IPO Report: Memorial Resource Development (MRD)

Six other companies are scheduled for the week of June 9, 2014.  The complete IPO calendar is available at IPOpremium.

The manager and joint managers are Citi, Barclays, BofA Merrill Lynch, BMO Capital Markets, Goldman Sachs, Raymond James, RBC Capital Markets, Wells Fargo.  The co-managers are Comerica Securities, Credit Suisse, Mitsubishi UFJ Securities, Morgan Stanley, Scotiabank/Howard Weil, Simmons & Co.,Stephens Inc.,      Stifel, UBS Investment Bank, Wunderlich Securities.  SEC filings

MRD scheduled a $612 million IPO with a market capitalization of $3.3 billion at a price range midpoint of $17 for Friday, June 13, 2014 on the Nasdaq.

MRD IPO Overview

MRD is an independent natural gas and oil company focused on the exploitation, development, and acquisition of natural gas, NGL and oil properties with a majority of its activity in the Terryville Complex of North Louisiana.

Q1'14 revenue was up 56% (compared to Q1 '13) to $190 million.  Increased volume contributed $42.5 million to revenues.  A favorable pricing variance contributed $25.8 million to the increase in revenues.

Reserve value discounted at PV-10

Proved:  $1,469 million

Probable:  $1,052 million

Possible:  $2,386 million (see 'reserve value' below)

MRD's 2014 drilling budget of $312 million is expected to be financed primarily from internal cash flow.

32 year inventory

These total net identified horizontal drilling locations represent an inventory of over 32 years based on MRD’s expected 2014 drilling program.

MRD Valuation

Glossary

Conclusion

The rating on MRD is neutral plus.

MRD is an independent natural gas and oil company focused on the exploitation, development, and acquisition of natural gas, NGL and oil properties with a majority of its activity in the Terryville Complex of North Louisiana, where MRD is targeting overpressured, liquids-rich natural gas opportunities in multiple zones in the Cotton Valley formation.

MRD‘s total leasehold position is 347,458 gross (205,818 net) acres, of which 60,041 gross (51,522 net) acres are in what MRD  believes to be the core of the Terryville Complex.

MRD is focused on creating shareholder value primarily through the development of its sizable horizontal inventory.

Organization chart

50% of MEMP's incentive distribution rights

MRD owns 50% of MEMP's incentive distribution rights.  MEMP's market cap is $1.36 billion.

Memorial Production Partners LP, through its subsidiary, is engaged in the acquisition, development, exploitation, and production of oil and natural gas properties.

Its properties consist of operated and non-operated working interests in producing and undeveloped leasehold acreage, and working interests in identified producing wells principally located in Texas, Louisiana, Colorado, Wyoming, New Mexico, and offshore Southern California.

As of December 31, 2013, its total estimated proved reserves were approximately 1,015 billion cubic feet of natural gas equivalent. Memorial Production Partners GP LLC serves as the general partner of Memorial Production Partners LP. The company was founded in 2011 and is headquartered in Houston, Texas.

MRD horizontal drilling locations

As of December 31, 2013, MRD had 1,582 gross (1,091 net) identified horizontal drilling locations, of which 1,431 gross (994 net) identified horizontal drilling locations are located in the Terryville Complex.

Drilling Inventory and Capital Budget

MRD intends to develop its multi-year drilling inventory by utilizing significant expertise in horizontal drilling and fracture stimulation to grow production, reserves and cash flow.

For 2014, MRD budgeted a total of $312 million to drill and complete 46 gross (39 net) operated wells.

MRD expects to fund 2014 development primarily from cash flows from operations.

The majority of drilling locations and the 2014 development program are focused on the Terryville Complex, where MRD plans to invest $264 million on drilling and completing 33 gross (28 net) horizontal wells and 2 gross (2 net) vertical wells.

$5.0 million of the Terryville Complex budget is allocated towards the drilling of vertical wells and routine facilities maintenance. In East Texas, MRD plans to invest $36 million on drilling and completing 8 gross (6 net) horizontal wells. In the Rockies, MRD plans to invest $12 million on drilling and completing 3 gross (3 net) vertical wells in the Tepee Field.

32 year inventory

These total net identified horizontal drilling locations represent an inventory of over 32 years based on MRD’s expected 2014 drilling program.

MRD believes its inventory to be repeatable and capable of generating high returns based on the extensive production history in the area, the results of its horizontal wells drilled to date, and the consistent reservoir quality across multiple target formations.

Reserve value

Proved, probable and possible reserves

As of December 31, 2013, MRD had estimated proved, probable and possible reserves of approximately 1,126 Bcfe, 800 Bcfe and 1,711 Bcfe, respectively.

MRD's PV-10 is based on the reserve report. PV-10 is a non-GAAP financial measure and represents the period-end present value of estimated future cash inflows from natural gas and crude oil reserves, less future development and production costs, discounted at 10% per annum to reflect timing of future cash flows and using SEC pricing assumptions in effect at the end of the period.

Value of reserves discounted at PV-10

Proved:  $1,469 million

Probable:  $1,052 million

Possible:  $2,386 million

As of December 13, 2013 MRD operated 98% of its proved reserves, 71% of which were natural gas.

For the three months ended March 31, 2014, 52% of MRD’s pro forma MRD Segment revenues were attributable to natural gas production, 24% to NGLs and 24% to oil.

For the three months ended March 31, 2014, MRD generated pro forma MRD Segment Adjusted EBITDA of $67 million and pro forma net income of $15.9 million, and made pro forma capital expenditures of $83 million.

For the year ended December 31, 2013, MRD generated pro forma MRD Segment Adjusted EBITDA of $159 million and pro forma net income of $11.8 million, and made pro forma total capital expenditures of $203 million.

MRD’s average net daily production for the three months ended March 31, 2014 was 168 MMcfe/d (approximately 70% natural gas, 21% NGLs and 9% oil) and its reserve life was 18 years.

As of December 31, 2013, MRD produced from 95 horizontal wells and 800 vertical wells.

The Terryville Complex represented 85% of MRD’s total net production for the three months ended March 31, 2014.

MRD’s average net daily production for the period from April 1 through April 30, 2014 was 179 MMcfe/d, of which 73% was from natural gas.

MRD’s estimated average net daily production from its properties in the Terryville Complex for the same period was 141 MMcfe/d, or 79% of its total production.

In the Terryville Complex, MRD has completed and brought online six additional horizontal wells since January 1, 2014, bringing its total number of producing horizontal wells to 27 in its primary formations.

The 30 day production average rates of MRD’s four most recent wells averaged 25.1 MMcfe/d per well.

MRD Dividend Policy

No dividends are planned.

5% stockholders

MRD Holdco LLC          75.7%

(Kenneth A. Hersh         75.7%)

Anthony Bahr                8.5%      

Jay Graham                  8.5%

Use of proceeds

MRD expects to net $391 million from its IPO. Proceeds are allocated as follows:

Redemption of PIK (paid-i-kind) notes    $359.9 million     

Cash consideration to certain former management members of WildHorse Resources $30 million                                                

Repayment of outstanding borrowings under WildHorse Resources’ credit agreements $587.4 million                                                        

Reimbursement to MRD LLC for June 15 interest payment on the PIK notes $17.2 million                                                   

Costs associated with MRD’s new revolving credit facility $4.3 million