Thinking of converting to a REIT? If not, you are just not doing it right ! As we reported yesterday after the close, Jana Partners revealed a 9.1% stake in Oil States International, Inc. (NYSE:OIS) and that it has had conversations with management regarding the formation of a REIT for its Accommodations business. They may also “seek to discuss the company’s capitalization, operations, strategy and future plan.” This marks another in a series of potential activist investments in the oil field service space in 2013. So what is the activist hedge funds game plan in regards to Oil States International, Inc. (NYSE:OIS)? It could involve the company becoming a REIT. Shares of the company are currently trading up 12% to $88.78 a share on the news.
RBC Model for Oil States International
On last week’s earnings call, Oil States International, Inc. (NYSE:OIS) management indicated that they have examined other structures (REIT, MLP, etc) for the Accommodations business, but have not found one that would be operationally feasible and advantageous to shareholders.
RBC downgraded the stock last week based on their outlook for a slowing growth rate in the Accommodations business. Their ’13/’14 growth rates for Accommodations (51% of EBITDA) are less than 10% vs. 2010–2012 average of 25% CAGR.
Oil States International, Inc. (NYSE:OIS) has indicated it can maximize shareholder value by using cash for Capex driven organic growth followed by M&A and share repurchases. From a potential buyers standpoint, the Accommodations business could be compared to a specialty lodging REIT, which typically trade at EV/EBITDA multiples of ~10-15x. Using this assumption, this would indicate that the current stock price is 35% below the low end of RBC’s sum of the parts valuation of $111, using a 10x multiple for Accommodations (see below).
RBC notes that under their sum of the parts valuation scenario, and believes the market is currently discounting OIS’s Accommodations business at a 5-6x EV/EBITDA multiple. At a multiple of 8x EV/EBITDA the stock is worth up to $171.
Sterne Agee disagreed and in a note today sated:
Jana Partners indicated in the filing hat it has discussed a change in Oil States International, Inc. (NYSE:OIS)’s corporate structure, including turning the Accommodations segment into a REIT. In addition, the 13D indicates, “The Reporting Person (Jana) also may seek to discuss the Issuer’s capitalization, operations, strategy and future plans. The Reporting Person expects to continue to have such discussions with the Issuer’s management as well as with the Issuer’s board of directors, shareholders and other parties relating to such matters, and may take other steps seeking to bring about changes to increase shareholder value as well as pursue other plans or proposals…”
What’s Oil States Worth? Our current $88 price target is a 10% discount to our sum-of-the-parts analysis assuming the current corporate structure. Under this scenario, we value the Accommodations segment at 8.0x 2013 estimated EBITDA ($548 million), implying about $3.7 million of equity value for Accommodations. Our initial back-of-the-envelope analysis suggests that under a REIT structure, the Accommodations business could trade at least at 11-12x EBITDA, implying a value for Accommodations of roughly $5.0-$5.5 billion and an Oil States International, Inc. (NYSE:OIS) share price (all else equal) of $110-117. Please click the link on the right for our recent full report with Sum-of-the-Parts valuation table.
Other Names in Oil Services That Could Be Impacted by Possible Strategic Partners: In our view, the two names in our coverage universe that possibly receive attention following Jana’s stake in Oil States are National-Oilwell Varco, Inc. (NYSE:NOV) (NOV, $65.92, Buy, $80 price target) and Weatherford International Ltd (NYSE:WFT) (WFT, $12.53, Buy, $14 price target). NOV currently has about 10% of its $2.4 billion in cash in the United States, but given its significant backlog and robust free cash flow, many believe NOV should be much more aggressive returning cash to shareholders.
On the Weatherford International Ltd (NYSE:WFT) front, there appears to be material value that has been masked by mismanagement over the past few years.