refusal on purchase.

Nice mix here of both oil and natural gas. Oil is the driver here accounting for an expected 75%+ of Trust revenues through the lifespan of the Trust. Currently that is a positive as the price of oil has risen much faster the past two years than that of natural gas. Hedges in place to mitigate some price risk, also will cap some potential upside if oil blows off from here. SDT was structured to mimic ECT. ECT is up 50%+ from ipo last summer. Solid parent operation with extensive experience in the Trust assets area. Easy recommend here in range, would expect SDT to trade $30+ here sometime first year public.

April 3, 2011, 2:21 pm



GNC - GNC plans on offering 25.875 million shares at a range of $15-$17. Insiders will be selling 9.875 million shares in the deal. Goldman, JP Morgan, Deutsche, and Morgan Stanley are leading the deal, Barclays Credit Suisse, Blair and BMO are co-managing. Post-ipo GNC will have 103.55 million shares outstanding for a market cap of $1.657 billion on a pricing of $16.

A big chunk of the ipo monies will be used to pay a dividend to insiders. Note that insiders also paid themselves a nice dividend as well on a recent debt restructuring. Remainder of the ipo proceeds will be used to repay debt.

Due to a couple leveraged buyouts over the past decade debt here is substantial. Post-ipo GNC will have $903 million in debt on the balance sheet.

Ares will own 28% of GNC post-ipo. Ares and other entities purchased GNC from Apoll in a 2007 leveraged buyout. Total consideration was $1.65 billion much of it funded via debt. Apollo attempted unsuccessfully to take GNC public twice in the 2004-2006 timeframe.

From the prospectus:

'Based on our worldwide network of more than 7,200 locations and our GNC.com website, we believe we are the leading global specialty retailer of health and wellness products, including vitamins, minerals and herbal supplements ("VMHS";) products, sports nutrition products and diet products.'

Large, successful brand and retailer here. Our one question is to discover if the pricing range here works factoring in the hefty debtload.

Much like competitor VSI, GNC enjoys higher margins on their own branded 'GNC' product line. GNC branded products accounted for approximately 47% of GNC's total 2010 sales. Branded products are sold at company owned stores, GNC franchise stores and Rite-Aid 'GNC store within a store' locations.

Sector - The US nutritional supplement industry generated $28.7 billion in sales in 2010. Growth projections are for 5%+ annually through 2015. Fragmented sector, GNC is largest participant with an estimated 5% US market share.

***GNC has had an impressive 22 straight quarters in company owned same store sales growth. Again, not a question here of a strong brand name or a successful operation. GNC is both. The question is the valuation with debt factored in.

As of 12/31/10, 2,917 company owned stores, 2,340 franchise stores and 2,003 franchised Rite-Aid stores within a store locations.

GNC plans on growing US company owned retail space by 3%-4% in 2011.

2010: 5.6% company owned same store sales growth, 2.9% franchise same store sales growth. $438,000 average revenue per company owned store. 101 company owned store openings, 40 closings.

2009: 2.8% company owned same store sales growth, 0.9% franchise same store sales growth.

GNC manufactures approximately 35% of products sold over the past five years.

Franchise revenues account for 16% of total revenues. Revenues from Rite Aid accounted for 3.5% of 2010 revenues.

11% of revenues from international operations, mostly in Canada.


$903 million in debt post-ipo.

2010 - $1.822 billion in revenues an increase of 6.7% from 2009. Gross margins of 35%. Operating margins of 11 1/2%. Interest expense ate up 19% of operating margins. For the size of the debt load, a nice positive here that interest expense is only cutting into 19% of operating margins. The debtload is large here, but not killing GNC operationally. Net after tax margins of 6.1%. EPS of $1.08. Note that cash flows here pretty much match EPS. If GNC continues to bring in 100+ million in cash flows annually, they can substantially pay down their debt load over the next five years.

2011 - Based on planned square footage growth and plugging in positive same store sales puts 2011 revenue growth at 5%-6%. Operating margins should improve slightly as debt servicing % will dip a bit. On a run rate of $1.922 billion with net margins of 6.5% puts 2011 EPS at $1.20. On a pricing of $16, GNC would trade 13 1/2 X's 2011 estimates.

Quick look at GNC and recent ipo VSI.

VSI - $955 million market cap, trades 24 X's 2011 estimates. Much less debt, $75 million. 33% gross margins, but just 3% net margins.

GNC - $1.66 billion market cap, at $16 would trade 13 1/2 X's 2011 estimates. 35% gross margins 6%+ net margins. Debt is the issue at $903 million.

Conclusion - IB's and private equity entities have finally been valuing these indebted ipo reasonably. The debt is an issue here, however debt servicing eats up just 19% of operating profits. Not ideal of course, but not enough to impede cash flows. GNC is a market leader, the worldwide supplement/vitamin leader in terms of revenues and store locations. Coming just 13 1/2 X's 2011 estimates is cheap. Definite recommend here in range, solid deal coming reasonably valued.

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