November 19, 2011, 1:08 pm

ANGI - Angie's List

ANGI - Angie's List

ANGI - Angie's List plans on offering 10.1 million shares at a range of $11-$13. Insiders will be selling 2.54 million shares in the deal. BofA Merrill Lynch is leading the deal, Allen, Stifel, RBC, Janney, Oppenheimer, ThinkEquity, and CODE co-managing. Post-ipo ANGI will have 57.3 million shares outstanding for a market cap of $688 million on a pricing of $12. Ipo proceeds will be funneled into advertising to drive membership growth.

3 venture funds will separately own 43% of ANGI post-ipo.
From the prospectus:
'We operate a consumer-driven solution for our members to research, hire, rate and review local professionals for critical needs, such as home, health care and automotive services.'
sort of a 'yelp' for services. Yes I know yelp has service reviews, however it much more entertainment/food focused. Note that big difference is members are the only ones permitted to write AND read the reviews on ANGI. No anonymous reviews, must be a paid member to read and/or write reviews.
1 million paid memberships. Typical member: 35-64 years old, owns a home, college educated with household income of $100k+.
Between 900-1000 most visited website in the US.
In 2010, 11.4 unique searches per member and 37% of members wrote at least one service provider review.
Local service providers who are highly rated on ANGI are encouraged to advertise discounts and promotions to members.
Unlike a lot of the Groupon and Zipcar verbiage in their prospectus, I do like this from ANGI sums up the business: 'We help consumers purchase "high cost of failure" services in an extremely fragmented local marketplace.'
Services include: home remodeling, plumbing, roof repair, health care and automobile repair.
ANGI offers service in 175 local markets in the US. I'm not a member so could not check and see how many reviews there were in the secondary markets. 2.6 million total reviews in database or about 15,000 per market. Again I am assuming larger markets have more reviews.
ANGI believes membership growth has been driven by a national advertising strategy, something a lot of other recent online ipos have eschewed for a more internet ad approach.
Cost - Annual membership plans range from $29 - $46. Pretty reasonable if it saves someone money. Keep in mind though, this is a site in which all content is member generated so the fee is essentially one for access. There is no professional content other than a magazine that comes with the membership.
70% renewal rate for first year members in 2010. 51% of advertisers in 2008 were still active advertisers with ANGI in 2011. Both solid numbers.
Market - good idea here originally by ANGI as household and professional services have always been a tough one. Word of mouth has usually been the best indicator of quality.
Growth strategy - obviously, continue penetrating their market bases.
62% of revenues are actually derived from advertising.
Approximately $1 per share in net cash post-ipo. Expect ANGI to burn through this cash before the end of 2012 and be back for a dilutive secondary. Immediately below will explain why.
ANGI is attempting a very aggressive valuation on ipo. I suppose spurred on by LNKD and GRPN, ANGI is attempting to come pretty richly valued across any metric. Currently internet ipos are being judged by different metrics apparently.
Growth has been solid but not really spectacular. Definitely not the growth curve of either LNKD of GRPN. Revenues increased 35% in 2009, 29% in 2010 and poised to grow 48% in 2011.
****Growth not really organic unfortunately: Selling and marketing expenses increased a whopping 66% in 2010 and look to grow another 85%+ in 2011.
****This is a massive red flag here. Normally I am uneasy if an operation is increasing revenues at just a 1:1 rate to sales/marketing expenditures. Here? ANGI is increasing sales/markets costs FASTER than their revenue growth. They are spending more than $1 in sales/marketing to garner $1 of revenue growth. That indicates a failed business model and strategy if going on for any length of time and here this has been happening since the beginning of 2010. Through the first nine months of 2011 ANGI has increased sales and marketing expenses $33 million over first 9 months of 2010. Revenues however have increased just $19.5 million. In 2010 similar story: revenues increased $13.4 million while sales/marketing expenses increased $17.5 million.
How is this a sound business strategy? I've not seen something like this since 1999, there doesn't appear to be a fundamentally sound strategy other than to burn up all cash on hand to grow the subscriber base and not remotely caring that you have spend 7 quarters spending $1.50 in direct sales/marketing costs for every $1 of new revenues. That is not sustainable, hence the plan is to funnel new ipo monies into the EXACT SAME strategy.
Losses have increased with revenues growth. Losses in '09 were $0.15, 2010 $0.40 and in 2011 should be $0.88 Again, as noted above, ANGI has implemented a business strategy that is not financially sustainable. Yes there has been growth, but the cost of that growth has been awfully high.
As 62% of revenues are derived from advertising it appears the business plan is to spend massively on subscriber growth with the goal being for ANGI to be able to go to advertisers and charge more for more 'eyeballs'. I guess that's it.
2011 - $88 million in revenues, a 49% increase over 2010. Massive loss of $0.88 per share.
2012 - Ipo cash will fuel sales/marketing spending which should continue to grow revenues...albeit at a slower pace than the spending. Expect $120 million in revenues a 35% increase from 2011. Losses should be in the $1 range once again.
Conclusion - Until ANGI stops burning cash at a 1999 internet start-up pace, you just can't own this. Will they stop burning cash down the line? At this point one cannot discern the answer. The plan appears to be to spend whatever it takes to grow the subscriber base to a point in which ANGI can combine ad rates and membership revenues to reach a point of positive cash flows. Right now they aren't close. Also I've just never been a big fan of websites that are 'exclusive' charging subscribers fees and then turn around and generate most of their revenues via advertising. That is what ANGI is doing. Based on the business plan of the past two years and the mounting losses, no interest here. Will keep an eye on it to see if things change, but this market cap is dangerously high for the cash burn rate. Party like it is 1999???? Was all well and good until 2001 hit and the cash burn overtook many and zeroed them out.

