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1 F R I E D M A N B I L L I N G S R A M S E Y ENERGY & NATURAL RESOURCES INVESTMENT BANKING IPAA’s 12 th Annual Private Capital Conference 144(a) Private.

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Presentation on theme: "1 F R I E D M A N B I L L I N G S R A M S E Y ENERGY & NATURAL RESOURCES INVESTMENT BANKING IPAA’s 12 th Annual Private Capital Conference 144(a) Private."— Presentation transcript:

1 1 F R I E D M A N B I L L I N G S R A M S E Y ENERGY & NATURAL RESOURCES INVESTMENT BANKING IPAA’s 12 th Annual Private Capital Conference 144(a) Private Placement vs. Traditional IPO George Hutchinson Managing Director (713) January 19, 2006

2 F R I E D M A N B I L L I N G S R A M S E Y Page 2 “The More Things Change, The More They Are The Same” -Alphonse Karr (a)Source: Baker Hughes on January 13, 2006 (b)Source: NYMEX December 2010 closing price on January 12, 2006 (c)Source: CommScan EquiDesk Energy Be Alert for “Paradigm Shifts…” The Cycle Exists –Supply and demand dynamics have changed –1,467 (a) rigs flood US market with supply as prices continue to climb –Natural gas and crude oil above $9/Mcf (b) and $61/Bbl (b) through 2010 –Does the other shoe drop? Record Level of Energy Equity Capital Markets Transaction –$17 billion (c) of equity raised in 2005 vs. $5 billion (c) a year in the ’90’s

3 F R I E D M A N B I L L I N G S R A M S E Y Page ’s and 1990’s – Own the Asset Not the Equity –Lower price environment produces modest cash returns per Mcfe –E&P companies consistently reported losses (cash flow positive) –Perception: E&P equities not expected to outperform S&P 500 –Own oil & gas assets over equities or be a mezzanine investor –Institutions underweight E&P equities 2005 – Energy Equities are Attractive – Outperforming S&P 500 –Robust prices allow companies to report strong earnings and cash flow –Reinvestment of cash is a differentiator –Winning strategies: Large low complexity repeatable development plays and acreage Demonstrated track record of value creation –Institutions market to overweight in energy Common Investment “Wisdom” Changes (again) A Paradigm Shift?

4 F R I E D M A N B I L L I N G S R A M S E Y Page 4 Were We Really That Bad? – Are We Really This Good? Source: John S. Herold M&A Database and CommScan EquiDesk

5 F R I E D M A N B I L L I N G S R A M S E Y Page 5 Differing Investor Objectives Private Equity144(a) Investors Public Hold Period 3 – 4 yrsunder 1 yearimmediate # Investors 1 – 5100 – # Institutional Investors1 – Directors MajorityMinorityMinimal Return Goal 25%+20%+15%+ Note: Statistics above are estimates and may not reflect actual results.

6 F R I E D M A N B I L L I N G S R A M S E Y Page 6 What is a 144(a) (a)Source: CommScan and EquiDesk Private placement (exemption created in 1990) Over $9 trillion (a) raised in convertible market Over $215 trillion (a) raised in debt market Beginning to see use in equity Raise capital first Subsequently file with SEC Private shareholders achieve full liquidity upon listing FBR 29/29 – The rest of Wall Street 14/21

7 F R I E D M A N B I L L I N G S R A M S E Y Page 7 144(a) Private Placement vs. Traditional IPO Process

8 F R I E D M A N B I L L I N G S R A M S E Y Page 8 144(a) Equity Offering – Key Benefits / Features 144(a) enables capital to be raised in seven to nine weeks –SEC documents filed after capital raised –Limits event risk in fickle equity markets Provides “safe haven” period for SOX –Flexibility regarding audit and other issues prior to share registration If done right - same broad investor group as IPO –No one buyer has pricing power –Approximately 200+ institutional investors Sold to sophisticated investors –Institutions with more than $100 million of assets (“QUIBS”) and accredited investors –Transactions primarily sold to QUIBS –If executed well, deals can be priced without material discount to IPO valuation Limited liquidity until shares registered, can be traded on “4th market”

