IPO Report: Philadelphia Energy Solutions (PESC)

Francis Gaskins |

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Following the completion of this offering, Philadelphia Energy Solutions (PESC) will be a holding company with two operating subsidiaries, Refining and Logistics, that operate its refining and logistics business segments, respectively. The company is based in Philadelphia, PA.

Six other companies are scheduled for the week of Aug. 3. The full IPO calendar is available at IPO Premium.

SEC Documents

Manager, Joint-managers: BofA Merrill Lynch, Credit Suisse
Co-managers: Goldman Sachs, Barclays, Jefferies, J.P. Morgan

End of lockup (180 days): Tuesday, February 2, 2016
End of 40-day quiet period: Tuesday, September 15, 2015

PESC scheduled a $250 million IPO with a market capitalization of $488 million at a price range midpoint of $16.50 for Thursday, Aug. 6, 2015 on NYSE.

Philadelphia Energy Solutions Summary

Following the completion of this offering, PESC will be a holding company with two operating subsidiaries, Refining and Logistics, that operate its refining and logistics business segments, respectively.

Refining is a merchant refiner and marketer that operates the 190,000 bpd Girard Point facility and the 145,000 bpd Point Breeze facility (collectively, the "Philadelphia refining complex") on a 1,300 acre site.

The Philadelphia refining complex is the largest refining complex in PADD I and the 10th largest in the United States.

Philadelphia Energy Solutions Valuation

Glossary

Per share dilution

.

.

-$14.66

     
             

Valuation Ratios

Mrkt Cap (mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

Philadelphia Energy Solutions (PESC)

$1,320

0.2

9.9

9.8

9.0

19%

             

Philadelphia Energy Solutions Conclusion

Neutral

Price to sales of .2

P/E of 9.9

Price to book of 9.8

IPO proceeds end up with Carlye & related parties

2.4% expected dividend

Philadelphia Energy Solutions Business

Following the completion of this offering, PESC will be a holding company with two operating subsidiaries, Refining and Logistics, that operate its refining and logistics business segments, respectively.

Refining is a merchant refiner and marketer that operates the 190,000 bpd Girard Point facility and the 145,000 bpd Point Breeze facility (collectively, the "Philadelphia refining complex") on a 1,300 acre site.

The Philadelphia refining complex is the largest refining complex in PADD I and the 10th largest in the United States.

Since January 1, 2015, Logistics has operated a crude oil rail unloading terminal with the capacity to unload four crude unit trains per day, or 280,000 bpd (the "North Yard terminal"), which provides certain logistics services to Refining.

The North Yard terminal is located adjacent to the Philadelphia refining complex and is the East Coast's largest crude oil rail unloading terminal.

The separation of PESC’s business into the refining and logistics segments provides flexibility in how PESC allocates capital and access capital markets, in order to balance the growth of its businesses and the return of capital to its stockholders.

PESC intends to explore growth opportunities in both of its segments, either organically or through third-party acquisitions.

These growth opportunities could include investments either upstream, downstream or within PESC’s current operations, including opportunities at the Philadelphia refining complex.

PESC is exploring, and will continue to explore, subject to market conditions, an initial public offering of a growth oriented master limited partnership, PES Logistics Partners, L.P. (the "MLP"), that will own a substantial portion of its logistics segment and that will be focused on providing logistics services to Refining and third parties (the "Logistics IPO"). In furtherance of the Logistics IPO, the MLP has filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (the "SEC").

Upon its formation, PESC believed that rapid growth in the production of light, sweet domestic crude oil from developing shale formations such as the Bakken, Eagle Ford and Permian, coupled with relatively static domestic distillation capacity, would create opportunities to secure domestic crude oil at advantaged prices relative to other sources of crude oil.

PESC believes it can continue to capitalize on this development by operating the North Yard terminal, the largest crude oil unloading terminal on the East Coast.

In addition, PESC believes the refined product supply and demand balance in PADD I has become increasingly favorable for us with the closure of numerous refineries that had previously supplied the East Coast.

To take advantage of these opportunities, PESC has made capital investments in a number of organic growth projects discussed below, including the North Yard terminal, and developed a network of supply relationships to transform the Philadelphia refining complex from a facility that primarily relied on waterborne foreign crude oil to one that can receive and process up to 80% domestic crude oil.

Philadelphia Energy Solutions Intellectual Property

Nothing

Philadelphia Energy Solutions Competition

The refining business is very competitive. Refining competes directly with various other refining companies, integrated oil companies, foreign refiners that import products into the United States and producers and marketers in other industries supplying alternative forms of energy and fuels to satisfy the requirements of industrial, commercial and individual consumers.

Some of Refining's competitors have expanded the capacity of their refineries and internationally new refineries are coming on line which could also affect Refining's competitive position.

Profitability in the refining industry depends largely on refined product margins, which can fluctuate significantly, as well as operating efficiency and reliability, product mix and costs of product distribution and transportation.

Certain of Refining's competitors that have larger and more complex refineries may be able to realize lower per-barrel costs or higher margins per barrel of throughput.

 Several of Refining's principal competitors are integrated national or international oil companies that are larger and have substantially greater resources.

Because of their integrated operations and larger capitalization, these companies may be more flexible in responding to volatile industry or market conditions, such as shortages of feedstocks or intense price fluctuations. Refining margins are frequently impacted by sharp changes in crude oil costs, which may not be immediately reflected in product prices.

The refining industry is also highly competitive with respect to feedstock supply.

Unlike certain of its competitors that have access to proprietary controlled sources of crude oil production available for use at their own refineries, Refining obtains all of its crude oil and other feedstocks from unaffiliated sources.

The availability and cost of crude oil is affected by global supply and demand. PESC has no crude oil reserves and are not engaged in the exploration or production of crude oil. PESC believes, however, that Refining will be able to obtain adequate crude oil and other feedstocks at generally competitive prices for the foreseeable future.

As a result of Logistics' contractual relationship with Refining under the commercial agreement and the North Yard terminal's direct connection to the Philadelphia refining complex, Logistics does not face significant competition from other crude oil rail unloading facilities for Refining's domestic crude oil rail unloading requirements.

Philadelphia Energy Solutions 5% Shareholders Pre-IPO


Investment funds affiliated with The Carlyle Group          48.8%

Philadelphia Energy Solutions Dividends

PESC currently intend to pay quarterly cash dividends of approximately $0.10 per share on its Class A common stock following this offering, commencing after the completion of the third quarter of 2015.

The amount of PESC’s expected quarterly cash dividend was determined based on (i) its expectation of its free cash flow; (ii) the cyclicality of the refining business; (iii) distributions to holders of the non-controlling interest in PES LLC and (iv) restrictions in its subsidiaries' financial arrangements.

Philadelphia Energy Solutions Use of Proceeds

PESC expects to receive $182 million from its IPO and use it for the following:

PESC Company will use the proceeds from the sale of LLC Units to us to distribute $181.8 million to Carlyle, PES Equity and certain members of management, see below...

...to purchase 11,767,321 LLC Units directly from PESC Company at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discount. PESC will use the net proceeds it receives from any exercise of the underwriters' option to purchase additional shares of Class A common stock from PESC to purchase LLC Units directly from PESC Company at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discount.

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