Quick Take

Well completion services firm NCS Multistage (Pending:NCSM) has filed an amended S-1/A registration setting its proposed terms for an IPO of $157 million. NCS has shown improved financial performance in 1Q 2017 vs. the prior year, but faces a headwind, as do all oilfield services firms, due to the worldwide oil glut.

While the company may indeed go public, my opinion on the IPO is NEUTRAL.

Company Recap

Houston, Texas-based NCS was founded in Canada in 2006 by current Chief Executive Officer Robert Nipper. Nipper has a long career history in the oil & gas industry and has been listed as the inventor on a number of patented devices for “downhole oil and natural gas” applications.

The company has developed a Multistage Unlimited Fracturing System, which it claims helps fracking companies create well site fracture networks that produce more oil.

Below is a brief explainer video on NCS’s system:

(Source: NCS Multistage)

NCS says more than 100,000 of its patented sleeves have been used in the field.

The company has major competitors comprised of large, publicly-held oilfield services firms and small, regional companies:

  • Schlumberger (NYSE:SLB)
  • Superior Energy Services (NYSE:SPN)
  • Weatherford International (NYSE:WFT)
  • Halliburton (NYSE:HAL)
  • Baker Hughes (NYSE:BHI)
  • Nine Energy Service
  • Packers Plus Energy Services

Commentary

NCS is proposing to raise $157 million by selling $9.5 million shares of common stock at a midpoint price of $16.50 per share. Since 45.3 million common shares will be outstanding after the floatation, the post-IPO market cap would be approximately $747 million.

I previously wrote a detailed analysis of NCS’s IPO prospect in my article Well Completion Firm NCS Multistage Files For $100 Million IPO.

In that article, I highlighted the company’s deteriorating financial performance over the past two calendar years – 2015 and 2016 – as follows:

  • Decreasing revenue resulting in a 14% drop vs. 2015
  • Decreasing gross margin, from 52% in 2015 to 45% in 2016
  • Increasing CFFO (Cash Flow From Operations)

I was highly negative on the company’s prospects as a result of its financial operations performance.

However, an interim “Preliminary Estimate” provided by the company in its most recent S-1/A filing shows a different picture:

Based on currently available information, we estimate, on a preliminary basis, that revenue will be within a range of $57.0 million to $59.0 million for the three months ended March 31, 2017, as compared to $23.1 million for the same period in 2016. This increase was primarily attributable to an increase in the sale of our completions products and services due to higher drilling and well completion activity as a result of an improved commodity price environment in the first quarter of 2017 as compared to the first quarter of 2016.

This change shows a 151% increase in top-line revenue in 1Q 2017 vs. 1Q 2016, as the company sold 17,000 sleeves vs. 7,117 for the same period in 2016.

So, it appears conditions have changed markedly to the positive for NCS. Hence the increase in its proposed IPO raise, no doubt due in part by an improved “story” to institutional investors.

Although I’m heartened by the company’s performance improvement, I’m still skeptical of the oil & gas industry as a whole, which is subject to a glut of projects and production, ultimately capping the interest of E&P firms to drill many wells and keep price competition high for oilfield services providers.

NCS will likely succeed in floating its IPO, and perhaps there will be a first-day pop, but over the medium term, I don’t see a lot of upward room given the worldwide oil glut.

As a result, my opinion on the IPO is NEUTRAL.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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