9 F R I E D M A N B I L L I N G S R A M S E Y Page 9 Private E&P Companies Seem to Favor the 144(a) Process Private E&P companies have two primary options to consider when accessing the public equity markets: a 144(a) and an IPO In 2005, private E&P companies raised $6 out of every $7 dollars vis-à-vis a 144(a) vs. a traditional IPO Note: 144(a) Transactions does not include private investments in public entities (PIPE’s). Source:CommScan and EquiDesk

10 F R I E D M A N B I L L I N G S R A M S E Y Page 10 Notable 144(a) and Private Offerings Bold denote FBR managed transaction. All FBR managed 144(a) transactions are sole managed. Notable E&P 144(a) Offerings: –Quest Resources - $198 million –Riata Energy - $244 million –CNX Gas Corporation - $447 million –Stroud Energy - $172 million –Rosetta Resources Inc. - $800 million –Whittier Energy - $51 million –Mariner Energy - $440 million –Petrohawk Energy Corporation - $200 million –Consol Energy - $1,309 million Other Notable Energy 144(a) Offerings: –Aventine Renewable Energy - $275 million –Energy Coal Resources - $96 million

11 F R I E D M A N B I L L I N G S R A M S E Y Page 11 What FBR’s Investors Seek in a 144(a) Investment? Transformational investment opportunities –Consol – CNX – Petrohawk – Mariner – Rosetta – Aventine Excellence in a niche Talented management with demonstrated track records Scalable investment opportunity Reasonable floor on risk Near-term liquidity

12 F R I E D M A N B I L L I N G S R A M S E Y Page 12 So Where’s the Rub? ProsCons Speed of executionValuation if not done right Safe harbor prior to registrationNo immediate access to retail investors Period of time to “refine” storyNeed for transformational thesis Broad institutional exposureMust deliver on promised results Grand opening IPO

13 F R I E D M A N B I L L I N G S R A M S E Y Page 13 Threshold Issue: What’s the Issuance Discount? Other 144(a) Equity Offering ProcessesFBR’s 144(a) Equity Offering Process Individual Investor’s % of Offering “Normal” IPO issuance discount is approximately 5% - 10% Issuance discount on a 144(a) is a function of the breadth/narrowness of distribution –The broader the institutional shareholder base, the lower the discount –Traditional IPO distribution process not well suited for a 144(a) offering 20% 10% 5% 15% FBR Targeted Cap of 10% Number of Institutional Investors in 144(a) Offering Note: Bell curves and statistics represented in graph above are estimates. Actual results may vary.

14 F R I E D M A N B I L L I N G S R A M S E Y Page 14 Proven Energy Investment Banking Track Record Leading Equity Capital Market Execution $176,000,000 March 10, 2005 FOLLOW-ON OFFERING Co-Manager FOLLOW-ON OFFERING Co-Manager $256,200,000 August 9, 2005 $96,485,000 May 26, 2005 FOLLOW-ON OFFERING Book-Running Manager $175,500,000 May 5, 2005 INITIAL PUBLIC OFFERING Co-Manager 144a PRIVATE PLACEMENT Sole Placement Agent $800,000,000 July 7, a PRIVATE PLACEMENT Sole Placement Agent $275,327,000 December 12, 2005 PRIVATE PLACEMENT Sole Placement Agent $446,987,000 August 1, 2005 PRIVATE PLACEMENT Sole Placement Agent $1,308,500,000 September 23, 2003 October 9, 2003 February 19, 2004 $149,000,000 June 9, 2004 FOLLOW-ON OFFERING Book-Running Manager FOLLOW-ON OFFERING Co-Manager $92,575,000 October 28, 2005 $599,696,000 September 15, 2005 FOLLOW-ON OFFERING Co-Manager INITIAL PUBLIC OFFERING Co-Manager $99,705,000 August 16, 2005 $440,335,000 March 3, 2005 PRIVATE PLACEMENT Sole Placement Agent $200,000,000 November 16, 2004 PRIVATE PLACEMENT Sole Placement Agent PRIVATE PLACEMENT Sole Placement Agent $198,356,000 November 14, 2005 $113,942,000 June 8, 2005 FOLLOW-ON OFFERING Book-Running Manager PRIVATE PLACEMENT Sole Placement Agent $51,175,000 June 14, 2005 $261,000,000 November 10, 2004 INITIAL PUBLIC OFFERING Co-Lead Manager $96,205,000 November 23, a PRIVATE PLACEMENT Sole Placement Agent $800,000,000 August 04, 2004 KKR Financial 144a PRIVATE PLACEMENT Sole Placement Agent

