IPO and Public Company Readiness:Oil and Gas Industry Focus
February 14, 2018
Agenda
I. IPO Activity in Oil and Gas Industry
II. The Decision to Go Public or Not
III. What to Expect in the IPO Process
IV. Hot Button SEC Issues
V. Things You Wish You Had Known Years Ago
VI. Predictions for 2018
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• A tale of four sectors
• 2012-2014: MLPs
• 2015-2016: E&Ps
• 2017: Services then E&P
• 2018: Services and E&P
• Recent activity influenced by need for capital and volatility in equity markets and commodity prices
IPO Activity in the Oil and Gas Industry
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Energy Market Overview in 2017 – 2018YTD
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Market conditions in late 2016 ignited Energy issuance in early 2017
— Commodity price improv ement, sector deregulation post-election and OPEC production cuts driv e a surge in equity v olumes
Volatility in Energy tape suppresses v olumes
Ongoing f ocus on weekly build in crude oil storage (DOE data)
Inv estors increasingly cautious and selectiv e in deal participation
Despite some commodity price improv ement, v olatility muzzles v olumes in Q3
Generalist inv estors ref use to engage in new issues until the sector f inds its f ooting
Recov ery in commodity prices encourages issuers to test the market
Elev ated discounts required to incent participation, howev er bid appears to hav e returned to the sector
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Jan – Feb ‘17 March – June ‘17 July – Oct ‘17 Nov ’17 – Feb ‘18 2017
SPX 5.5% 2.6% 6.3% 1.6% 18.9%
DJIA 4.6% 3.3% 9.5% 3.2% 24.7%
XLE (7.2)% (7.1)% 4.6% (2.9)% (4.3)%
OSX (7.6)% (23.0)% 1.2% 1.0% (18.8)%
($ Millions)
OFS Issuance
E&P Issuance
WTI
$85 July - Oct '17
$636
$551
$2,051
Nov '17 - Feb '18
$3,415
$1,364
$2,028
Jan - Feb '17
$5,773
$3,745
$1,111
March - June '17
$2,301
$3,111$3,111
1,191
60%
70%
80%
90%
100%
110%
120%
130%
Inde
xed
Pric
e
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Issuance Themes and Outlook
E&P Midstream / MLP OFS Expect much less follow-on issuance relative to past
years as leverage has come down and companies are seeking to operate within cash flow and return capital to shareholders
An active M&A market could bolster issuance as equity investors have been willing to support attractive catalysts, although scrutiny around use of proceeds (including acquisitions) is increasing
Significant E&PIPO backlog remains intact as that market has been closed since January 2017; predominantly gas weighted
Timing remains a question even as many issuers have largely cleared the SEC; highly dependent on commodity backdrop and investor sentiment, which has been less constructive for gas names
Anticipate ~$5.5 bn - $6 bn of midstream equity needs in 2018 (~$1.7 bn raised to date), not including third party M&A financing or monetizations
Relative to ~$12 bil lion in midstream issuance in 2017, 2018 estimate seems manageable from a supply / demand perspective, even as fund flows remain challenged
Shift towards a more “self funding” model that is less dependent on capital markets expected to continue to weigh on volume relative to years past
Alternative financing sources including private / structured equity and sponsors taking back equity will l ikely continue to augment volumes and improve execution relative to public common only
Fairly l imited near term IPO backlog
OFS has represented 45% of all energy issuance in 2018 YTD vs. 15% in 2017 and 12% in 2016; while very active to date, issuance expected to be contingent on market conditions
The OFS equity market has raised ~$1.6 bn year to date, with a significant amount remaining in the backlog for both IPO and follow-on issuance
14 OFS IPOs have priced since Q4 2016, many of which have the potential to do follow-onsafter their lock-up releases, particularly given the large sponsor ownership in the these names
There are currently a number of companies in the OFS IPO backlog, with many more continuing to monitor market conditions
After being heavily E&P-weighted in 2015/2016, energy issuance shifted back toward midstream in 2017 and midstream / OFS in early 2018
Issuance Outlook
2016 Issuance (mm) 2017 Issuance (mm) 2018 Issuance (mm) YTD
IPO Follow-on Convertible Total % of Total IPO Follow-on Convertible Total % of Total IPO Follow-on Convertible Total % of Total
Coal - - - - - $398.3 $422.8 - $821.1 3.2% - - - - -
E&P $1,175.3 $31,150.6 $2,355.0 $34,680.9 70.3% $474.0 $6,303.6 - $6,777.6 26.3% - $55.2 - $55.2 1.5%
Midstream C-Corp - $715.9 - $715.9 1.5% - $3,581.8 - $3,581.8 13.9% - $1,190.8 - $1,190.8 32.4%
MLP $323.4 $6,574.8 - $6,898.2 14.0% $2,363.2 $5,859.3 - $8,222.6 31.9% - $680.0 - $680.0 18.5%
Mining - $334.5 $65.0 $399.5 0.8% $570.4 $1,059.7 - $1,630.1 6.3% - - - - -
Oil Service $264.3 $3,288.8 $2,337.5 $5,890.6 11.9% $1,518.6 $1,757.7 $625.0 $3,901.3 15.1% $1,367.3 $279.6 - $1,646.9 44.9%
R&M - $277.5 - $277.5 0.6% - - - - - - - - - -
Royalty Trust - - - - - - - - - - - - - - -
Shipping - $476.9 - $476.9 1.0% - $541.0 $280.0 $821.0 3.2% - $97.5 - $97.5 2.7%
Total $1,763.0 $42,819.0 $4,757.5 $49,339.5 100.0% $5,324.5 $19,526.0 $905.0 $25,755.5 100.0% $1,367.3 $2,303.1 - $3,670.4 100.0%
Historical Issuance By Subsector
___________________________Source: Bloomberg, FactSet, and corporate filings as of 2/8/2018.Note: Includes all SEC registered offerings.