November 19, 2011, 1:06 pm

LRE - LRR Energy

LRE - LRR Energy

LRE - LRR Energy plans on offering 10.8 million units at a range of $19-$21. Wells Fargo, Raymond James, Citi, and RBC are leading the deal, Baird, Oppenheimer and Stifel co-managing. Post-ipo, LRE will have 22.4 million total units outstanding for a market cap of $448 million on a pricing of $20.

Lime Rock will own all non-floated units including the General Partnership. Lime Rock manages $3.9 billion of private capital for investment in the energy industry.
***All ipo proceeds will go to parent Lime Rock as consideration for the LRE's properties. Nothing out of the norm with that. However in addition to ipo proceeds, LRE will also go into $156 million debt to pay of Lime Rock. I've always stressed that the MLP structure is not ideal for E&P's. Why? Well the E&P business required hefty capital expenditures to replace production, including new exploration and acquisitions. In addition to capex, the MLP also needs to yield large enough to entice buyers. To be successful and E&P MLP must have very strong and consistent cash flows to cover both the yield and capex. Debt on the books on ipo is a hindrance that I do not like to see as not only does the operation need cash flows to cover capex and yield, now they need to service debt as well. . The stronger E&P mlp's have come public with clean balance sheets. Not the case here though as Lime Rock has opted to suck out $156 million and place that debt on the back of the public LRE.
From the prospectus:
'Formed in April 2011 by affiliates of Lime Rock Resources to operate, acquire, exploit and develop producing oil and natural gas properties in North America with long-lived, predictable production profiles.'
Initial properties located in the Permian Basin in West Texas, Mid-Continent region in Oklahoma/East Texas and the Gulf Coast region of Texas.
30.3 MMBoe proved reserves, with 84% proved developed. 691 net producing wells as of 3/31/11.
57% of revenues from oil/NGL's, 43% natural gas.
Note that LRE does operate 93% of their proved reserves.
13.5 years reserve-to-production lifespan. As is common in this sector, LRE will need to acquire and/or discover additional reserves as they deplete current proved reserves.
55% of total reserves are in the Permian Basin.
Hedges - LRE plans on hedging 65%-85% of annual production 3-5 years out on a rolling basis.
Issue - LRE had a lackluster 3rd quarter with daily average production 8% lower than the first 6 months of 2011. LRE blames both a greater than expected nitrogen presence in a gas field as well as gas plant mechanical failure.
Largest customers include ConocoPhillips, Seminole Energy and Sunoco.
$156 million in debt. Debt went into parent's pocket.
***Yield - LRE plans to distribute $0.475 per unit to holders quarterly. At an annualized $1.90, LRE would yield 9.5% annually on a pricing of $20.
Forecast - 12 months ending 9/30/12. $106 million in revenues with sequential drops each quarter. Expect Lime Rock to offer LRE a dropdown acquisition sometime before 2013 to be paid for either via more debt, a share offering or a combination of both. $18 million in capex expected. ***Note that LRE is forecasting a 117% coverage ratio the first 4 quarter public. Even with the debt on the books and declining production, cash flows should be strong enough to pay distribution and expected capex.
Note that LRE has 52% of oil production through 6/12 hedged strongly at $105.37 per barrel. In addition 52% of natural gas production is hedged at $6.46, well above current prices. Once these hedges drop off, expect the coverage ratio to decline from the 117% above.
The natural gas hedges alone are strong enough that without them, LRE would not have enough cash available to pay the full distribution through 9/30/12.
Quick look at LRE and a few other MLP E&P's.
LRE - Pricing of $20 would yield 9.5% with $156 million in debt.
LINE - 7.5% yield, pretty debt laden.
BBEP - 9.6% yield, debt on the books.
PSE - 7.4% yield, excellent balance sheet.
VNR - 8%, has loaded up on debt to grow post-ipo.
QRE - 9.3%, some debt on books.
LGCY - 7.3%, some debt.
ENP - 8.7%, pretty solid balance sheet.
Simply on yield and balance sheet, ENP and PSE would be the two most attractive. LRE is a pretty average looking deal in this space. Should get done around range due to attractive yield(9.5% on a $20 pricing). Keep in mind a chunk of that yield is due to very strong natural gas hedges and it remains to be seen if LRE can fund full distributions once those fall off. In addition, the 9/30 quarter was a disappointment. Slight recommend due to strong yield, nothing to get too excited about.

