KLX Energy pays up for debut bond amid market volatility and glut of energy deals — Deal Preview

KLX Energy Services acquisition of Motley Services positions the oilfield servicer for growth. But getting there won’t be cheap as the newly spun-off entity’s financing proposal is up against choppy trading conditions and recent deal saturation from other energy issuers, said six buysiders.

Price talk for KLX’s B3/B seven-year USD 250m senior secured notes was circulated this morning in the 10.5% to 10.75% range, sitting between initial whispers in the 9.75% area earlier this week and widened whispers in the 11% area yesterday (25 October).

JPMorgan is lead bookrunner. Books are expected to close at 2pm ET today, pricing thereafter.

With oil prices hovering in the USD 66-67 range and global stock markets flirting with a correction, many buysiders are becoming more focused on the downside scenario for smaller, E&P-dependent companies, such as oilfield servicers like KLX or raw material providers like Hi-Crush Partners, whose USD 450m 9.5% unsecured notes due 2026 sunk to the mid-80s this week after pricing at par in late July.

“While [KLX is] not as at risk as someone like Hi-Crush which is at the end of the tail and can just get flicked off in bad times, they are still on the tail,” said one buysider. “If oil prices fall because of demand and or constraints on completing wells, or if pipeline capacity is not on schedule, that could impact performance.”

Others buyside sources said they were wary of investing in another relatively small energy service company, given that KLX’s deal comes on the heels of a debut deal last week from fellow oilfield servicer Nine Energy Service.

“It’s the same story,” said one buysider. “I thought that Nine Energy was special and unique, and now it’s clearly not. So what makes this different than Nine or another small service company that’s evidently going to come to the market?”

KLX Energy provides completion, intervention and production services including downhole tools. It was spun off from its parent KLX Inc. just last month. The Motley acquisition adds new tools such as coiled tubing services, primarily in the Permian Basin.

Given its short operating history, buysiders said the company needed to prove itself as a standalone entity. With that in mind, the company’s management team—many board members and senior executives were also senior management figures at B/E Aerospace—appealed to investors looking at the deal.

“That’s a good legacy,” said one buysider. “B/E was always a bellwether HY credit, the place you hid out during bad times. This is basically the same management team running KLX.”

KLX is pitching the deal on leverage of 2.8x, based on pro forma adjusted EBITDA of USD 88.2m and total debt of USD 250m, according to deal documents.

Those numbers do not take into account the impact of the Motley acquisition—based on annualized 3Q18 adjusted EBITDA guidance of USD 106m for KLX and an annualized mid-point figure of USD 46m for Motley, the combined company is expected to generate USD 152m in EBITDA, according to deal documents.

Based on those EBITDA figures, KLX is expected to generate free cash flow of USD 54m, factoring in USD 25m of interest costs, USD 63m of capital expenditures and USD 10m in cash taxes, sources said.

Pro forma liquidity is USD 227.9m, based on the company’s USD 155.4m cash position and USD 72.5m availability on its USD 100m ABL due 2023.

“That’s decent for energy, but it’s not good for M&A, especially for a company in aggressive growth mode,” a buysider said.

Deja vu?

Nine Energy, another public oilfield servicer, priced its five-year USD 400m senior unsecured notes last week, pitching a similar story as KLX—relatively low leverage, patented equipment—as reasons for investors to fund its acquisition of Magnum Oil Tools International.

Pricing may have been pushed wider on KLX partly because investors who bought Nine Energy did not have space for a similar company so soon afterwards.

Despite its greater leverage, some sources said they preferred 3.3x levered Calfrac to KLX—especially after the servicer reported a 41% increase in EBITDA year-over-year—because it is a larger Canada-focused company with less Permian exposure than KLX.

Calfrac’s B3/B- USD 650m 8.5% senior unsecured notes due 2026 traded yesterday at 90 to yield 10.428%, according to MarketAxess. Nine Energy’s B3/B USD 400m 8.75% senior unsecured notes due 2023 last traded yesterday at 101.5 to yield 8.301%, according to MarketAxess.

The company did not respond to a request for comment. JPMorgan declined to comment.

2018 Debtwire

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