2023-06-20 17:15:14 ET
Summary
- Kodiak Gas Services, Inc. has filed proposed terms for a $328 million U.S. IPO.
- The firm provides a range of compression services for gas and oil extraction in the United States.
- Kodiak has produced revenue growth, but the IPO appears pricey as U.S. rig counts have been dropping significantly.
- I'm Neutral [Hold] for the Kodiak Gas Services, Inc. IPO.
A Quick Take On Kodiak Gas Services, Inc.
Kodiak Gas Services, Inc. ( KGS ) has filed to raise $328 million in an IPO of its common stock, according to an amended S-1/A registration statement .
The firm provides compression services for natural gas and oil exploration in the United States.
Management’s valuation assumptions appear to be high relative to other players in the market.
As such, my outlook on the Kodiak Gas Services, Inc. IPO is Neutral [Hold] based on valuation and worsening macroeconomic uncertainties ahead.
Kodiak Overview
Montgomery, Texas-based Kodiak Gas Services, Inc. was founded to develop a fleet of large horsepower compression systems for use under fixed-price contracts with medium to large E&P firms active in the Permian Basin and Eagle Ford Shale regions.
Management is headed by founder, president and CEO Mickey McKee, who has been with the firm since its inception in 2011 and was previously the SVP of Sales and Engineering at CDM Resource Management, a provider of contract natural gas compression systems.
Kodiak currently operates a fleet of compression systems, with 81% producing at least 1,000 horsepower each.
As of March 31, 2023, Kodiak has booked fair market value investment of $34 million in equity and $2.7 billion in debt from investors, including EQT Fund.
Kodiak - Customer Acquisition
Selling, G&A expenses as a percentage of total revenue have risen slightly as revenues have increased, as the figures below indicate:
Selling, G&A | Expenses vs. Revenue |
Period | Percentage |
Three Mos. Ended March 31, 2023 | 6.9% |
2022 | 6.3% |
2021 | 6.2% |
(Source - SEC.)
The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A expense, fell to 1.7x in the most recent reporting period, as the table shows below:
Selling, G&A | Efficiency Rate |
Period | Multiple |
Three Mos. Ended March 31, 2023 | 1.7 |
2022 | 2.3 |
(Source - SEC.)
Kodiak’s Market & Competition
According to a 2021 market research report by Fortune Business Insights, the global hydraulic fracturing market was an estimated $11.7 billion in 2020 and is forecast to reach $28.9 billion by 2028.
This represents a forecast CAGR of 9.5% from 2021 to 2028.
The main drivers for this expected growth are the continued growth of natural gas and oil products for energy and other uses, along with improved technological aspects of the industry.
Also, the chart below shows the historical and projected future growth trajectory of the U.S. hydraulic fracturing market:
U.S. Hydraulic Fracturing Market (Fortune Business Insights)
Major competitive or other industry participants include the following:
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Halliburton
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Schlumberger
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Baker Hughes
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ProFrac Holdings
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Weatherford
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Others.
Kodiak Gas Services, Inc. Financial Performance
The company’s recent financial results can be summarized as follows:
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Growing top line revenue
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Increasing gross profit but decreasing gross margin
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Higher operating profit
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Reduced cash flow from operations.
Below are relevant financial results derived from the firm’s registration statement:
Total Revenue | ||
Period | Total Revenue | % Variance vs. Prior |
Three Mos. Ended March 31, 2023 | $ 190,112,000 | 12.9% |
2022 | $ 707,913,000 | 16.7% |
2021 | $ 606,375,000 | |
Gross Profit (Loss) | ||
Period | Gross Profit (Loss) | % Variance vs. Prior |
Three Mos. Ended March 31, 2023 | $ 118,354,000 | 11.1% |
2022 | $ 440,562,000 | 11.2% |
2021 | $ 396,198,000 | |
Gross Margin | ||
Period | Gross Margin | % Variance vs. Prior |
Three Mos. Ended March 31, 2023 | 62.25% | -1.1% |
2022 | 62.23% | -4.8% |
2021 | 65.34% | |
Operating Profit (Loss) | ||
Period | Operating Profit (Loss) | Operating Margin |
Three Mos. Ended March 31, 2023 | $ 60,355,000 | 31.7% |
2022 | $ 222,091,000 | 31.4% |
2021 | $ 188,955,000 | 31.2% |
Net Income (Loss) | ||
Period | Net Income (Loss) | Net Margin |
Three Mos. Ended March 31, 2023 | $ (12,343,000) | -6.5% |
2022 | $ 106,265,000 | 55.9% |
2021 | $ 180,963,000 | 95.2% |
Cash Flow From Operations | ||
Period | Cash Flow From Operations | |
Three Mos. Ended March 31, 2023 | $ 23,290,000 | |
2022 | $ 219,846,000 | |
2021 | $ 249,978,000 | |
(Source - SEC.)
As of March 31, 2023, Kodiak had $14.0 million in cash and $3.0 billion in total liabilities.
Free cash flow during the twelve months ending March 31, 2023, was negative ($39.7 million).