November 19, 2011, 1:03 pm

DLPH - Delphi Automotive

DLPH - Delphi Automotive

DLPH - Delphi Automotive plans on offering 27.7 million shares at a range of $22-$24. Note that insiders will be selling all shares in this ipo. Goldman Sachs, JP Morgan, BofA Merrill Lynch, Barclays, Citi, Deutsche Bank, and Morgan Stanley are leading the deal, a slew of others co-managing. Post-ipo DLPH will have 328.25 million shares outstanding for a market cap of $7.55 billion on a pricing of $23.

DLPH will receive no proceeds from the ipo, therefore there will be no use of proceeds.
Paulson & Co will own 15% of DLPH post-ipo. Paulson is the main seller here, letting go 20+ million shares on ipo.
Delphi filed for Chapter 11 in 10/05. In 2009 Paulson & Co and a number of other participants scooped up the majority of Delphi's historical business. Since the 2005 Chapter 11, DLPH has reduced product lines from 119 to 33, exited 11 businesses and closed over 70 sites decreasing global headcount by 23%. Currently 91% of hourly workforce is located in low cost developing countries. 30% of hourly workforce are temporary employees. In other words, DLPH used the Chapter 11 to shift from a union based North American/Europe workforce into cheap, Mexican, Eastern European, Brazilian and Chinese labor – therefore offering fewer benefits to temporary employees. DLPH has no US pension or post-retirements healthcare obligations, however there appears to be $618 million in foreign liabilities.
From the prospectus:
'We are a leading global vehicle components manufacturer and provide electrical and electronic, powertrain, safety and thermal technology solutions to the global automotive and commercial vehicle markets.'
One of world's largest vehicle component manufacturers, customers include the 25 largest auto manufacturers in the world. ***A direct play here on the health and growth of the worldwide new auto market.
110 manufacturing facilities with a presence in 30 countries including China.
DLPH stresses how they've shifted their product portfolio to meet and exceed increased worldwide safety, fuel efficiency and 'green' standards. DLPH refers to these as 'megatrends' in the worldwide auto industry.
24% of revenues derived from emerging markets.
Products in 17 of the 20 top-selling vehicle models in the United States, in all of the 20 top-selling vehicle models in Europe and in 13 of the 20 top-selling vehicle models in China.
***43% of revenues in Europe. As we've noticed, Europe is a bit of a mess lately, going forwards we'll need to keep an eye on the European business here.
GM is 21% of revenues, Ford 9%.
  4 segments:
Electrical/Electronic Architecture - Electrical/electronic backbone for autos. Connectors, wiring assemblies and harnesses, electrical centers and hybrid power distribution systems. 41% of revenues.
Powertrain - Full end-to-end gasoline and diesel engine management systems. Fuel injection, combustion, electronic controls. 30% of revenues.
Safety - body controls, reception systems, audio/video/navigation systems, hybrid vehicle power electronics, displays and mechatronics. 19% of revenues.
Thermal - HVAC systems. 10% of revenues.
#1 or #2 products worldwide in 70% of net sales.
Supplier to every major automotive OEM in China.
