Jagged Peak Energy IPO: What Investors Need to Know

By Eric Volkman Markets Fool.com

The Permian Basin, which sprawls across Texas and a piece of New Mexico, isthehot U.S. oil and gas play now. It's "stacked," meaning that there are multiple oil-rich rock layers piled on top of one another. Its acreage is soaked with black gold, making it cost-effective even in these times of relatively depressed oil prices.

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Image source: Getty Images.

It's no wonder that some of the top energy companies -- Chevron, ExxonMobil, andApache, to name a few -- are active in the Permian.Smaller operators have gotten into the action, too. One of these, Jagged Peak Energy, is on the brink of launching its initial public offering. Here's a brief look at the company and its upcoming issue.

Black-gold rush

Jagged Peak has planted its flag in the Delaware Basin, a subregion anchoring the western end of the Permian. The company says that it "held an average 89% working interest in approximately 68,121 gross (60,875 net) leased or acquired acres," as of the end of September 2016.

At that time, it had completed 16 horizontal wells, and over Q3 of that year was producing 6,366 barrels of oil equivalent per day (Boe/d) of product, on average.

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Jagged Peak is a young company, having been founded in 2013 by an affiliate of specialty private equity firm Quantum Energy Partners. Despite its youth, however, it's got years of experience behind it -- CEO and near-namesake Joe Jaggers has been in the business for decades, most notably as head of Ute Energy, an oil and gas company that was once in the Quantum portfolio.

Jagged Peak has a young energy company's financials, but its revenue has zoomed northward -- it more than doubled on a year-over-year basis in the first nine months of 2016, to over $51 million. But operating expenses rose, too, again more than doubling, which deepened the company's loss to almost $8 million from the year-ago deficit of around $700,000.

This Fool's take

Jagged Peak is an ambitious company on the move. That 6,366 Boe/d production level is well up from the 345 Boe/d figure of Q1 2014, for a compound annual growth rate of 220%. In 2016, three rigs were in operation, a number the company aims to double this year.

Increased production means higher costs, of course. Jagged Peak plans to allocate around $527 million in capex this year to drill and complete wells. That's well above 2016 levels; in the first three quarters of that year, the company spent approximately $87 million on capex, not including acquisitions.

While Jagged Peak might operate at a net loss, given the richness of its play and the presence of seasoned management, it's packed with potential, particularly on any significant upward move in the oil price.

The company surely hopes that the trajectory of its stock will be similar to that of 2016 market newcomer Centennial Resource Development, a fellow Permian Basin operator. Centennial's stock price has risen by 85% since its debut. However, shares of fellow recent industry IPOsWildHorse Resource Developmentand Extraction Oil & Gas-- which, admittedly, aren't active in the Permian -- are both down from their first day closing prices.

Plus, the Jagged Peaks and the Centennials of the market have to vie for investor dollars with much bigger guns active in the play, like Chevron or Apache. Jagged Peak is far from the only company active in the Permian.

That said, the company occupies some excellent real estate, and has the experience and ambition to benefit from its efforts. For those who believe that oil and gas investments have a future, especially those busy pumping in the Permian, Jagged Peak shares could be worth buying.

The details

Jagged Peak's shares are slated to hit the market on Friday. They will be listed under the ticker symbol JAG on the New York Stock Exchange. Just over 38.2 million shares will be sold at a price of $16 to $18 apiece. Nearly 26.5 million of those shares are on offer from the company, with the rest being sold by affiliates and insiders.

The company said the proceeds will be utilized chiefly to fund capital expenditures and to retire debt. It says in its IPO prospectus that it does not "anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future."

The joint book-running managers of this Texas-sized issue areCitigroup,JPMorgan Chaseunit J.P. Morgan,Credit Suisse,Goldman Sachs,Royal Bank of Canada's RBC Capital Markets, andWells FargoSecurities.

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The author(s) may have a position in any stocks mentioned.

Eric Volkman has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.