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Pricing Deal Value Price vs. File / Offer /Date Issuer ($mm) Range Offer Current Industry
02/08/18 Quintana Energy Services Inc $93 Below (25.9%) (10.0%) Natural Resources
02/08/18 Cardlytics Inc 70 In Range (7.1%) 2.8% Technology
02/07/18 Cactus Inc 437 In Range 8.6% 7.4% Natural Resources
02/07/18 Victory Capital Holdings Inc 152 Below (27.8%) (4.7%) Financials
02/07/18 Huami Corp 110 In Range 0.0% 3.5% Technology
02/07/18 Evolus Inc 60 In Range (7.7%) (2.8%) Healthcare
02/01/18 Corporacion America Airports 486 Below (19.1%) (5.9%) Industrial
02/01/18 FTS International Inc 404 In Range 9.1% (3.9%) Natural Resources
01/31/18 Hudson Ltd 749 In Range (5.0%) (14.3%) Consumer & Retail
01/31/18 Sol-Gel Technologies Ltd 86 In Range 0.0% (11.7%) Healthcare
01/25/18 PlayAGS Inc 164 In Range (5.9%) 23.3% Real Estate
01/25/18 ARMO BioSciences Inc 147 Above 13.3% 125.3% Healthcare
01/25/18 Solid Biosciences Inc 144 In Range (5.9%) 60.4% Healthcare
01/25/18 resTORbio Inc 98 In Range 0.0% 13.3% Healthcare
01/24/18 PagSeguro Digital Ltd 2,606 Above 13.2% 30.2% Technology
01/24/18 Gates Industrial Corp plc 841 In Range (2.6%) (5.6%) Industrial
01/24/18 Menlo Therapeutics Inc 137 Above 13.3% 109.7% Healthcare
01/18/18 ADT Inc 1,470 Below (22.2%) (9.7%) Business Svc.
01/18/18 Nine Energy Service Inc 185 In Range 7.0% 1.1% Natural Resources
01/11/18 Liberty Oilfield Services Inc 249 Above 13.3% 10.7% Natural Resources
Average (20): $434 (2.6%) 16.0%
18.1%
27.1%
6.3% 8.7%13.8%
25.9%
12.1%16.5%
2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17 4Q 17 1Q 18
23 23 2319
37
20
43
20
2Q-16 3Q-16 4Q-16 1Q-17 2Q-17 3Q-17 4Q-17 1Q-18
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39.1% 26.3% 29.7% 25.0% 23.3% 25.0%
39.1% 47.4%
54.1% 65.0% 51.2% 55.0%
21.7% 26.3% 16.2% 10.0% 25.6% 20.0%
4Q 2016 1Q 2017 2Q 2017 3Q 2017 4Q 2017 1Q 2018
20 Most Recent IPO Pricings
Strong 2018 IPO Market
IPO Issuance, Pricing and Alpha Generation
2018YTD has seen a 100% increase in IPO Issuance and a 179% increase in IPO Volume Relative to 2017 Year over Year
____________________Sources: Dealogic and Factset as of February 9, 2018. Includes SEC registered IPOs with a base deal value greater than or equal to $50mm. Excludes MLPs, SPACs, REITs, BDCs, and YieldCos.