Sector - Demand for DLPH's products is driven by the number of vehicles produced worldwide. Global vehicle production is expected to increase annually 6.5% through 2015. That growth is being driven by developing markets notably China. DLPH believes over 1/2 of their growth will come from developing markets.
***Drivers here are the lean and low cost structure of DLPH geared towards supplying the auto manufacturers in developing markets. All well and good, however keep in mind the US and Europe still make up a significant amount of DLPH's revenue base.
Risks are rather obvious as they usually are - As we witnessed in 2008/2009, the global automotive sector is quite cyclical. Even though DLPH has no legacy costs after their 2006 Chapter 11, there is still significant debt on the books. Does appear to be a well run operation heading into ipo, so while the risk of a repeat bankruptcy appear small, an economic downturn would quickly lead to DLPH missing quarterly/annual estimates.
$1.345 billion in cash in this cash intensive business. Note that DLPH still owes some of this cash to previous owners and underfunded foreign pension benefits. Not a bad balance sheet here with $2.173 billion in debt. Not ideal, but manageable.
2011 - solid year for DLPH through the first nine months. On pace for approximately $16.5 billion in revenues, growth of 20%. Gross margins of 16.5%, operating margins of 10.1%. Debt servicing will eat up 9% of operating profits. As noted above, not ideal but not a dealbreaker either. 4% net after tax margins. EPS of $2. On a pricing of $23, DLPH would trade 11 1/2 X's 2011 estimates.
2012 - Growth should slow here as DLPH's strong 2011 % wise was in part due to a few years of stagnant revenues in the worldwide auto market. Expect 7%-8% revenue growth to $17.75 billion. The business is so large here and management has done about a good a job pushing margins as much as possible...therefore I'd expect margins to remain in the same ballpark, with net margins improving slightly due to lowered debt servicing costs. Gross margins of 16.5%, operating margins of 10.2% with 4.2% net margins. EPS of $2.27. On a pricing of $23, DLPH would trade 10 X's 2012 earnings.
I'd be higher on this deal if the GM ipo would have performed better since debut. DLPH at 10 X's 2012 estimates would trade at a hefty premium to their largest customer GM's 5 X's 2012 estimates. That's a concern. Other than that though, this deal looks solid. Debt is not eating up too much of operating profits, management has done a nice job of growing margins in a space historically difficult to achieve margin growth.
Some near term headwinds here as well with GM's recent lackluster report (21% of DLPH's revenues) and Europe's government debt issues. I like this deal, other than the quite large P/E disparity here between supplier and largest customer. That may present an issue.

November 19, 2011, 1:02 pm

DDMG - Digital Domain Media Group

DDMG - Digital Domain Media Group

DDMG - Digital Domain Media Group plans on offering 6.325 million shares at a range of $10-$12. Roth Capital and Morgan Joseph are leading the deal. Post-ipo DDMG will have 47 million shares outstanding for a market cap of $517 million on a pricing of $11. Ipo proceeds will be used for working capital(ie, to fund losses).

