Value Investors Club / MPAC (MPACW)

Description

Summary

We are long MPACW. Matlin Patterson Acquisition Corp (NASDAQ: MPAC) is a SPAC which recently announced the acquisition of US Well Services (“USWS”), a company specializing in “clean” hydraulic fracturing fleets for unconventional oil and gas.

The deal was approved by shareholders on November 2^nd and will close on November 9th.The new tickers for the common stock and the warrants will be USWS and USWSW. The warrants which represent ½ of a share at a $11.50 strike and a 2023 expiry are currently trading at 0.68 with a very low implied volatility (eg. the longest dated options of FRAC have an IVM of 40-50%). A re-rate to peer volatility of 45% would imply a warrant price of at least $1.00. There is an embedded redemption provision for the warrants if the stock hits $24.

Transaction Overview

Crestview, the private equity fund, is investing $225 million via a PIPE at $10 per share to ensure that the Company will have a minimum of $280 million of cash on balance sheet at closing. The proceeds from the pipe and the cash in the trust will be used to repay existing debt and provide incremental cash to fund the expansion of the “clean fleet”. Today leverage is pretty conservative at 1.5x EBITDA.

The PIPE was actually upsized from $135 million due to redemptions from arbs due to current market conditions. Normally a lot of SPACs are turds but here we think it is interesting that Crestview elected to fund a pipe at the SPAC IPO price (no discount) and with the recent upsize suggests to us that they believe in the upside of the common. USWS management is also rolling over 100% of their equity in the transaction which we take to be a bullish sign. PIPE investors have a lock-up until the share price exceeds $12 per share so we think there is incentive to get the stock price to this level.

Including $37 m of cash from the SPAC trust (excl. redemptions) and the pipe of $225m, the transaction creates USWS at an EV of $262m at an EV/EBITDA multiple of ~4.0x for 2018. Peers (eg. FRAC with conventional fleets) are currently trading at a mean of 4.5x 2018 EBITDA and analysts have a 12M price target of $18 on FRAC stock or ~30% additional upside. FCF conversion for USWS is around 75% which would imply a FCF yield of 17% versus 14% for peers.

Company overview

USWS is a technology-oriented oilfield service company focused exclusively on hydraulic fracturing services for the oil and gas industry. USWS was founded in 2011 with an investment from Antero Resources (NYSE: AR) which remains a major customer of its fleet. Joel Broussard (Chairman and CEO) and Matt Bernard (CFO) raised $30 million of equity and $80 million of debt and became Board Members in 2012. Later, TCW led an $180m financing in 2014 and became the largest shareholder in USWS.

USWS is one of the first companies to develop and commercially deploy electric-powered hydraulic fracturing equipment. USWS’ patented Clean Fleet® technology which was developed in 2014 and is covered by 15 patents (64 pending) combines natural gas turbine generators with electric motors and existing industry equipment for hydraulic fracturing. The Clean Fleet reduces completion costs and offers significant fuel cost savings compared to diesel-powered pumps estimated at $13 million at current fuel prices.

The Clean Fleets also have much longer useful lives of 15-20 years vs. 6 years for diesel powered fleets and reduced repair and maintenance costs translating into better free cash flow conversion. The average cost of building a Clean Fleet is $60 million with a 3-year payback period.

Today, USWS operates 11 active fleets serving the Marcellus, Utica, Permian and Eagle Ford basins. Two electric fleets will be deployed in Q1 2019 under newly awarded contracts.

Financial Projections and Valuation

Conservatively assuming only 2 fleets are added in 2019 (vs. 6 projected by management), we get to a 2019 EBITDA of around $160 million which would imply shares are trading at 3.7x forward EBITDA and at at 20% forward FCF yield. We think the shares could be re-rated as industry sentiment improves with significant upside for the warrants.

Exhibits

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Deal closing

Re rate to comps

Improved industry sentiment

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			2018	2019
Price:	10.00	EPS	0	0
Shares Out. (in M):	60	P/E	0	0
Market Cap (in $M):	600	P/FCF	6	0
Net Debt (in $M):	-12	EBIT	0	0
TEV (in $M):	588	TEV/EBIT	0	0