Continued from part one…
How much could the new entity be worth? Well, during the final presentation at the Sohn Investing Conference in Manhattan, Greenlight Capital’s David Einhorn stated that based on a sum of the parts valuation, Oil States is currently worth in the region of $118 per share, a 21% upside from current levels. Part of this thesis was based on the fact that at the time, Oil States International, Inc. (NYSE:OIS) was trading at a EV/EBITDA multiple of around seven times, although in comparison to the company’s larger peers this does not appear to be significantly under/overvalued.
Larger peers Halliburton Company (NYSE:HAL), Schlumberger Limited. (NYSE:SLB), Weatherford International Ltd (NYSE:WFT) and National-Oilwell Varco, Inc. (NYSE:NOV) trade at an average EV/EBITDA ratio of 7.4x for 2014, falling to 6.4x for 2015. At present levels Oil States trades at a EV/EBITDA figure of 7.1x times, falling to 6.6x for 2015, around the same as the industry average. Nevertheless, if the accommodations business achieves REIT status, Greenlight feels that the combined value of the two entities could be worth $155 per share. This view is held by Jana Partners, which in April of last year disclosed a 9% stake in Oil States and began pushing for a break up.
The diversified REIT sector trades at 1.6 times book on average, implying that the SpinCo could attract a valuation of slightly under $1.9 billion, of course this valuation does not take in to account the SpinCo’s relatively clean balance sheet and room for growth.
Risks faced by Oil States’ spinoff
Still, there is a huge risk facing this spin off as it effectively removes Oil States International, Inc. (NYSE:OIS)’ defensive business at a time when oil & gas E&P players, especially the majors are cutting capital expenditure. This trend is especially prevalent within the deep-water-drilling market were rig providers, Transocean LTD (NYSE:RIG) and Seadrill Ltd (NYSE:SDRL) are trying to grapple with sliding rig contract day rates. SpinCo EBTDA came in at $476 million during the twelve month period ending June 30th of last year, which is approximately 60% of Oil States’ overall 2013 EBITDA. It is likely that a capital spending slowdown within the E&P market will have a significant impact on Oil Stats’ bottom line after the spinoff. Over the long-term however, demand for oil services is only likely to rise.