Andranik Hakobyan
Shares of Kodiak Fuel Providers (NYSE:KGS) have seen a lackluster public debut with shares buying and selling flattish within the aftermath of its public providing, at the same time as pricing came about at a reduction from the preliminary providing vary.
Whereas I’m usually drawn to reductions being supplied in public choices, I fail to spot the enchantment right here amidst a really leveraged stability sheet and considerations on the cyclical ingredient (amongst others) of the enterprise right here.
Delivering Horsepower
Kodiak claims to be the main operator of contract compression infrastructure within the US. These industrial operations are key to provide pure fuel and oil reliably, as the corporate operates horsepower compression models beneath fixed-revenue contracts with each upstream and midstream clients.
This partnership mannequin, in key areas just like the Permian basin (the place about 70% of capability is stationed) and the Eagle Ford Shale, implies that the firm performs a key function within the power infrastructure, with LNG solely set to develop necessities for compression horsepower on this area for the foreseeable future. That at the very least is the declare of the corporate itself.
The corporate operates a fleet of three.2 million horsepower of compression models, with over 3,000 precise compressing models, most of which have over 1,000 horsepower every, badly wanted as these unconventional assets require extra strain than conventional oil wells.
The corporate has a hard and fast income contract with main gamers, in actual fact, it generates about 40% of gross sales from the 4 largest clients, with the main buyer being accountable for a proportion within the low double digits.
Having simply owned 650,000 horsepower of capability in 2017, the corporate grew to a 2.6 million horsepower capability base in 2019 which it has steadily expanded to three.2 million horsepower, with occupancy charges surpassing 98% over time (and sometimes approaching the 100% mark).
Given the speedy ramp-up of the fleet and capability, the common life of those models is barely seen at 3.7 years. With mechanical availability being key and oil majors and unconventional gamers trying to forfeit capital spending, Kodiak believes that it’s nicely positioned to function efficiently on this area of interest phase as a key associate to those operators.
Valuation & IPO Ideas
Kodiak, initially aimed to promote 16 million shares in a $19-$22 vary, however demand for the providing was mushy, leading to pricing of the general public providing being decreased to $16 per share. This reduces the gross proceeds of the providing to $256 million, cash which is earmarked to decrease the online debt load of the enterprise.
With a complete of 75 million shares excellent, this suggests that former shareholder EQT will stay a majority shareholder publish the providing, as fairness of Kodiak is awarded a $1.20 billion fairness valuation.
The IPO paperwork reveal a professional forma web debt load of $1.78 billion publish the providing, but this was based mostly on the midpoint of the preliminary providing worth. Provided that the decrease provide worth resulted in $72 million in fewer gross proceeds from the providing, that web debt load really will increase to about $1.85 billion.
Trying on the precise outcomes, we see that the enterprise grew gross sales from $606 million in 2021 to $708 million in 2022, pushed by greater capability and pricing. Working earnings rose from $189 million to $222 million, within the absence of a modest impairment cost in 2021. This can be a vital revenue, however after all comes forward of curiosity bills, which in 2022 have been very excessive at $170 million, partly made up from positive aspects on derivatives. Adjusted EBITDA of $399 million is excessive, with leverage ratios coming in at over 4.5 occasions.
First quarter gross sales for this 12 months rose about 13% to $190 million as the corporate grew working earnings in a quite related vogue to $60 million, with EBITDA of $106 million which means that it tops $400 million per 12 months right here. The query is after all how a lot earnings energy is fairly anticipated going ahead with power costs having retreated from 2021 highs.
With working earnings trending at $240 million, and assuming that the corporate can (over time) finance at round 6% (given leverage ratios and prevailing rates of interest), I peg annual curiosity bills round $110 million. After a 25% tax price, that works all the way down to earnings of round 100 million each year, for earnings of round $1.30 per share.
Concluding Comment
Whereas the earnings energy calculated above appears fascinating given the prevailing share worth, I’m extraordinarily cautious right here. Whilst the corporate has good phrases about its robust aggressive place, I regard this enterprise as considerably of a commodity-like enterprise.
This creates after all cyclical uncertainty as oil costs have seen their swings (this 12 months as nicely). Furthermore, there are a lot of extra uncertainties within the lengthy haul associated to the electrification of the gear (maybe because of extra stringent environmental rules), however after all additionally the impression of continued concentrate on ESG on the long-term perspective for the shopper base of Kodiak, which is the most important concern in spite of everything.
Amidst all this, whereas the stability sheet stays closely leveraged, I discover it very straightforward to keep away from the shares right here, as I’ve no curiosity to become involved right here, regardless of the optics of an inexpensive price-earnings a number of.
