As jubilant members of the Rice family rang the opening bell at the New York Stock Exchange on Feb. 24, Rice Energy Inc.’s stock had already risen 10 percent since the first trade a month earlier.
On Jan. 24, the Canonsburg-based Marcellus driller became the second most successful IPO in the history of oil and gas firms, raising $1.05 billion.
The record had been set just a few months earlier by Colorado-based Antero Resources, another Marcellus Shale operator whose public offering yielded a $1.57 billion payout.
Rice and Antero have two important things in common: Their projects are both concentrated in the Appalachian region and they both decided to go public when investors, with appetites pent up for several years, were looking for ways to bite off a chunk of the fastest growing shale play in the U.S.
Rice got a hint of that appetite during an eight-day roadshow in January, where the company pitched itself to more than 230 potential buyers. Many were likely the same people who had paid $44 per share in October for a piece of Antero.
“The energy world is a pretty focused group,” said James Rogers, Rice’s chief accounting officer. “There was just a huge demand for that in the market.”
Other Marcellus Shale companies are benefiting by way of record stock prices.
In the past two months, shares of Texas-based companies Range Resources, Cabot Oil & Gas and Magnum Hunter Resources, along with Pittsburgh-based EQT Corp., hit their all-time price peaks. EQT’s stock price climbed to $104 per share on March 18.
It’s a good time to be a Marcellus company — even a unprofitable one.
Watching the numbers
In 2011, Rice Energy sustained a loss of $936,000. In 2012, that loss grew to $19.3 million, and last year to $35 million.
Revenue in those years increased from $14 million to $27.2 million to $88.6 million.
In its SEC registration, Rice disclosed that it did not have good internal controls in 2011 and 2012 and said it has hired a team of accountants to review financial reporting.
Neither of those things are uncommon during an initial public offering, said Peter Kern, a partner at BKD CPAs & Advisors who helped take State College-based Rex Energy public in 2007.
“The value of these companies is really the resources that they have, the rights to which are obviously underground,” he said. “It’s a capital intensive business. It’s not uncommon that they would lose money in the early years.”
Antero, too, was losing money at the time it filed its registration statement, though it had been profitable before. Rice has been in the red for at least the past three years.
“Poor financial controls are not that uncommon either,” Mr. Kern said.
Private companies have different standards for financial reporting than public firms, he said. Part of that has to do with the role of the auditor.
In private firms, the auditor works with the company to catch problems and iron them out. Public companies do that themselves.
“When the auditor comes, they just give them statements and say, ‘Hey, make sure they’re right,’” Mr. Kern said.
For Chris Wiles, president and portfolio manager at Mt. Lebanon-based Rockhaven Capital Management LLC, however, the trend is unnerving.
“Having lived through 1998-2000 when all of these dot-coms were going public with absolutely no earnings and some with no revenue,” he said, “to see that happening again is head-scratching. Companies go public when it’s easy to go public, when greed is high and people are clamoring to get shares of anything. And that’s kind of the environment we’re in now.”
A growing curve
Rice is a young company with ambitious plans. Founded in 2007, it has drilled about 50 wells, mostly in Washington County, where its gushers have consistently ranked at the top of production results for the past 18 months.
It also holds acreage in Greene County and has plans for an aggressive Utica Shale drilling program in eastern Ohio. Its 2014 capital budget is $1.23 billion, with nearly a third devoted to leasing more land.
The company boasts it has the youngest management team in the industry. All of its executives are under 35. Two, including the CFO and the vice president of geology, are still in their 20s.
Many of its wells are named after superheroes — there’s the Hulk, X-Man, Captain Planet, Zorro, Batman and Robin, to name a few.
The money to drill those wells has come partly from generous private equity support — investments that look to the IPO process as a “harvest,” according to Bloomberg Industries senior energy analyst Vincent Piazza.
“It’s there as a recycling mechanism for their capital,” he said.
During his first conference call with investors in March, the company’s CEO, Dan Rice, said a major impetus to take the company public was “an alignment with investors who share a similar investment horizon.”
In other words, private equity wants profits sooner rather than later, often inside of five years.
Public investors — and often it’s energy mutual funds that pick up new exploration and production firms during the public offering — give Rice more money to grow and more time to make money.
Meanwhile, the private equity investors that funded the growth thus far get an immediate payout and can reinvest that money in the next promising startup. According to Bloomberg estimates, there is $110 billion of private equity money searching for a destination in energy today.
Private equity-backed energy companies that have gone public have underperformed the S&P 500 index over the past year, according to Mr. Piazza’s research.
That’s not to say Rice or Antero will meet the same fate, he said.
That’s hard to predict, and given all the unknowns, Mr. Wiles at Rockhaven isn’t even trying.
“From an investor’s perspective, these development stage (exploration and production) companies are extremely difficult to analyze or value,” he said. “There are a host of moving parts/variables and a very large degree of faith/hope.”
All about the Marcellus
The current excitement over Rice and Antero, as evidenced by the record-breaking IPOs and the climb in their stock prices since then, is, in large part, excitement over the Marcellus Shale itself.
Unlike other, less successful exploration companies that went public within the past few months, Antero and Rice were focused on one or two shale plays, and both are in the Appalachian region, Mr. Piazza noted.
“If you think about what the Marcellus has offered over the past couple of years — just given the production cadence (in spite of) the muted price for gas — it speaks for itself,” Mr. Piazza said.
Rice may have also benefited by being among the few exploration and production IPOs of its time. It was part of a trio of companies to go public in January, but in October, when Rice announced its intention, “there wasn’t much in the pipeline coming up.”
Looking back at Rex Energy’s IPO in 2007, Mr. Kern said he’s struck by “the difference that seven years makes.”
Over that period, the Marcellus Shale has become a proven resource and the Utica has gone from an unknown to a destination target. Dozens of companies have revealed their drilling results. The plays’ borders are much more well defined and their economics more understood.
“There’s really been a lot of pent-up money looking for investments that are attractive,” he said.
Rice and other recently-gone-public firms “got to kind of sit back a little and let some of the first movers stake out where some of the best ground is and react accordingly,” he said.
Anya Litvak: firstname.lastname@example.org or 412-263-1455
First Published April 1, 2014 5:15 AM