PBC will own 40% of DDMG post-ipo.
From the prospectus:
'We are an award-winning digital production company.'
CGI and digital visual effects for motion pictures and advertising. 3 academy awards and 4 awards for Scientific and Technical Achievement in motion pictures.
DDMG has done CGI and/or effects work on 80 major motion pictures including Apollo 13, Titanic, and Curious Case of Benjamin Button.
Sector - Increasing consumer demand led by increase in 3D content as well as the trend towards more cost effecting on screen effects via computer generated effects. Total visual effects market was $1.4 billion in 2010 for feature films and $214 million for advertising. Both segments enjoyed double digit growth in 2010, although fairly low ad comps with 2009.
Note that DDMG plans to use ipo monies to begin producing their own large scale live-action films. I'm never a proponent of investing in a start-up motion picture production companies. The risk reward is rarely favorable to outside investors. DDMG's first co-production(with Oddlot Entertainment) is for a film to be titled 'Ender's Game'. DDMG will be a primary investor in the film and will lead the digital production.
In addition to live action, DDMG plans on getting into animated film production.
Note that DDMG has no experience leading production on films pre-ipo.
Also DDMG is apparently getting into the for-profit education sector. Aligned with Florida State University, they are launching the Digital Domain Institute offering a fully accredited four-year BFA degree. Classes commence in the spring of 2012.
Ambitious branching out by DDMG. Unfortunately for ipo investors, DDMG has been funneling all traditional effects revenues into the projects above leaving a very ugly earnings statement in their wake.
13 active feature film project work as of 11/1/11. Revenues for these projects should be $100+ million.
$1.50 per share in case, assuming an $11 pricing.
2011 - Really shaky 3rd quarter. Bad enough that the company noted outright in the prospectus it was a light quarter. Full year revenues should be in the $105 million range. Gross margins here are ultra-slim. Much too slim for a company that has been around for nearly 20 years. Even back in 2008(before embarking on new lines of business), gross margins were weak. Gross margins should be in the 15%-20% range. Losses staggering as 1)gross margins eat most of revenues and 2)DDMG has been spending heavily on their primary production and education plans. Losses should be in the $1.50+ range. I cannot own a company burning through this much cash. Period, end of store.
2012 - Losses should continue to be staggering. DDMG will need a major hit with their first film to make this ipo look even average in range.
Successful visual effects company that is un-investable due to ugly earnings statements. By all accounts DDMG is quite good at what they do: visual effects for the motion picture industry and advertising. Lot of risk here as DDMG embarks on feature film primary production responsibilities(with the implied financial risks) as well as a for-profit educational center. DDMG couldn't put money on the bottom line for years before embarking on these plans. Now? Losses of $1.50+ per share. Not interested.

November 16, 2011, 8:42 am

INVN - InvenSense

INVN - InvenSense

INVN - InvenSense plans on offering 11.5 million shares at a range of $7-8.50 Insiders will be selling all of the over-allotments 1.5 million shares. Goldman and Morgan Stanley are leading the deal, Oppenheimer, Piper, Baird and ThinkEquity co-managing. Post-ipo INVN will have 79.7 million shares outstanding for a market cap of $618 on a pricing of $7.75. Ipo proceeds will be used for general corporate purposes.

