RPC Lures Buyers With Cheapest Oil-Service Value on Profit Surge: Real M&A
RPC Inc. (RES), the Atlanta-based oil services company that has been considering a sale, may lure acquirers with the industry’s cheapest valuation and profits that are projected to double to a record this year.
The provider of pressure pumping that helps drillers unlock oil and gas trapped in shale rock has hired Goldman Sachs Group Inc. for advice, three people with knowledge of the matter said this week. At yesterday’s closing price of $21.51, RPC trades at 13 times earnings, the lowest among U.S. oil-field services companies with market values greater than $2 billion, according to data compiled by Bloomberg. Net income will surge 115 percent to a high of $315 million this year, analysts’ estimates show.
RPC, which has returned more on average to investors in the last five years than all of its U.S. rivals, may warrant a takeover price of $35 a share, with C&J Energy Services Inc., Patterson-UTI Energy Inc. (PTEN) and Weatherford International Ltd. (WFT) among the potential acquirers, said Gabelli & Co. While the biggest stock market slump since 2008 may spur the controlling Rollins brothers to delay the sale, according to Global Hunter Securities LLC, RPC is now even cheaper for buyers after this month’s rout battered energy shares.
“From a valuation perspective, it’s really taken a hit recently,” John Lawrence, an analyst at Tudor Pickering Holt & Co. LLC, the Houston-based investment bank specializing in energy companies, said in a telephone interview. RPC “has strong pressure pumping capacity and a good domestic footprint that’s hard to replicate over time. The pool of potential buyers is large,” he said.
Jim Landers, vice president of corporate finance at RPC, said the company doesn’t comment on market rumors.
RPC hired New York-based Goldman Sachs after interviewing several investment banks in the past few weeks, said the people familiar with the matter, who spoke on condition of anonymity because the information is private.
The oil-services firm gets about half of its revenue from pressure pumping, including from hydraulic fracturing, or fracking. In fracking, which is useful for drilling in unconventional reservoirs lined with hard rock, companies inject water, chemicals and sand under high pressure to release gas.
A new combination of drilling techniques has been developed to exploit shale deposits that were previously considered unrecoverable, boosting the U.S. Energy Information Administration’s estimate for recoverable natural-gas resources in the country by 50 percent from a decade ago.
New exploration and production projects are boosting demand for pressure pumping and prompting drillers to add more equipment, said Andrea Sharkey, a research analyst at Rye, New York-based Gabelli, which owns RPC shares.
‘Earnings Sweet Spot’
“Capacity is very tight, volumes are rising and pricing is rising as well,” Mark Demos, a portfolio manager at Fifth Third Asset Management in Minneapolis, said in a phone interview. “The industry is in an earnings sweet spot.”
RPC’s net income is projected to more than double this year to a record $315 million and gain an additional 21 percent in 2012, according to four analysts’ estimates compiled by Bloomberg.
“They’re thinking that pressure pumping is hot right now - - maybe a little colder today than a few weeks ago marketwise -- so why not sell while the market is good,” Timothy Parker, who oversees $8.5 billion in natural-resource stocks, including RPC shares, at T. Rowe Price Group Inc., said in a phone interview from Baltimore.
Cheaper Than Rivals
RPC trades at a price-to-earnings ratio of 13, which is lower than eight other U.S. oil-field services companies with market values greater than $2 billion, data compiled by Bloomberg show. The industry average is 24.
Even before the market rout this month, RPC was cheaper than its comparably sized rivals. The shares rose 10 percent this week after Bloomberg News reported on Aug. 7 that the company was weighing a sale, giving it a market value of $3.2 billion as of yesterday. It posted the biggest gain in the New York Stock Exchange Energy Index, which was down 3.5 percent.
For the last five years, RPC’s return on equity, which measures how much a company earns for each dollar invested, has averaged 28 percent, the best among its competitors, according to data compiled by Bloomberg.
RPC may garner about $35 a share from a strategic buyer, according to Gabelli’s Sharkey, based on about 6 times her estimate for the company’s 2012 earnings before interest, taxes, depreciation and amortization of $850 million. That price would equate to about $5.2 billion and a 63 percent premium to yesterday’s closing price. It’s about 29 percent higher than the company’s peak of $27.05 in April.
Fifth Third’s Demos said RPC would seek a sale price that’s as much as 30 percent above its record.
“I’d imagine they’re looking for something well above their previous high,” he said. “If we’re not going to go in recession and it’s just a slower-growth economic environment, oil prices will remain high enough for activity to keep increasing. Companies like RPC will still have assets that are very valuable in the market.”
While RPC has been evaluating a sale, growing concern that the American economy will fall back into a recession wiped out more than $2 trillion in value from U.S. stocks this month before yesterday’s rebound. The Standard & Poor’s 500 Index tumbled the most since December 2008 two days ago after S&P cut the U.S.’s AAA credit rating for the first time.
Crude oil for delivery next month declined to $79.30 a barrel yesterday, the lowest settlement since September, after the Federal Reserve said risks to the economic outlook have increased. The U.S.’s rebound from the worst recession since the Great Depression had pushed oil up 236 percent since December 2008 to its 2011 high of $113.93 on April 29.
Oil will average $103 next year, 9.6 percent below this year’s peak, according to the median of analysts’ estimates compiled by Bloomberg.
“Given the huge drop in the general stock market and oil prices, any buyout price that would’ve been considered a week ago is probably lower today,” Scott Burk, an analyst at Canaccord Genuity in New York, said in a phone interview.
The market turmoil may make RPC Chairman Randall Rollins and his brother Gary Rollins less likely to sell, said Matt Beeby, an energy analyst at Global Hunter in Fort Worth, Texas. The brothers -- 79 and 66, respectively, according to the company’s website -- own more than half of the shares outstanding and are both on the board. RPC was formed in 1984 when it was spun off from the family’s company, Rollins Inc.
‘Sit and Wait’
“I doubt the Rollins family would want to sell at this point,” Beeby said in a phone interview. “They can certainly sit and wait.”
According to T. Rowe’s Parker, larger companies in the pressure pumping business such as Baker Hughes Inc. (BHI), the world’s third-biggest oil services provider, may be interested in acquiring RPC to increase scale. In April 2010, Baker Hughes of Houston completed a $7.1 billion acquisition of BJ Services Co., another pressure pumping company.
RPC’s similarly sized competitors in the well pressure pumping industry like C&J Energy Services may want to quickly expand the size of their pumping fleet, Canaccord’s Burk said. Houston-based C&J sold shares in an initial public offering last month. Patterson-UTI, the Houston-based owner of oil and gas rigs, and Weatherford, a Geneva-based oil-rig owner, may also be potential acquirers of RPC, Gabelli’s Sharkey said.
Representatives for Baker Hughes, C&J, Patterson-UTI and Weatherford didn’t respond to requests for comment.
“Buying any of the smaller pressure pumping companies would be a quick way to add capacity,” Sharkey said. “A company might view the market pullback as a reason to make a lower offer and try to get RPC a little cheaper than they could’ve a couple months ago.”
RPC ended a three-day slump yesterday, rising 11 percent as the S&P 500 posted its biggest rebound since March 2009. The benchmark gauge for American equity climbed 4.7 percent as the Fed vowed to keep interest rates near zero through mid-2013.
“Despite the big stock pullback, it’s still a pretty good time to sell,” Tudor Pickering’s Lawrence said. “I think it gets sold as long as the markets can stabilize.”
To contact the reporter on this story: Joseph Ciolli in New York at email@example.com.