From thestreet.com
Top Stories: Energy IPO Rolls Into a Bearish Oil Patch Market
By Mavis Scanlon
Staff Reporter
2/3/98 5:25 PM ET
A 2-point drop in asking price is certainly an inauspicious way to head into an IPO. But that is exactly what Miller Exploration Company is grappling with as it prepares to roll out 5.9 million common shares in 1998's first energy-related IPO. The issue is expected to be priced Tuesday evening at between $8 and $9, down from the $10 to $12 listed in its initial prospectus.
"In this market, that is something of a death watch," says David Menlow, president of IPO Financial in Springfield, N.J. "If Miller is going to have a 2-point price drop, that is done because investors don't want to pay those prices."
No one's blaming Miller. The market's been bearish toward oil stocks due to price drops in crude, and new energy offerings in the first half of 1998 should be no exception.
Energy IPOs in 1998 aren't likely to repeat 1997's chart-topping performance. Twenty-five energy companies came public last year, and the average return from their IPO prices as of mid-December topped gains made by the telecommunications, transportation, and financial services sectors, according to CommScan, a New York-based data research firm. Exploration and production companies like Miller, however, fared far worse than their oil service and equipment brethren. E&P companies that went public in 1997 gained an average of 7% over their offer price while the sexier issues, the rig equipment and fabrication companies, gained an average of 66%. This year, the E&P sector as a whole is down about 4%, according to Baseline.
One can only imagine what the road show must have been like for Miller, which will trade on the Nasdaq under the symbol MEXP, as the price of crude in January dipped first to a two-year low, then a four-year low. Nevertheless, the company has laid out a strategy that will increase its reserves, the main asset on which an E&P company is valued. The original offering was for 6.1 million shares, 600,000 from shareholders. The 600,000 was cut to 450,000 Tuesday morning, according the equity syndicate desk at Bear Sterns, the lead underwriter. That brings the total shares offered down to 5.95 million. At $8 to $9 per share, Miller can expect to garner between $42 and $53 million, significantly less than the $66 million for which it originally planned.
But the lower prices may be what's needed to attract investors. Dan Rice, manager of the State Street Research Global Natural Resources fund, likes the company's prospects and relatively low cash flow multiple.
"If it is priced correctly the stock should do okay," he says. In general the buyers will be longer-term players, he added, as the momentum players who pushed up IPO prices in this sector are gone. "At $8 to $9 I will be participating. At that range I am interested; at $10 to $12 I am not."
Over the past four years, Miller, a family-owned business and the successor to an E&P company founded in 1925, has explored more extensively in the natural gas arena. Revenues from natural gas increased to 83% in 1997 from 74% in 1994. The small-cap company plans to focus its exploration efforts mostly in the Mississippi Salt Basin, an area with geologic formations indicating the presence of hydrocarbons. This area provided Miller with the bulk of its reserve increases in 1994 and 1995, and the company wants to get back in there to do some exploratory drilling.
Additional strategies for the Traverse City, Michigan-based company includes the extensive use of 3-D seismic data, an advanced technology that has greatly increased chances of drilling success. |