Three venture firms will separately own 45% of INVN post-ipo. Qualcomm will own just over 5%.
From the prospectus:
'We are the pioneer and a global market leader in intelligent motion processing solutions.'
Motion processing - The ability to detect, measure, synthesize, analyze and digitize an object’s motion in three-dimensional space.
INVN pioneered the world's first integrated MotionProcessing solution. Fabless model, INVN does not manufacture their own processors.
Primary end market is consumer electronics. End products include console and portable video gaming devices, smartphones, tablet devices, digital still and video cameras, smart TVs, 3D mice, navigation devices, toys, and health and fitness accessories.
Primary uses to date have been motion-based video games and user interfaces for smartphones. Bulk of revenues have been derived from placement in Wii MotionPlus and Wii Remote Plus controller. Recently INVN has begun seeing substantial revenues from handset makers as well.
INVN has shipped 157 million units as of 10/2/11.
INVN lists their advantages: Patented integrated platform that simplify access to complex functionality demanded by end customers. Enhanced performance and reliability with a smaller form factor and lower cost saves customers time and expense.
***Lot of techhead stuff in the prospectus. For our purposes, INVN pioneered digital motion processors and relies heavily on Nintendo's WII for revenues. Nintendo's Wii controllers/motion pad accounted for 85% of 2010 revenues and 80% of 2009 revenues. An awful lot of risk in a tech ipo relying so heavily on one product for bulk of revenues. To work longer term INVN must expand their revenue, especially at a market cap that is approaching $1 billion by the time all the options eventually exercise. We've seen a few that have been able to do that, we've seen a number that crash and burn though when they've been unable to expand those revenues to other sources.
Risk - as noted above, loss of Nintendo or not being able to add handset makers to help drive revenues. In the S-1 INVN notes: 'Nintendo reduced its orders for our products below levels we had anticipated during fiscal years 2011 and 2010, which negatively impacted our net revenue.'
Sales of Nintendo's WII were 20.5 million units for the 12 months ending 3/31/10, 15 million in the 3/31/11 year and are expected to be 13 million in the 3/31/12 year.
***Note that INVN's processor's are not incorporated into the Xbox or Playstation.
Primary competitor is STMicroelectronics(STM). STM is a larger more diverse operation, so not a pure comparable.
$1.75 per share in cash post-ipo.
Fiscal year ends 3/31 annually. FY '11 ended 3/31/11.
FY '11(ending 3/31/11) After rapid growth in 2010, growth slowed in 2011. $96.5 million in revenues, just a 20% increase from FY '10. FY '10 did not see INVN increase their revenue base much past Nintendo. When you've got a $757 billion market cap of $96.5 revenue base, you better plan on growing those revenues swiftly. This is a potential big issue for INVN as the next generation Wii platform is not scheduled for launch for at least another year. Gross margins of 55% not overly impressive for a fabless processor operation. Operating margins of 22%. Plugging in taxes, net margins of 14%. EPS of $0.17.
FY '12(ending 3/31/12) - Very strong first half for INVN. ***Most importantly while they grew revenues 73%+ year over year in the first half of the fiscal year, only 30% of those revenue were derived from Nintendo(down from 70%+). Promising sign here.
$170 million in revenues, a strong 75% increase over a lackluster FY '11. Gross margins look to improve to 56%. Operating margin improvement to 33%. Can't stress enough how strong the first half of INVN's fiscal year has been. Due to tax loss carryforwards, tax rate should be 25%. 25% net margins. EPS of $0.53. On a pricing of $7.75, INVN would trade 15 X's FY 2012 EPS.
Conclusion - Mid-term success of this ipo will be dependent on INVN's ability to attain new customer wins that result in significant revenues. Specifically INVN is targeting the handheld/tablet market. Some promising signs of this with the first half of FY '12.
***Note that it appears INVN is making strong inroads into the handheld and tablet market. Samsung, LG and HTC combined have acounted for 35% of revenues. Through the first half of FY '12 at least, INVN has done a very sweet job of broadening their end market from 'just the Wii' and into handhelds. Promising tech ipo with technology that could make it a nice long term winner. Could. Lot of risk here as noted, however INVN is showing nice signs of broadening customer base. First hald of FY '12 has been as strong as we've seen from a tech ipo in awhile. INVN followed a very strong first quarter with an even better 2nd fiscal Q. Coming just 15 X's FY '12 estimates with a 75% revenue growth rate, INVN is too cheap in range here. Strong recommend off blistering first half of FY '12.

November 13, 2011, 8:02 pm

CHKR - Chesapeake Granite Wash Trust

CHKR - Chesapeake Granite Wash Trust

CHKR - Chesapeake Granite Wash Trust plans on offering 26.9 million units at a range of $19-$21. Morgan Stanley and Raymond James are leading the deal, Deutchse Bank, Goldman and Wells Fargo co-managing. Post-ipo CHKR will have 46.7 million units outstanding for a market cap of $934 million on a pricing of $20.