Kodiak Gas Services’ IPO Details
KGS intends to sell 16 million shares of common stock at a proposed midpoint price of $20.50 per share for gross proceeds of approximately $328.0 million, not including the sale of customary underwriter options.
No existing or potentially new shareholders have indicated an interest in purchasing shares at the IPO price.
Immediately after the IPO, the company will be majority controlled by EQT AB.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $3.4 billion.
The float to outstanding shares ratio (excluding underwriter options) will be approximately 21.33%. A figure under 10% is generally considered a "low float" stock which can be subject to significant price volatility.
The firm is an "emerging growth company" as defined by the 2012 JOBS Act and may elect to take advantage of reduced public company reporting requirements; prospective shareholders would receive less information for the IPO and in the future as a publicly-held company within the requirements of the Act.
Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:
We intend to use the net proceeds from this offering, together with a portion of the proceeds resulting from the Term Loan Derivative Settlement, to repay $314 million of borrowings outstanding under the Term Loan and fees relating to the Term Loan Transaction. Any net proceeds from this offering together with proceeds resulting from the Term Loan Derivative Settlement in excess of $314 million will be used for general corporate purposes. In addition, any net proceeds resulting from the exercise of the underwriters’ option to purchase additional shares will be used for general corporate purposes.
(Source - SEC.)
Management’s presentation of the company roadshow is not available.
Regarding outstanding legal proceedings, management believes that any legal proceedings would not have a material adverse effect on the firm's financial condition or operations.
The listed bookrunners of the IPO are Goldman Sachs, J.P. Morgan, Barclays and numerous other investment banks.
Valuation Metrics For Kodiak Gas
Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:
Measure [TTM] | Amount |
Market Capitalization at IPO | $1,537,500,000 |
Enterprise Value | $3,359,042,000 |
Price / Sales | 2.11 |
EV / Revenue | 4.60 |
EV / EBITDA | 14.73 |
Earnings Per Share | $0.85 |
Operating Margin | 31.26% |
Net Margin | 9.04% |
Float To Outstanding Shares Ratio | 21.33% |
Proposed IPO Midpoint Price per Share | $20.50 |
Net Free Cash Flow | -$39,665,000 |
Free Cash Flow Yield Per Share | -2.58% |
Debt / EBITDA Multiple | 8.05 |
CapEx Ratio | 0.83 |
Revenue Growth Rate | 12.93% |
(Source - SEC.)
As a reference, a potential public comparable would be Weatherford International ( WFRD ); shown below is a comparison of their primary valuation metrics:
Metric [TTM] | Weatherford International | Kodiak Gas Services | Variance |
Price / Sales | 0.95 | 2.11 | 121.8% |
EV / Revenue | 1.29 | 4.60 | 256.9% |
EV / EBITDA | 6.41 | 14.73 | 129.7% |
Earnings Per Share | $4.64 | $0.85 | -81.6% |
Revenue Growth Rate | 22.1% | 12.93% | -41.40% |
Net Margin | 3.9% | 9.04% | 132.46% |
(Source - SEC and Seeking Alpha.)
Commentary About Kodiak Gas
KGS is seeking U.S. public capital market investment to pay down its substantial debt load.
The company’s financials have produced increasing top line revenue, growing gross profit but lower gross margin, higher operating profit but decreased cash flow from operations.
Free cash flow for the twelve months ending March 31, 2023, was negative ($39.7 million).
Selling, G&A expenses as a percentage of total revenue has risen slightly as revenue has increased; its Selling, G&A efficiency multiple was 2.3x in the most recent reporting period.
The firm currently plans to pay dividends according to its Board of Directors' decision process. The firm's ABL Facility contains restrictions on the payment of dividends.
Kodiak’s CapEx Ratio indicates it has spent heavily on capital expenditures, exceeding its recent full-year operating cash flow.
The market opportunity for providing well compression services in the Permian and Eagle Ford Shale basins is large and expected to grow steadily in the coming years.
Goldman Sachs is the lead underwriter and the five IPOs led by the firm over the last 12-month period have generated an average return of 23.4% since their IPO. This is an upper-tier performance for all major underwriters during the period.
Risks to the company’s outlook as a public company include the recent volatility in oil & gas product pricing and elevated interest rates, which can make servicing the company's debt load more expensive.
As for valuation expectations, management is asking IPO investors to pay an Enterprise Value / Revenue multiple of 4.6x.
However, a concern I have is the dropping rig count in the U.S. natural gas industry as shown in the chart below:
U.S. Natural Gas Rig Count (YCharts (I:USNGRR))
A dropping rig count suggests dropping demand for services such as Kodiak’s.
General macroeconomic conditions appear to be deteriorating while OPEC+ is seeking to cut production, anticipating an economic downturn that is already underway in several global regions.
Management’s valuation assumptions appear to be high relative to other players in the market.
As such, my outlook on the IPO is Neutral [Hold] based on valuation and macroeconomic uncertainties ahead.
Expected IPO Pricing Date: June 28, 2023.
For further details see:
IPO Update: Kodiak Gas Services Pursues $328 Million IPO Plan