Analysts expect the acquisition of Magnum—the number two player in dissolvable frack plugs—to give Nine Energy Service ‘incremental exposure’ to the downhole tools market. (Source: Hart Energy/Shutterstock.com)
[Editor's note: This story was updated at 9:54 a.m. CST Oct. 16.]
Nine Energy Service Inc. (NYSE: NINE) said Oct. 15 it plans to beef up its completion tools business with the $493 million acquisition of Magnum Oil Tools International Ltd.
Magnum is a downhole technology provider that has served the global oil and gas industry for over a decade. Headquartered in Corpus Christi, Texas, the company offers proprietary downhole completions products, including dissolvable and composite frack plugs, and other patented consumables with operating facilities in the Permian, Scoop/Stack, Bakken, Niobrara, Haynesville, Marcellus/Utica and Canada.
Nine will acquire Magnum, which does not have any debt, for a combination of about $334 million cash and 5 million shares of Nine common stock valued at $159 million, based on a 30-day value weighted average price as of Oct. 12.
Analysts with Tudor, Picking, Holt & Co. (TPH) said they were not surprised by Nine’s announcement since the company’s hunger for M&A had been well telegraphed. Additionally, the incremental downhole tools exposure is nice to see, despite the acquisition’s price tag.
Magnum is the number two player in dissolvable plugs, according to the TPH analysts, who noted that 46% of the company’s 2017 revenue was from dissolvables.
“Businesses like this usually ain’t cheap given high returns on capital, free cash flow generation [$300,000 2017 capex] and it looks like Nine will pay about eight to nine times run rate 2018 EBITDA [vs. Nine trading about seven times 2018 EBITDA],” TPH analysts said in an Oct. 15 research note.
However, TPH analysts said in a followup research note on Oct. 16 the math works for Nine’s acquisition of Magnum because it adds “earnings firepower” to the company’s completion tools business. Further, the firm considers the Magnum acquisition a better through-cycle strategy vs. simply acquiring various oilfield services businesses.
“We understand that the price paid [about nine to 10 times 2018 EV/EBITDA] and the debt load [coupled with the associated interest expense] may spook some folks but given the consolidated nature of the dissolvable plug competitive landscape, lateral length extension trends, robust growth in TPH estimated U.S. onshore well count 2019/2020 [about 10% each year], and market share capture potential, we believe Nine is thoughtfully playing the long game and estimate Magnum could add $65 million to $70 million in 2019 EBITDA,” TPH analysts said Oct. 16.
Magnum CEO Lynn Frazier, who founded the company in 1985, said he sees the transaction with Nine as a “great next step for Magnum’s business evolution.”
“The combination of Nine and Magnum made sense as we looked for the right partner with alignment in our culture and priorities,” Frazier said in a statement. “Together, we will be able to offer superior technology and service to our customers and provide an excellent environment for our employees to develop and help grow the company.”
Nine expects the Magnum partnership to solidify the company as “one of the premier providers of completion focused technology combined with excellence in both service execution and conveyance capability,” according to the company’s press release.
The TPH analysts also added that Nine’s completion tools business is “the most attractive, highest returning portion of the company’s business mix recently driving outsized earnings growth [vs. U.S. onshore activity] but it’s been a relatively small portion of the company’s revenue stream [about 10%-15%].”
Ann G. Fox, Nine’s president and CEO, said in a statement, “Magnum will propel Nine to a more balanced profile of completion tools, creating excellent barriers to entry while simultaneously building a business that is less labor and less capital intensive and more free cash flow generative. This will allow us to navigate a very difficult labor market and supports our approach of blending capital intensity, helping us provide more sustainable through-cycle returns for our shareholders.”
Nine will fund the cash purchase price of the transaction with net proceeds from a $400 million notes offering announced concurrently with the Magnum acquisition plus borrowings under a new credit facility and cash on hand.
The company expects to close the transaction by the end of October.
J.P. Morgan Securities LLC is exclusive financial adviser to Nine in the transaction, and Kirkland & Ellis LLP is the company’s legal counsel. Magnum’s exclusive financial adviser is FMI, and Porter Hedges LLP is the company’s legal counsel.
Emily Patsy can be reached at epatsy@hartenergy.com.
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