Wyatt’s “Unconventional IPO” — CEO Invests $25 Million to Start New Energy Company?

Ian Wyatt pitches "Freedom Drillers" after the Iran news.... Can you really buy into a South Texas oil producer before it goes public? Is it worthwhile?

This tease caught my eye, mostly because I was genuinely curious — Ian Wyatt is promoting a “webinar” he’s going to host on May 10 that will talk up a way to play the “new bull market” in oil, and part of it, at least, is going to be about a “unconventional IPO.”

So I wanted to know what he’s talking about. And, of course, I want to share my thoughts with all my dear friends here at Stock Gumshoe. Let’s dig in, shall we?

There’s not a lot of info, but here’s a taste of the email:

“… crude oil is surging 51% in the last year.

“Now’s the time to invest.

“That’s why one top venture capital firm just invested $300 million.

“They’ve already made a killing with early investments in Airbnb and Uber. But instead of sinking more cash into private tech companies…

“They’re backing a retired Fortune 500 CEO.”

And then we get a few more tidbits on the signup form for this webinar — a webinar that, I assume, will be similar to his past webinars in that he talks up the opportunity but reserves the actual information about the investment for his paid subscribers.

Which is fine — I have no problem with folks selling information or research, but I’d rather not sit through an hour-long sales pitch… and if it’s something I can learn on my own, I know I’ll have a better chance of thinking rationally if I take my time and research several sources first. If I pay for the idea or listen to talk about crazy return potential, odds are pretty good that I’ll be overwhelmed with profit lust and will have trouble thinking clearly.

Or that’s the idea, anyway, and the core reason why I started doing what I do here at Stock Gumshoe, revealing these “secret” stocks and trying to add some perspective here and there — the more you can think for yourself and poke a few holes in the hype, the better the chance you have of thinking rationally. Most of us will still do dumb stuff most of the time, I guess, but it’s nice to at least improve the odds a little.

Ready? OK, here are the other clues from the signup page:

“Former Fortune 500 CEO emerges from retirement to launch a new oil stock IPO!

“… one company acquired 360,000 acres in the Texas oil belt

“Why this new company could earn $250 million in cash profits – starting THIS YEAR

“How to claim your shares NOW – before this unconventional IPO”

And that’s pretty much it, at least until we get to the actual webinar at lunchtime on Thursday. So what’s the stock they’re hinting at?

I suspect this is a recent SPAC deal, and our Mighty, Mighty Thinkolator concurs: This is almost certainly the soon-to-be Magnoia Oil & Gas.

Which doesn’t exist yet, but is expected to soon — and it will have a new ticker, but for right now the “unusual IPO” means that you can buy into the SPAC if you wish, and will own shares of Magnolia once the transaction happens to create it.

What does that all mean? A SPAC is a Special Purpose Acquisition Vehicle, also often called a “blank check” company. These are pools of money that are raised in the public markets via an IPO, usually connected to an established investor or an industry bigwig who has some “brand value,” and they take those IPO proceeds and try to buy a company or merge into a company. For the target company, this has the advantage of bringing that big bolus of cash and sometimes a stronger management team or higher visibility, and usually the big advantage is that the target company can go public without itself having to go through the sometimes onerous IPO process… since the SPAC already trades publicly, it just changes its name and ticker and voila! The new combined company is publicly traded.

In this case, the SPAC was sponsored by TPG, the huge venture capital/private equity company, and headed by Stephen Chazen, who retired as CEO of Occidental Petroleum (OXY) in 2016. They called it TPG Pace Energy Holdings (TPGE), and it went public almost exactly a year ago.

The plan was to search for a target business in the energy business… from their website, “The strategy of TPG Pace Energy Holdings is to identify and acquire businesses that are better suited to generate strong returns in a public market environment while benefitting from the operational expertise of TPG and Mr. Chazen.”

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And that’s what they’ve done in agreeing, on March 20, to buy the South Texas oil and gas assets of the giant Houston private equity firm EnerVest. EnerVest was reportedly in serious trouble a year ago, with oil prices down sharply, so this way they sell off a share of some of their best assets to a strong and experienced operator, maintain 51% ownership, and also get a lot of cash that should make their investors much happier (and perhaps generate some fees from a portfolio that was probably pretty disastrous for a few years following the 2014 oil crash).

When it goes public, according to the Magnolia investor presentation, EnerVest will own 51% of the new company, the sponsor (TPG) will own 7%, and public investors, both the SPAC shareholders and the folks who added more capital in a private fundraising round in conjunction with the merger, including the new CEO, will own 43%.

They’re also raising some debt in a senior note offering, but not very much, so the numbers actually look fairly appealing — they will be much less debt-burdened than many oil companies, and they are expected, at least they themselves so believe, to generate a lot of free cash flow and to be valued, on an EV/EBITDA basis, among the cheapest South Texas oil companies.

The stock actually looks pretty interesting at this valuation — I did go through the investor presentation, though I didn’t dig much deeper than that, and the financial metrics look really impressive, and if Steve Chazen is able to have anything like the kind of success he had at Occidental there’s a chance that he could build the company into something far more substantial, presumably by adding to their Eagle Ford and Austin Chalk properties. Of course, Steve Chazen does not have a magic wand to control the oil price, and Occidental under his leadership did fall plenty fast in 2014 and 2015 when oil fell, dropping 30% or so.

If oil stays at $58/barrel and the other forecast assumptions are accurate, (which I have no outside expertise in assessing), then Magnolia thinks they’ll be earning $200 million in EBITDA after Capex (almost $550 million before Capex, but you can’t capex or you stop producing oil). That’s $184 million in free cash flow, and that means they could potentially have paid off their net debt (the current $300 million debt offering) by the end of 2019. That’s a little lower than the cash flow yield for 2018, mostly because capex will be higher, but it’s still a pretty solid cash return… and I would guess that they would bump up the capex and try to grow production more, with additional drilling, given the relatively high oil price and their lack of leverage.

So that seems pretty interesting, particularly since I don’t really have any oil exposure right now. That’s not enough to make me commit a meaningful amount of cash to this after spending just an hour or two browsing through the presentation, but it’s enough to get me intrigued. If you want a little more background, there was a quick Bloomberg story here that sums it up and has some quotes from Chazen about his (conservative) strategy.

The story is a little bit reminiscent, at least for me, of the last big oil CEO who came back to start a new company — Mark Papa from EOG Resources, who formed Centennial Resource Development using a SPAC called Silver Run Acquisition about two years ago. That one was a little more richly valued on the basic EV/EBITDA numbers, but oil prices were also quite a bit lower then — and the stock has certainly done well, going from about $10 to $19 in a couple years.

And those of you who’ve been reading my work for a long time probably know what my next thought was — “if this was a SPAC, there are warrants… right?”

And yes, there are warrants — almost every SPAC comes with warrants attached, and after a few months those warrants typically begin trading separate from the equity (the initial ticker at the IPO was TPGE.U for the combined units, they have now split into TPGE and TPGE.WS — each unit included one third of a warrant). That warrant piece is where a lot of the juice comes from for the sponsors of the SPAC, and the extra sweetener to get public investors to invest in something that doesn’t really exist yet… warrants provide substantial leverage if the eventual business combination ends up being a great investment.

The odds of that are fairly long, it must be said