Posted by: Aaron Pressman on April 18, 2006
Ever see the show Dirty Jobs on the Discovery Channel? Host Mike Rowe travels around the country filling in for a day on some of the worst, dirtiest jobs on the planet. He’s cleaned out sewers, turned dead turkeys into compost and made charcoal among many other adventures that my kids find absolutely hysterical despite the gross-out factor for dad.
I thought of Mike as I read through the prospectus for what’s sure to be the IPO of the week, oil and gas service company Complete Production Services. It’s slated to be priced on Thursday at $22 to $24 a share and trade under the symbol CPX.
Sadly I wasn’t only thinking of Dirty Jobs literally (the company probably has enough icky jobs for a whole season of Rowe’s show) but also in the metaphorical sense. Because, here we go again: private equity investors take a big dividend out of a company just as its to go public, saddling it with more debt than the business itself required. And that extra debt reduces the value of the company’s equity.
With the price of oil making a new record every day and producers scrambling to increase production after decades of underinvestment, it’s unlikely many will object to the $147 million dividend in this case. But it allows the company to appear to be raising more money for itself (a good thing) and less for selling shareholders (not such a good thing) than is really the case.
The numbers on the deal look okay, especially in the midst of the current oil boom. Built by a (continuing) string of acquisitions, CPX had $53.9 million of net income in 2005, up from $13.9 million in 2004. With 70.5 million shares to be outstanding after the offer, that’s about 76 cents a share of profit, or a p/e of almost 32 assuming that the IPO is priced at $24 a share, the high end of the current range. Market cap would be just $1.69 billion but with pro forma debt outstanding after the IPO of $426 million and cash of $198, total enterprise value would be about $1.92 billion. That’s 2.5 times 2005 sales of $758 million and 12 times 2005 EBITDA of $161 million. The company has continued making acquisitions, so its run-rate is already higher than the 2005 figures even without any growth.
Using CapitalIQ, I looked at valuation data for 10 comparable companies, ranging from giants like Schlumberger (SLB) and Halliburton (HAL) to relative small fries like Key Energy Services (KEGS) and Superior Energy Services (SPN). The median p/e ratio was 33, enterprise value to revenue was 3.5 and enterprise value to EBITDA was almost 15. So at $24 a share, CPX looks fairly valued versus the comparables. What if the stock jumps before it starts trading? At $30 a share, you’re looking at a p/e of 39, TEV/revenue of 3.1 and tev/ebitda of almost 15. Getting loftier but still in the ballpark. Get much beyond that and it looks like you’re just chasing a hot sector.