Friday, July 24, 2020

Temasek Tracking - FTS International with unrealised loss of US$1.32b


2002  Founded
2011 Temasek buyout (May 2011)
2013 Pulled out of planned IPO
2018 IPO

FTSI is a tale of making debt-fueled bets in the boom-and-bust energy business, where company values can rise and fall swiftly. Did Temasek's search for higher ROI cause it to throw caution to the wind? And did Temasek think they can run an oil fracking service any better than the owners they were buying out?

In 2002 brothers Dan and Farris Wilks founded FTSI (originally named Frac Tech International) that provides fracking services to the shale oil sector. It rode on a very profitable stretch from 2002 to 2011 and became a top name in fracking services.

In May 2011 Temasek + RRJ Capital completed a buyout of Wilks brothers' 70% of FTSI which put a valuation of US$5.7B. It was a buyout and a recapitalisation. This was completed with cash US$2.45B and debt US$1.7B. Another investor, Chesapeake Energy, held 26% share had their holdings increased to 30% + cash distribution of US$200M.

Temasek' share was 38.67% with cash paid US$1.33B and RRJ's share was 31.9% with cash paid US$1.12B. Temasek's holdings is booked under it's subsidiary Maju Investments (Mauritius) Pte Ltd.

For FTSI founders, it was perfect timing to exit. Overnight, the Wilks brothers joined the ranks of billionaires in the US. For Temasek, it was horrible timing at best, and poor reading of the market at worse..

Two charts show the banna skins Temasek slipped on.



Temasek bought into FTSI coming off a very good run, at a point when oil prices, at US$130/barrel, was the second highest peak in its history. The Singapore SWF was making a bet on the price of oil, and it could not have picked a worst possible timing. The price of oil collapsed from 2011 onwards due basically to global oil glut and lower demands.

With oil prices on downard trend after 2011, the heady days were over. The recapitalisation of FTSI with US$1.7B debt had the immediate effect of huge interest cost dragging down its bottomline. After 2012, oil prices slipped under shale oil production cost. It was game over. FTSI has made no decent profits in the last decade and it projected negative returns for the next 3 years.

Immediately following the buyout, investors had to pony up a further US$360M in 2012 for working capital. It is not known how much was Temasek's share in this.



The poor financials and oil outlook forced the new owners to pull out an IPO planned for 2013. Finally in 2018, IPO went through. In a very weak market, the IPO sought to raise only US$100M. It is not known if the IPO was fully subscribed or whether Temasek had to sink in further $ to pick up any slacks.

The shares opened at US$400 in 2018. It is now worth US$7 a piece. FTSI financials as at Mar 2020 show its net asset was down to a mere US$29M.

When Temasek took over FTSI, the CEO was Marcus Rowland. He was a finance guy from Cheasapeake and drawing a compensation of US$24M+, the highest pay package for CEOs in the oil sector. Temasek  replaced him in 2012 with Greg Lanham. Greg came from Temasek. where he was global head of Energy. The guy who most likely originated the FTSI investment went over to run the company.  As the FTSI investment turned into a dud very quickly, Greg obviously took the heat. His tenure there was only 3 years.


Chesapeake Energy :
The company was the second largest natural gas producer in US with a long successful stretch. Flashy buying spree, a mountain of debt, unprofitable wells, global oil glut and lower demand, and management crisis, brought about the downfall of the company. Temasek bought up US$500M of Chesapeake preference shares in 2010 which was divested in 2013. How much was the realised loss is unknown. Chesapeake filed for bankruptcy in Jun 2020.


Investment watch :
The grub is gone and Temasek is left holding the empty pan. It may actually have a very very long term view and wait for oil prices to return to US$130/barrel.

Unrealised loss :
Temasek paid US$1.33b for 2,080,857 number of shares. The price today is about US$3.61 thus the book value is US$7,500,000. The unrealised loss is currently US$1,322,500,000.

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Temasek's investments in oil companies has'nt been rosy. Check out other companies I have covered:  Chesapeake,  Cheniere, Kulun Energy, Orchard EnergyVenari Resources, Seven energy 
 

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NOTE: The blog is updated when new information is obtained. The 'Unrealised loss" para was added on 30 Dep 2020.