IPOs, Initial Public Offerings: pre & post IPO

PetroLogistics LP (PDH)

Print this entry

CONCLUSION
Avoid PDH on the IPO.

Based in Houston, Texas, PetroLogistics LP (PDH) scheduled $700 million IPO with a market capitalization of $2.78 billion at a price range mid-point of $20 for Thursday, May 3, 2012.  [S-1]

Manager,  Joint Managers:  Morgan; Citigroup; UBS.
Co Managers: SOCIETE GENERALE; Stifel Nicolaus; SunTrust.

SUMMARY
PDH Built an independent plant to process processes propane into propylene.

Began operations in October 2010 and, after an approximately year-long start-up and plant optimization phase, achieved production rates at or near current capacity beginning in December 2011.

PAYOUT
Expects to make a $2.20 cash distribution for the 12 months ending June 30, 2013, which is an 11% payout at the price range mid-point.

The payout is based on a forecasted 30% net profit margin, which is not sustainable in a commodity business, because customers and competitors are highly motivated to increase supply by building their own plants.

Pre-IPO grade-score summary
. Many IPOs in today’s environment are graded C+ and scored 7
. If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company’s
outlook and/or its market segment
. If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company’s overall business outlook
is more favorable
Glossary of IPO Analysis terms

PDH SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

2

1

C+, 7

VALUATION

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Forecast June 2012 12 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

PetroLogistics LP (PDH)

$2,780

2.8

9

7.9

8.2

25%

Sales & earnings ratios based on forecasted results for the 12 months ended June, 2013.

RISKY PLAY ON THE PROPANE-TO-PROPLYLENE SPREAD
The spread is historically high now, compared to the averages for 2000-2007

The spread in a downward trend
The spread is down 9% from a year ago to $.43 per pound from $.46 per pound.  PHD expects a further decline to $.416 by June 2013 clearly a downward trend.  IPOdesktop expects the downward trend to continue as the majors complete their in-house plant building plans.

Commodity Pricing Dynamics
Because propane is the sole feedstock, and propylene is the primary product sold by PDH’s facility, PDH’s profitability is primarily determined by the difference in price between propane and propylene, the “propane-to-propylene spread.”

Like other commodities, the pricing for propylene and propane reflect supply and demand dynamics and are intricately related to the price movements of crude oil, natural gas and petrochemicals. The current dynamics affecting the price of these commodities, together with the tight supply/demand environment for propylene have led to the recent increase in the propane-to-propylene spread.

MAIN CUSTOMERS BUILDING NEW PLANTS
Dow Chemical recently announced its plan to build its own on-purpose propane dehydrogenation propylene facility for start-up in 2015.

Dow also announced that it is considering building a second propylene facility with a possible start-up date in 2018.

CURRENT CONTRACTS EXPIRE BETWEEN 2013 & 2018
During 2011, PDH’s three largest customers accounted for approximately 95% of total sales.

PDH currently has multi-year contracts with The Dow Chemical Company (DOW), Total Petrochemicals USA (TOT), BASF Corporation (BASFY) and INEOS Olefins and Polymers USA (INEABS ) that expire between 2013 and 2018 and a one-year contract with LyondellBasell Industries N.V. (LYB ) that ends in December 2012.

Each of PDH’s customer contracts contain pricing terms based upon market rates — that’s a double edged sword.

CONVOLUTED ORGANIZATIONAL STRUCTURE

IPOdesktop does not like convoluted organizational structures.

CONCLUSION
Avoid PDH on the IPO based on the above

BUSINESS
Built an independent plant to process processes propane into propylene.  Propylene is utilized in the production of a variety of end uses including paints, coatings, building materials, clothing, automotive parts, packaging and a range of other consumer and industrial products.

PRIVATE EQUITY SPONSOR
This is a bailout for the PE firms, because they are receiving 96% of the IPO proceeds

PDH is majority owned by Lindsay Goldberg and York Capital. Although the project development for the facility occurred over several years beginning in 2003.  PDH’s predecessor was legally formed in 2007 to acquire the site of a former ethylene cracker from ExxonMobil and to develop the site into a PDH facility with the support of PDH’s sponsors.

After the closing of this IPO, Lindsay Goldberg will indirectly own 67% of the general partner and directly and indirectly own 50% of the common units, York Capital will indirectly own 17% of the general partner and directly and indirectly own 13% of the common units.

COMPETITION
Management estimates over 30 different companies produce propylene in North America.

PDH considers companies with net long positions in PGP and CGP to be direct competitors, including Enterprise (EPD), Chevron Phillips (CVX), ExxonMobil Chemical (XOM), Shell Chemical (RDS.B), Flint Hills and the Williams Companies (WMB).

Dow Chemical recently announced its plan to build its own on-purpose propane dehydrogenation propylene facility for start-up in 2015. Dow also announced that it is considering building a second propylene facility with a possible start-up date in 2018.

USE OF PROCEEDS
PDH expects to net $23.3 million from sale of 1.5 million units by PDH.  Shareholders intend to sell 33.5 million units or 96% of the IPO.

The $23.3 million in IPO proceeds to the company are allocated for working capital and general partnership purposes including “funding a portion of the distributions to our common unitholders for the lost margin resulting therefrom” from a planned maintenance project in 2013.  S-1 page 11

FINANCIALS

PetroLogistics LP PDH, C+, 7

Post IPO shares: 139mm

Propane dehydrogenation facility

Proforma

Forecasted*

Houston, TX

2011

2013

IPO Mkt

Revenues ($mm)

$615

$1,006

Cap (mm)

Gross profit % of revenue

19%

34%

$2,780

Net income

$13

$300

@$20

Pretax-profit margin

2%

30%

Net profit, continuing operations

* 12 months ended June, 2013

PDH SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

Mination

tary

rating

20 is perfect

2

2

2

1

C+, 7

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Forecast June 2012 12 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

PetroLogistics LP (PDH)

$2,780

2.8

9

7.9

8.2

25%

 

 

 

 

 

 

 

Post a Comment

 

Login

Lost your password?