IPO
Offe
r / 1
Wee
k
Above In Range Below
Volume ($bn):
Qua
rter
ly IP
O Is
suan
cePr
icing
s: L
ast 6
Qua
rter
s
$4.7 $7.3$5.9 $9.1 $9.4 $3.9 $10.9 $8.7
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• The equity markets had improved considerably to start the year in 2018 with investors showing a corresponding willingness to put money back to work in energy
o Crude had reached ~$66 and the S&P 500, XOP, OSX and AMZ indices stood at (+5.6% / (0.7%) / +3.8% / +5.2%) at the end of January
• As a result, the Liberty and FTSI IPOs were very well received – both offerings were upsized with Liberty pricing $1 above the initial range and FTSI at the high end of the initial range with a number of long-only investors participating, indicating that investors’ sentiment to energy has improved materially vs. 2017. Other initial public offerings for Nine Energy, Quintana, and Cactus have also successfully priced, despite recent market volatility
• Unfortunately, the week of Feb 5th brought an abrupt end to what had been two straight years of low volatility, strengthening fundamentals, and one of the longestuninterrupted moves in the S&P 500 to all-time highs (+58% over 24 months with no major drawdown). Monday, Feb 5th was the single worst day in the US market since August 2011
o Last week’s sell-off was largely driven by expectations for higher interest rates, which gave way to heavy selling pressure from “systemic investors”. These investors, who take large positions based on volatility targeting, underwent a $100Bn+ re-positioning event when interest rates, the VIX and other technical measures started to blow out...thus compounding the sell-off in the markets
• Importantly however, fundamentals in energy are still relatively unchanged and we expect the following themes to continue once broader market volatility abates:
o The steep decline in stock prices last year has led to an increasing amount of skepticism towards newly public companies – it’s a “micro focus”, not a “macro focus” on whether or not to invest in IPOs
o IPO investors demonstrating a preference for companies that are successfully executing business plans in such a way that produces superior cash margins and shareholder returns, today
– The high level of NAM completions activity and shortage of available equipment potentially makes hydraulic fracturing companies attractive (Liberty, FTSI)
– In addition, technologically differentiated OFS product companies (typically low capex), such as Cactus, appealed to IPO investors
o Track record is important – investors are cautious to take risk on companies which are not performing well today or whose assets are still under construction (or “on the come”)
– More than likely valuations in these situations are focused on replacement value rather than cash flow multiples
o Public E&P investors are focused on positive cash returns rather than growth (and are skeptical of assets outside of select core basins) – which has cooled receptivity to new E&P companies (especially gas companies) which are typically in high-growth, investment phase
2018 IPO Outlook2018 Oil & Gas IPO Outlook.pptx\12 FEB 2018\6:18 PM\2
2018 Energy Capital Markets UpdateContextualizing our Outlook
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Current Themes in the MLP Market
The midstream and MLP market is in a period of significant change
The Alerian Index at 268 is down ~50% since it peaked in September 2014 at 540
Public equity raises had averaged ~$23 billion per year from 2011 – 2014, but fell ~70% in 2017
The most recent data point that demonstrates the softness in the MLP market was the IPO of BP’s MLP, which priced below the range and subsequently traded down. This contrasts with Shell’s MLP IPO on October 29, 2014, which priced at a record yield of 2.8% above the range and subsequently traded up over 40%
The current MLP “playbook” includes:
Strengthening the balance sheet ~4.0x (~4.5x max)
Increasing distribution coverage 1.3+x
Attempting to finance equity component of growth capital with retained earnings (e.g. EPD)
Evaluating IDRs
Evaluating MLP vs. C-Corp
Many MLP sponsors are currently evaluating their commitment to the MLP market as well as their IDR structure
