Solaris Oilfield IPO Might Not Be So Slick

Overview

Solaris Oilfield Infrastructure Inc. (NYSE: SOI) filed an S-1/A on May 2, 2017, for its upcoming initial public offering of 10.6 million shares. The company has a marketed price range of $15 to $18, and it has an additional 1.59 million share over-allotted as an option for its underwriters. If Solaris Oilfield prices at the midpoint of its proposed range, it could have a market capitalization of $697M.

The underwriters for the IPO are Credit Suisse, Goldman Sachs & Co. LLC, Morgan Stanley, Evercore ISI, Simmons & Company International, Tudor, Pickering, Holt & Co., Wells Fargo Securities, Raymond James, Oppenheimer & Co., Seaport Global Securities and Wunderlich.

We highlighted this deal on our IPO Insights platform.

Business overview

(Source: SEC Filings)

Formed in 2014 and based in Houston, Texas, Solaris Oilfield Infrastructure is an oilfield services company that provides a mobile delivery and storage system for a special sand that is used in fracturing at oil and shale sites. Outside investor Yorktown Energy Partners will own 46.4 percent of the company's class B shares following the IPO, and Landcraft Site Services, which is owned by company founder William Zartler, will own 40.1 percent of the company's class B shares.

Executive management team overview

William A. Zartler is the founder and chairman of Solaris Oilfield Infrastructure. He has served as a manager and chief executive officer of the company's predecessor since October 2014 and as a member of the board of directors since February 2017. Zartler also founded Lodacraft Site Services LLC and served as the company's executive chairman from February 2014 to September 2014. Zartler founded Solaris Energy Capital in January 2013 and continues to serve as its manager and sole member. Prior to that, Zartler founded Denham Capital Management and served as a managing partner from 2004 until January 2013. He holds a Master of Business Administration from Texas A&M University and a Bachelor of Science in mechanical engineering from the University of Texas at Austin.

Gregory A. Lanham is the chief executive officer and a director of Solaris Oilfield Infrastructure and was named to those roles in February 2017. Lanham co-founded Accendo Services LLC and served as its CEO from December 2015 to January 2017. He served as the CEO and as a director of FTS International from November 2012 to November 2015 and as a managing director with Temasek Holdings LTD from 2008 to October 2012. He worked for 20 years at Anadarko Petroleum Corporation. He holds a Bachelor of Science in petroleum engineering from the University of Oklahoma.

Financial highlights and risks

Solaris Oilfield Infrastructure reported total revenues of $18,157,000 and $14,205,000 for the years that ended on Dec. 31, 2016, and Dec. 31, 2015, respectively. It reported a net income of $2,803,000 for the year that ended on Dec. 31, 2016, and a net loss of $1,373,000 for the year that ended on Dec. 31, 2015.

The company provided preliminary estimates for the three months ended March 2017. The company expects revenue between $10-$10.4M compared to $3.1M for the three months ended March 2016. Operating income is expected to be between $4.6-$4.8M compared to an operating loss of $0.1M over the same time period. The significant increase is due to improved conditions in the oil and gas industry.

The company reports multiple risk factors, including its dependence on domestic capital spending by the oil and gas industry. The company also reports that volatility in oil and gas prices negatively impacts the demand for its services. The company plans to use its proceeds to repay its credit facility; to pay cash bonuses to certain employees; to make distributions to the existing owners; and for general corporate purposes.

Competitive Landscape

Solaris Oilfield Infrastructure operates in a highly competitive market. The company reports that it has numerous competitors that provide similar services. Using sales for the past twelve months and assuming a market capitalization above, SOI will have a P/S when it IPOs of 38.71x.

Conclusion: Consider Caution

Although Solaris' revenues grew from 2015 to 2016, the oil market remains highly volatile.

The company shows signs of continued improvement, with preliminary estimates for Q1 2017 well above the same time period in 2016.

However, we predict the turnaround in the industry may be short-lived and that oil and gas prices will remain volatile.

We recommend that investors avoid this IPO.