Liberty Oilfield Services decrease IPO size deal, heightening Investor Concerns

Liberty Oilfield Services (Pending: BDFC) is a company that offers E&P firms  the necessary services to conduct hydraulic fracking. Founded in 2011, the company has grown from a one-fleet firm to one that owns fourteen operational fleets and has an eye on further expansion.

Hydraulic fracturing is an immensely diverse market, leaving a host of niches for various businesses to cover. Liberty Oilfields rents out its fleet to oil-drilling firms. Each fleet holds up to 40,000 HHP. Liberty Oilfield’s relatively large fleet is, therefore, able to meet a lot of demand in the sector. In fact, demand currently surpasses the capacities of the Denver, Colorado-based fracking services company. That’s why Liberty Oilfield plans on adding another five fleets to its repertoire.

What is concerning for investors though is that the company waited until the last minute to reduce the size of its IPO by almost 38%. Initially, Liberty Oilfield had stated an intent to sell off 22.9 million of its shares on NASDAQ. The shares would sell between the range of $16 to $19 per share. On Tuesday the company announced a change in the terms. The offering that the company is launching will now be for 20 million of the common stock going at between $12 and $13 apiece. The new deal will bring Liberty Oilfield’s market cap to $2.24 billion, with the proceeds reading $250 million at the set midpoint and $299 million should insiders exercise their overallotment privileges.

The syndicate in charge of the Liberty Oilfields deal will constitute Morgan Stanley, JP Morgan, Wells Fargo Securities. Citigroup, Evercore ISI, Goldman Sachs, Tudor Pickering Holt & Co., Houlihan Lokey, Intrepid Partners, Retrie Partners as well as Suntrust Robinson Humpky & Co.

The deal on the table at the moment is substantial but it flags the company’s financials ahead of its first issuance. The company has shown tremendous growth over the years it has been in operation under the guidance of CEO Christopher Wright, with his experience and MIT education. However, the question about whether it will continue to do so has plagued the company since the announcement of the changed deal.

Liberty Oilfield recorded a loss in both revenue and profit in 2015 going on to 2016. Sales income dropped from $455 million in 2015 to $375 million in 2016, while the loss multiplied six times over during the same period. Liberty Oilfield pointed at fragmentation of services in the hydraulic fracking industry as the reason for the losses. It also cited stiff competition from companies such as Basic Energy Services Inc. and C&J Energy Services Inc. as another contributor to its losses. So if the market continues to lag and competition remains, will that be the end of Liberty Oilfield? The company’s explanation for its losses is a little worrying.

The company plans to buy additional fleets and fund operations with the IPO proceeds. Similarly, Liberty Oilfields will also pay off part of its debt and buy interest from majority shareholders in its subsidiary Liberty LLC. These moves would put the company in a better position to expand its operations to areas like the Eagle Ford Shale, thus earn it higher incomes.