Ipo proceeds will go to parent company Chesapeake Energy(CHK).
CHK will own all non-floated units, including subordinated units, 42% of CHKR post-ipo. CHK is the 2nd largest producer of natural gas and is the most active driller of new oil and natural gas in the US.
Growth energy Trust structured quite similar to recent ipos SDT and PER. Expected payouts and yield % follow, assuming a pricing of $20.
CHKR will make initial distribution of $0.54 to unitholders fairly quickly post-ipo at the end of December 2011.
Targeted distribution by year:
2012 - $3.13, 15.7%
2013 - $3.48, 17.4%
2014 - $3.41, 17.05%
2015 - $3.18, 15.9%
Distributions will drop off quickly after 2015. 2016 distributions should be $2.28 or 11.4%. Expect distributions to drop below $2 annually beginning in 2017. Even so the first full five years public, CHKR's target distributions will equal $15.48 or 77% of mid-range pricing of $20. Assuming everything else checks out, this deal is an easy recommend in range based on the strong parent and the hefty payout the first full years public.
First full five years public with targeted distributions
PER: $13.90
SDT: $14.97
CHKR: $15.48
From the prospectus:
'Chesapeake Granite Wash Trust is a Delaware statutory trust formed in June 2011 to own (a) royalty interests to be conveyed to the trust by Chesapeake in 69 existing horizontal wells in the Colony Granite Wash play located in Washita County in western Oklahoma (the "Producing Wells";), and (b) royalty interests in 118 horizontal development wells.'
These growth Trusts have gotten popular recently as a vehicle for aggressive E&P operations to raise money from mature fields to fund capex/pay down debt. As long as they continue to be structured for the unitholder as favorably as this one and SDT/PER, they should continue to work out well.
Colony Granite Wash Formation - 45,500 gross acres(28,700) held by CHK located in the Anadarko Basin in western Oklahoma. 44.3 mmboe, consisting of 18.6 mmboe in the developed wells and 25.7 mmboe in the development wells. 19% oil, 31% natural gas liquids and 50% natural gas located at 11,500-13,000 feet.
***Note that unlike SDT/PER, natural gas will make up a higher % of production here than oil. Oil will make up 35%-40% of revenues.
CHK plans on drilling the 118 development wells in proved undeveloped locations by 6/30/15.
Royalty Interest - 90% of the net proceeds in the 69 existing horizontal wells and 50% of the net proceeds from the 118 planned development wells.
CHK owns a 47% net revenue interest in the producing properties and 53% net revenue interest in the development properties. As such the Trust will have a 42% net revenue interest in the producing properties and a 26% net revenue interest in the development wells.
Hedges - 37% of expected revenues to be hedged through 9/30/15. Oil is hedged at an average of $87.42 per barrel through 9/30/15. Note that natural gas production is unhedged.
Trust lifespan to be 20 years, although as we've noted, distributions will begin decreasing annually from 2015 with distributions under $2 annually beginning 2017.
CHK will operate 94% of all the wells. CHK began drilling horizontal wells in the Colony Granite Wash in 2007 and is currently the largest leaseholder in the area with 61,100 net acres. CHK has drilled 133 of the 173 horizontal wells in the formation since 2007. 9 rigs drilling for CHK in the formation.
Risk - Two here as hedges here are not as strong on a % of production as either SDT or PER. A significant dip in the price of oil, natural gas and natural gas liquids would have a negative impact on CHKR's yield. The other very real risk here is CHK fails to effectively execute the drilling plan. If anything delays the drilling plan in a given quarter or two, expect CHKR to dip.
CHKR expects to receive approximately $36 million each quarter the first half of 2012.
Note that CHKR has been conservative in forecasting oil and natural gas prices through mid 2014 with natural gas topping around $5 and oil at $93.
Conclusion - Another good energy Trust structured in range to raise cash for CHK and provide strong returns for unitholders. CHK has a strong track record in this formation, as long as they execute the drilling plan this one should be a winner. Easy recommend here, expect this to trade to $25-$30 sooner than later.

November 6, 2011, 1:59 pm

RNF - Rentech Nitrogen Partners

RNF - Rentech Nitrogen Partners

RNF - Rentech Nitrogen Partners plans on offering 17.25 million units at a range of $19-$21. Morgan Stanley and Credit Suisse are leading the deal, Citi, RBC, Imperial, Brean Murray, Dahlman Rose and Chardan are co-managing. Post-ipo RNF will have 38.25 million units outstanding for a market cap of $765 million on a pricing of $20. Ipo proceeds will go to parent Rentech(RTK), the majority of which will go to repay debt.