15 F R I E D M A N B I L L I N G S R A M S E Y Page 15 FBR Energy & Natural Resources Group Rankings The Leading Energy Equity Underwriter Source: CommScan EquiDesk Data & Software. Bookrunner volume tables (including over allotment) - domestic IPOs, follow-on’s, private placements excluding closed end funds and best efforts; *Natural Resources (consists of the following sectors: Oil & Gas, Mining, Energy) Market value less than $5 billion.

16 F R I E D M A N B I L L I N G S R A M S E Y Page 16 Appendix: Overview of FBR Process for 144(a)

17 F R I E D M A N B I L L I N G S R A M S E Y Page 17 Overview of FBR Process for 144(a) – Weeks 1 & 2 Description Conduct organizational meeting to coordinate schedule over next 2 months Begin financial, operational and legal due diligence (contracts, audited financial statements, internal budget, 3 rd party review of company’s reserves) Provide company with thorough due diligence request list Build investment banking model of company’s profitability over next five years FBR Commitment Committee – Prepare committee memorandum (typically pages and 2-3 hour all hands meeting including FBR’s CEO) for permission to send engagement letter Circulate first draft of road show presentation Circulate first draft of offering memorandum Hire outside engineering consultant and other consultants Field trip with consultants Informal discussion with senior (bank) lenders, bridge lenders and term loan B investors Launch background checks and references

18 F R I E D M A N B I L L I N G S R A M S E Y Page 18 Overview of FBR Process for 144(a) – Weeks 3 & 4 Description Continue financial, operational and legal due diligence Finish road show presentation Finalize company projections FBR equity research analyst visit with management Draft and finalize offering memorandum FBR Commitment Committee – permission to print offering memorandum

19 F R I E D M A N B I L L I N G S R A M S E Y Page 19 Overview of FBR Process for 144(a) – Weeks 5 – 7 Description Continue financial, operational and legal due diligence Practice presentations with senior members of FBR’s energy group Test management presentation against road show and amend as needed Kickoff road show at FBR headquarters with 4-5 teach-in presentations to entire FBR sales force from company management, investment banking lead Managing Director, FBR equity research analyst, FBR’s institutional sales head and follow up teach-in Net road show uploaded for online viewing – passwords changed regularly 3 week road show – management in front of 150+ investors Lead bankers prepare accounts (30-45 min per account) before most of company management’s one- on-one meeting Price equity offering at end of road show Close and fund transaction the following week

20 F R I E D M A N B I L L I N G S R A M S E Y Page 20 Overview of FBR Process for 144(a) – Post Closing Description Limited trading for investors on the PORTAL Market ®, which is operated by The Nasdaq Stock Market, Inc. Company commits to file registration statement or S-1 with the SEC before predetermined date – typically 90 days after closing of 144(a) transaction Receive SEC review, comment and response period Grand opening IPO – print final offering memorandum and conduct road show Company or selling shareholders receive net proceeds from offering


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