Between 2002 and mid-2005, the market window for initial public offerings (IPOs) in the oil-service sector remained largely closed, after stock values in that sector slid from their lofty peaks in 2000 and 2001. But this summer, that window was wide open. At the end of July, Superior Well Services Inc., an Indiana, Pennsylvania-based supplier of pressure-pumping services, thundered to market in an oversubscribed $84-million IPO led by Key Banc Capital Markets. Weeks later, in mid-August, Bronco Drilling Co., an Oklahoma City contract land driller, tested the Wall Street waters in an oversubscribed $94-million IPO co-led by Johnson Rice & Co. and Jefferies & Co. That's just for openers. By early fall, Union Drilling Inc., a Bridgeville, Pennsylvania, contract land-driller, had filed an S-1 for a proposed $150-million IPO to be underwritten by JP Morgan Securities, Jefferies & Co., Bear Stearns & Co. and RBC Capital Markets. Similarly, Hercules Offshore LLC, a Houston-based jackup rig and liftboat operator, filed a proposed $172.5-million IPO to be underwritten by Credit Suisse First Boston, Citigroup, Howard Weil, Deutsche Bank Securities and Simmons & Co. International. In addition, Basic Energy Services, a Midland-based well-service rig provider, has proposed an upwardly revised $287.5-million IPO to be underwritten by Goldman Sachs & Co., Credit Suisse First Boston, Lehman Brothers, UBS Securities, Deutsche Bank Securities, Raymond James & Associates and RBC Capital Markets. And, Dresser Inc., an Addison, Texas-based manufacturer of flow-control products and measurement and power systems, has proposed a $575-million IPO to be underwritten by Morgan Stanley & Co., Credit Suisse First Boston, Banc of America Securities, UBS Securities, Lehman Brothers, Raymond James & Associates and Simmons & Co. International. The parade doesn't stop there, however. Fred Charlton, managing director, corporate finance, for Simmons & Co. International in Houston, says, "While we'll co-manage the Hercules Offshore and Dresser offerings, there are several other service IPOs with which we'll also likely be involved once they're filed." What's prompting this tide of oil-service IPOs? Charlton, whose firm also co-managed the Superior Well Services deal along with A.G. Edwards and RBC Capital Markets, offers one explanation. "There are a variety of sponsors that invested private equity in oil-service companies during the 2002-04 downturn, patiently building up those companies for the time when the IPO window would again open. Now that this has occurred, those financial sponsors are harvesting their investments." Indeed, during the past few years, First Reserve Corp. patiently pumped private equity into Dresser Inc.; Limerock Partners and Greenhill Capital Partners, into Hercules Offshore; and Credit Suisse First Boston Private Equity, into Basic Energy Services. Favorable fundamentals However, in no small part, high stock valuations and the favorable macro fundamentals of the industry have also helped trigger the current spate of oil-service IPOs, including the one for Superior Well Services (Nasdaq: SWSI). This year, not only is the U.S. rig count up significantly, to about 1,440 from an average level of 1,200 in 2004, but more than 90% of that drilling is for natural gas, says Charlton. "Superior mainly provides pressure-pumping services for well stimulation-a business driven by the fortunes of the natural gas industry. Thus, with continued strong gas prices and the rig count also rising, operators are willing to spend more on well stimulation to increase gas flow rates." And, this benefits a company like Superior. Sharing Charlton's assessment is Brian Akins, Noblesville, Indiana-based managing director for Key Banc Capital Markets, an arm of Cleveland-based Key Bank and lead manager of the Superior offering. "With the jump in commodity prices this year, E&P companies have all raised their capital budgets for 2005 and 2006, and clearly that's going to benefit the entire service industry," he says. "But the upstream sector's increasing focus on unconventional resource plays like tight-sand gas also means added producer demand for, and spending on, pressure-pumping and fracture-stimulation services-to which Superior is very leveraged." This summer, investors responded in a big way to this aspect of the company's story. "Out of the 57 one-on-one meetings we arranged with investors during the Superior offering, we had an 88% hit ratio. That tells you how focused the institutional side is on the service sector right now," says Akins. What investors also found attractive about Superior is that its management team-ex-Halliburton veterans-had already shown they could compete with the likes of Schlumberger, BJ Services and even Halliburton itself and, in the process, achieve strong growth. Says Akins, "Between 2000 and 2004, the company experienced a compound annual growth rate of 53% in EBITDA (earnings before taxes, depreciation and amortization), 62% in net income and 50% in revenues. In addition, this company is well on its way to expanding sales beyond its Appalachian roots." David Wallace, chief executive officer and founder of Superior Well Services, explains why the late July IPO made sense for his company, which not only provides pressure-pumping services but also downhole surveys through electric wireline logging. "Earlier this year, we realized from a macro perspective that with rig counts up, natural gas production flat and the demand for gas in the U.S. rising 1.5% annually, there was a lot of growth opportunity in front of us. "We also recognized that there was going to be a tremendous need for capital expenditure if we were going to continue our historical growth pattern, and eventually concluded that becoming public would not only give us the ability to raise a lot of capital to reinvest in equipment, but also more tools to finance acquisitions, such as using stock instead of cash." When Wallace speaks of historical growth, he's talking about quantum growth. Since 2000, the once Appalachian-centered service company has grown its producer customer base from 89 to more than 500-including the likes of Chevron, Unocal, Chesapeake Energy, XTO Energy and Anadarko Petroleum. It has also nearly tripled its fleet of pressure-pumping and wireline trucks to 290 and expanded its operations to Alabama, Mississippi, Louisiana, Oklahoma, Texas and Utah. As a result of this growth and diversification, its 2000-04 revenues have risen from $15 million to $76 million; EBITDA, from $2.8 million to $15.2 million; and net income, from $800,000 to $5.5 million. "While 59% of our revenues today still derive from our activities in the Appalachian Basin, we see most