RTK will own all non-floated units as well as the general partnership management of RNF. At first glance, appears to be a bit of a head scratcher here. RTK's ownership interest in RNF would be valued at $420 million which is more than RTK's current market cap of $360 million. RTK will be able to clean up their debt as well on this ipo. The reason appears to be that A)RTK itself has been relying on RNF's core business as their revenue driver as they evolve their clean energy segment. Post RNF ipo, RTK's main revenue driver will be their stake in RNF as they continue to attempt to turn their clean fuels segment towards commercialization.
***Should note here that RNF's parent operation is an unusually weak parent for limited partnership structure. This ipo is being modeled after the CVI spin-off of UAN. CVI has a core refining operation, while here RTK doesn't appear to have much else. I am skeptical of this deal here because of the weak parent company whose track record is spotty at best. This deal feels a bit like a shaky company attempting to take advantage of a strong fertilizer pricing environment.
From the prospectus:
'We are a Delaware limited partnership formed in July 2011 by Rentech, a publicly traded provider of clean energy solutions and nitrogen fertilizer, to own, operate and grow our nitrogen fertilizer business.'
Nitrogen fertilizer facility is located in East Dubuque, IL. Ammonia and UAN with natural gas as primary feedstock. Much like UAN, TNH and CF substantially all products are nitrogen based.
**Structured as a pass through partnership similar to UAN and TNH. RNF will distribute to unitholders all cash available each quarter.
Location right in the middle of the 'corn belt' IL/IA/WI. Core market is 200 mile radius from facility. RNF estimates the ammonia consumed in these states is 4 X's the amount produced and the UAN used is 1.4 X's the amount produced.
RNF does not maintain a fleet of trucks or rail cars. They sell their fertilizers at their plant with customers responsible for shipping. RNF believes this helps lower their fixed costs and allows higher margins than larger competitors.
Post-ipo, 66% of ammonia production capacity produced by public companies.
Capacity of 830 tons of ammonia per day with the capacity to upgrade up to 450 tons of ammonia to produce 1,100 ton of UAN per day.
***Note that RNF plans to spend $100 million to upgrade capacity. Without the cash on hand post-ipo, expect either an equity, debt or combination offering sometime within first year public.
Sector - Much like the UAN ipo, RNF is coming public due to a strong pricing environment for domestic nitrogen based fertilizer. Nitrogen, phosphate and potassium are the three essential nutrients plants need to grow for which there are no substitutes. Global demand is driven by population growth, dietary changes and consumption of bio-fuels. Global fertilizer demand is projected to increase by 45% between 2005 and 2030, or just shade under 2% annually. UAN fertilizer has grown 8.5% over the past decade. Why? Unlike ammonia, UAN can be applied throughout the growing season. UAN fertilizer is costly to transport, locking out foreign competition.
Corn - Corn crops consume more nitrogen fertilizer than any other domestic crop. Iowa and Illinois are largest nitrogen fertilizer consuming states in the US. Mid corn belt Ammonia prices have tripled over the past 10 years while UAN prices have quadrupled. Ammonia use has increased 18% in core corn markets the past five years.
Sales prices - Due to lack of transportation and storage costs, RNF claims the highest sales price per ton compared to the two pure play comparables TNH and UAN.
Natural gas, RNF's prime feedstock, represents 80% of cost to produce ammonia.
Capacity utilization rate averaged 92% over last three fiscal years.
Note that historically this has been a very cyclical market with the past 3-4 years representing the strongest cycle run in 30 years.
Risks - Plentiful here as RNF is coming public in the mdist of a long and strong pricing cycle. Nitrogen fertilizer being driven by ethanol production. If ethanol production declines, corn volumes may decline as well. In addition, a rise in the price of natural gas can negatively impact margins. This is a deal in which projections are more tenuous than the average midstream MLP ipo.
$1 per unit in cash post-ipo, no debt.
Fiscal year ends 9/30 annually. FY '11 ended 9/30/11. 273 tons of ammonia produced in FY '11, 312 tons of UAN.
Seasonality - Most deliveries made in the 6/30 and 12/31 quarters during spring planting and fall harvest.
FY '11 - $179 million in revenues. 42% gross margins, 39% operating margins. As a pass through, tax burden will be on unit holders. $1.83 in EPS.
FY '12 - Really all that matters here is projected cash available for distribution. $204 million in revenues with $2.31 in net EPS.
***RNF is forecasting $2.34 per unit in distributions for FY '12. Approximately $0.20 of that is technically cash from the ipo. On a pricing of $20, RNF would yield 11.7% annually. Strong yield here.
Lets look at RNF and two pure comparables TNH and UAN.
RNF - 11.7% projected yield with strong balance sheet. ***Note that based on FY '11 numbers yield would be 9%. RNF is projecting a stronger cash flow(and yield increase in FY '12 than either of their two pure play competitors. If they can pull it off, deal should work mid-term.
UAN - $1.84 billion market cap, some debt on the books. Yielding 8.9% currently.
TNH - $3.07 billion market cap, good balance sheet. Yielding 9% currently.
conclusion - Yield wise based on 2011 coming public right at payout ratio of two pure comparables UAN and TNH. RNF is the weaker of the three however, smaller output/facility and a much weaker parent. RNF is forecasting a pretty aggressive increase in yield in FY '12, much stronger than either UAN or TNH. The key to whether this deal works mid-term from $19-$21 pricing depends on whether they can execute. As it looks right now, pretty fairly valued on recent quarter here $19-$21.

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