Buy-ins of MLPs: VTTI, OKS, MEP, Kinder MLPs
IDR buy-ins / modifications: NS, HEP, ANDX, ARLP, WPZ, NEP, PAA, SEP, MPLX
Distribution Policy: EPD, GEL, BWP
____________________Source: Market data as of February 9, 2018.
BPMP SHLXIPO Date 10/26/2017 10/29/2014Pricing Range $19.00 - $21.00 $19.00 - $21.00Yield Range 5.0% - 5.5% 3.1% - 3.4%Pricing vs. Midpoint of Range (10.0%) 15.0%MQD Yield 5.8% 2.8%1-Day Performance (4.2%) 46.5%
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E&P
OFS
Source: FactSet asof 2/1/18
9.0x
8.5x
8.0x
7.5x
7.0x
6.5x
6.0x
5.5x
5.0x
4.5x
4.0xFeb-17 Mar-17 Apr-17 May-17
Jun-17 Jul-17
Large Cap
Aug-17 Sep-17
Mid Cap
Oct-17
Small Cap
Nov-17 Dec-17 Jan-18
14.5x
12.5x
10.5x
8.5x
6.5x
4.5x
2.5xFeb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18
Diversified OFS Capital Equipment Land Contract Drillers
Onshore C&P Services Proppant Providers Offshore ContractDrillers
EV to 2018E EBITDA Multiples
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• Immediate cash to grow business or strengthen balance sheet
• Future access to cash to grow business
• Liquidity
• Equity currency for M&A
• Attract / Retain talent
• Wider Investor Base
• Prestige / Public Relations
Benefits of Being Public
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• Time and expense of IPO and being public
• Loss of control by current stockholders
• Liability
• Ongoing legal compliance obligations
• Effect on management decisions
Costs of Being Public
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You’re big enough
Benefits to public scrutiny outweigh benefits of private
status3
There’s enough business model
progress
2
Outcome interval is small
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You Know its Time to Go Public When…
Right team in place
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• Process Overview
• Pre-filing period
• Waiting period
• Post-effective period
• Current SEC Climate
• Hot button SEC issues to anticipate
• IPO Guidebook available on Gibson Dunn website
Overview of the IPO Process
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• Financial Statements for Issuer and Targets
• Proper Tax Structuring from Beginning
• Running Your Business While Executing on the IPO
• Post-IPO Public Company Obligations Start at Pricing
Four Things You Wish You Had Known
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• Volatile commodity environment
• Supply/demand uncertainty• Public investors hunt for stability
• Quality, stable and predictable cash flows sell best
• Makes consolidation more likely
• Makes private capital transactions more likely for those who cannot fit public stability demands
• Tighter (and perhaps fewer) IPO windows
• But streamlined SEC process to hit windows for well prepared issuers
Market Thoughts for 2018
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Assessing IPO Windows
Window 1: Mid Jan – Mid February
Little or no credit for following year projections in valuation
Tight window to execute prior to financial staleness in mid Feb
Could have competing supply if issuers only waiting for calendar to turn (to avoid year-end IPO)
Window 2: March – June
Longer window to execute Full visibility for investors into latest full
year financial performance
Some potential valuation credit for following year’s projections
No notable slow-down periods
Window 3: July - September
Greater credit for following year’s projections
Must navigate summer holiday / slow-down periods
Could have competing supply post Labor Day as market opens back up
Window 4: October – Mid December
Full credit for following year’s projections Can get busy ahead of November financial
staleness
Must navigate holiday periods Year-end investor psychology typically
results in greater price sensitivity
Timing considerations will vary at different points throughout the yearJanuary ‘18
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Market Holiday
FOMC Meeting Federal Holiday
Financial Staleness
Market Slowdown
Midterm Elections
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Tax Thoughts for 2018
21%
100% 35% Rate 21% Rate ExpensingGathering System (7Y MACRS) $0.28 $0.17 $0.21
Unregulated Pipeline (15Y MACRS) $0.20 $0.12 $0.21
PV10 of Depreciation Deductions
2017 2018-2025 2026 and beyondCorporations & Shareholders (combined) $50.47 $39.80 $39.80MLP Unitholders $43.40 Effectively $33.40 $43.40Delta $7.07 $6.40 ($3.60)
Tax on $100 of Earnings
• Regulated businesses excluded
• Phases out in 20% increments annually beginning 2023 until it is zero in 2027
Corporate tax rate
Bonus Depreciation
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Tax Thoughts for 2018 (cont’d)
Corporation MLPUp-C
ShareholdersShareholders
Unitholders
Partners
$21.00
$18.80
Effectively $33.40
$21.00
$18.80
$33.40 to $40.80**
Sponsor
$21.00
* Assumes corporation pays dividends or there is high trading activity, causing shareholders to recognize capital gains.
$39.80* $39.80* $33.40-$40.80 $33.40 $39.80*??
** Depends on application of 20% trade or business deduction, which can be limited by amount of W-2 wages paid or amount of capital invested in business.
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• More SPAC Impact on O&G Companies Considering an IPO
• What are SPACs?
• Current SPAC activity
• SPAC acquisition as alternative to IPO
More SPAC Activity in 2018
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• More Support from SEC
• Direct Listings
• Greater scrutiny for corporate shell merger IPOs
SEC Thoughts for 2018
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Resources
James ChenowethPartner
TaxTel: +1 [email protected]
Brian LanePartner
Securities RegulationTel: +1 [email protected]
Gerry SpedalePartner
Capital Markets/M&ATel: +1 [email protected]
Hillary HolmesPartner
Capital Markets/Corporate CounselingTel: +1 [email protected]
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