-- Petroleum Place Inc. is issuing $355 million of credit facilities to refinance existing debt and pay a one-time dividend to its private equity sponsor, Vista Equity Partners.
-- We are assigning a ‘B’ corporate credit rating to the parent holding company, P2 Acquisition LLC, a provider of software and data solutions to the oil and gas industry.
-- We are also assigning a ‘B+’ issue-level rating to the operating company’s first-lien credit facilities and ‘CCC+’ issue-level rating to its second-lien term loan.
-- The stable outlook reflects the company’s improved margins and predictable and recurring revenue base.
On Dec. 10, 2012, Standard & Poor’s Ratings Services assigned a ‘B’ corporate credit rating to P2 Acquisition LLC. The outlook is stable.
We also assigned a ‘B+’ issue-level rating with a recovery rating of ‘2’ to operating company Petroleum Place Inc.’s $25 million revolving credit facility and $220 million first-lien term loan. In addition, we assigned a ‘CCC+’ issue-level rating with a recovery rating of ‘6’ to Petroleum Place’s $110 million second-lien term loan. The ‘2’ recovery rating indicates expectations of substantial (70% to 90%) recovery in the event of a payment default by the borrower and a ‘6’ indicates expectations for negligible (0% to 10%) recovery.
Our ratings on P2 Acquisition LLC, parent company of Petroleum Place, reflects the company’s “weak” business profile, characterized by its modest overall position in a fairly narrow segment of the oil and gas exploration and production (E&P) market and its “highly leveraged” financial profile under our criteria. Offsetting some of these issues is the critical role the company’s products play in facilitating the E&P process, good growth prospects, and a highly recurring revenue base. The company’s management and governance are ‘fair.’
P2 provides software and data solutions for the upstream oil and gas industry. The company offers products that address the land management and geospatial data, finance and accounting, production reporting and operations, and environmental, health, and safety needs that major oil companies as well as independent midsize and national oil companies in the U.S., Canada, and abroad must contend with. The company has more than 1,200 customers and more than 90% of revenues come from North America. The finance and accounting domain accounts for more than 40% of total revenues and land management and geospatial data domain 34%. The company has made acquisitions to further complement its own offerings.
We view the company’s business risk profile as weak, reflecting a modest overall position in the $600 billion-plus global E&P industry where it competes with numerous companies, including several much larger and long-established players in selected domains and that address specific verticals with greater resources. However, these factors are partially offset by its suite of products that provide opportunities for cross-selling and attracting new customers both in North America and abroad.
The E&P software market is a small part of the entire E&P cycle of expenditures, which we expect to continue increasing in the mid-single-digit area as the industry steps up its spending in unconventional and deepwater frontiers. With the critical role that software plays in the cycle, we expect spending in this sector to rise as well. Other major companies--such as Halliburton, Schlumberger, and SAP--that are long established and have greater financial resources as well as numerous smaller companies all provide products aimed at specific niches. However, P2’s extensive product offerings has helped it boost its modest overall share and win contracts with major oil companies.
The company also has long-established relationships with many major national oil companies as well as independents. The top 10 customers account for approximately 25% of revenues and the average tenure of its major customers exceeds 12 years. Ratings are supported by recurring revenues (nearly two-thirds of 2012 revenues) and renewal rates of 95%. The company’s gross margins have approached 70% and EBITDA margins have risen sharply in recent years largely through cost reduction initiatives to levels reflective of the software industry.
P2 will have a highly leveraged financial risk structure following the transaction with an estimated pro forma level of 6.0x for fiscal year ended September 2012. While leverage will decrease slightly over the next few years, we do not believe that it will drop materially below 5x. We expect future capital expenditures to be in line with historical levels at around 2% of revenues. Our base case assumes growth in the mid-single digits, in line with the growth in oil and gas E&P expenditures and EBITDA margins remaining near present levels. This results in leverage staying above 5x for the next several years, unless most free cash flow, which we estimate to exceed $25 million annually, goes to debt reduction.
We view P2’s liquidity as “adequate”. We estimate sources of cash to exceed uses over the next 12 to 24 months. Cash sources include free cash flow and access to a $25 million revolver. Uses would include working capital growth and modest capital expenditures. Loan amortization is minimal and the loans mature in fiscal 2019 and 2020. Pro forma cash is also modest at $10 million.
Other relevant aspects of P2’s liquidity include:
-- Sources of cash are likely to be above 1.2x in the next 12 months.
-- Net sources are likely to be positive during the period even if EBITDA falls by 15% to 20%.
-- There will be a maximum leverage covenant that we expect to be set at a level that will provide 30% headroom.
-- Besides the minimal amortization, there are no debt maturities during the next 12 to 24 months.
-- While the company has made acquisitions in the past and we expect it to make more in the future, no major acquisitions are assumed. No additional dividends are projected.
For the full recovery analysis, please see the recovery report on P2, to be published on RatingsDirect following this release.
The stable outlook reflects the company’s improved margins on its predictable and recurring revenue base as well as its good cash flow generation. We could raise the rating if the company can reduce leverage to below 5x while sustaining margins at present levels and expanding the business organically. We could lower the rating if increased competition leads to margin deterioration and a weakening business profile, and causes leverage to rise to above the mid-6x area.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Temporary contact number: Jacob Schlanger (917-371-5651).
P2 Acquisition LLC
Corporate Credit Rating B/Stable/--
Petroleum Place Inc. (The)
US$110 mil 2nd lien term bank ln due CCC+
Recovery Rating 6
US$25 mil revolver bank ln due 2017 B+
Recovery Rating 2
US$220 mil 1st lien term bank ln due B+
2018 Recovery Rating 2