of our future growth occurring in Oklahoma, Texas and the Rocky Mountains," says Wallace. To achieve this, Superior-which currently has only a 1% share of the U.S. pressure-pumping market-is relying on several strengths. One is a nearly pristine balance sheet after the company paid off virtually all its bank debt with proceeds from the IPO, and its ability to now reinvest more aggressively in additional pressure-pumping equipment. Another has to do with management's technical expertise. "We're seeing a shift in U.S. drilling activity to more challenging areas where highly sophisticated technology is needed to stimulate zones in deeper, hotter downhole environments," Wallace says. "As former Halliburton hands, we're trained to work in those environments-using the proper gels and nitgrogen-based fracture-stimulation systems. We believe as a small company, we have the ability to respond faster and more cost-effectively to producers than larger competitors such as Schlumberger and BJ Services." Recently, the company opened an office in Vernal, Utah, to cover operator needs in both the Uinta and Piceance basins. Additionally, it has just opened up an office in Van Buren, Arkansas, to position itself to serve independents working the nearby Fayetteville Shale. Scott B. Gill, a research analyst with Simmons & Co. International who has an Overweight rating on Superior's stock, observes that U.S. pressure-pumping activity is continuing to outpace general domestic drilling activity. This is due to the increasing size and complexity of fracture- and acid-stimulation treatments-and that this trend has yet to show any signs of slowing. "Moreover, the U.S. pressure-pumping market remains capacity constrained as demand for equipment far outstrips supply-a situation that is likely to persist for the foreseeable future as lead times on new pressure-pumping equipment have increased markedly," Gill says. The result: price gains in this niche market. Against this backdrop, Superior, a small company that is aggressively expanding beyond the Appalachian Basin, "is positioned to benefit handsomely," he says. Bronco buying When it came to market in mid-August, the IPO of Oklahoma City-based Bronco Drilling Co. (Nasdaq: BRNC) had several plusses going for it. One, amid high hydrocarbon prices, the economic returns for producers and service companies alike were already upticking. Second, land-rig demand in the U.S. was accelerating at a faster-than-usual clip not only because of stepped-up drilling activity in conventional plays, but also due to an increasing focus by operators on unconventional gas-resource plays. "Coalbed-methane, tight-sand gas and shale plays tend to be both low-risk and drilled on tight acreage spacing, the result of which has been a much greater demand lately for land rigs," says Josh Cummings, partner, energy corporate finance, for Johnson Rice & Co. in New Orleans. "The third positive Bronco had going for it was that it was a small-cap story with an organic growth rate significantly higher than its peers, in terms of its potential to grow revenues, EBITDA and net income." When Johnson Rice initially took the company on a road show, which ultimately involved visits and group meetings with close to 100 institutional investors, the buyside was impressed with the fact that Bronco planned to more than double its operating rig fleet during the next two years, he adds. The IPO was oversubscribed, raising $97 million. "The unique part of the Bronco story is that the company came to market not only with a critical mass of operational rigs but also a large inventory of additional rigs in its yards that can be refurbished and put to work." Frank Harrison, Bronco president and chief executive officer in Oklahoma City, says the IPO route made the most sense for the company because, in his view, traditional bank financing isn't adequate for drilling contractors seeking rapid growth. "The only reason we waited until this summer to go public is that, after years of witnessing tough times for the service industry, we wanted to be sure the current market had legs to it. And it does. Commodity prices are great, and E&P companies have budgets and wells they need drilled," Harrison says. With the backing of Wexford Capital, a Greenwich, Connecticut-based private-equity sponsor, Bronco started its long road to achieving critical mass in 2001 with the purchase of one operational rig for around $1 million. The following year, it acquired Bison Drilling, another Oklahoma driller, adding seven rigs to its fleet. Then Bronco made a key strategic move in 2003 with its purchase of Oklahoma City-based U.S. Rig and Equipment and affiliate Elk Hill Drilling. That buy gave Bronco an added inventory of 22 rigs but just as importantly, a huge assortment of rig parts and equipment. More recently, this summer, the company post-IPO closed on the $50-million purchase of Norman, Oklahoma-based Eagle Drilling and agreed to the pending $68-million acquisition of Duncan, Oklahoma's Thomas Drilling. When completed, the combined acquisitions will boost Bronco's fleet to 30 operational rigs and 32 other rigs either in the refurbishment process or being held in inventory. Importantly, it expects through its Oklahoma refurbishment yards to turn out at least one new operational rig every 60 days, sometimes two. "Our strategy for growth has always been people, equipment and money," says Harrison. "Thomas Drilling is an especially good fit because it provides us not only plenty of rig equipment but also a very knowledgeable management team that knows this business well." The Bronco head adds that his new public company now has the organization and the money to become an aggressive consolidator in the contract drilling business and to expand into new core areas to further its organic growth. Zachary M. Graves, Bronco chief financial officer, notes that during the first two quarters of 2005, Bronco had an average of 12 rigs operating, generating revenues of about $20 million and EBITDA of around $6.3 million. Comparatively, for all of 2004, the company had an average of nine rigs operating, throwing off revenues of roughly $22 million and EBITDA of $1.5 million. The company expects to have 35 rigs operating by year-end 2005 and upwards of 45 rigs online by year-end 2006. This is based on its accelerated rig-refurbishment program plus its expansion beyond southern Oklahoma's Arkoma Basin into such areas as Colorado's Piceance Basin and Texas' Barnett Shale and Cotton Valley plays. "This assumes just refurbishment of existing rigs, and not any new acquisitions," Graves says. Adds Harrison, "We will, of course, make future acquisitions, but only to the extent that they're accretive."