Less than one month ago investors bet $1 billion on James Hackett, former President and CEO of Anadarko Petroleum Corp.  Silver Run Acquisition Corp. II is a blank check company that will leverage James Hackett’s knowledge of the Eagle Ford Shale and Permian Basin to fund an opportunistic acquisition.  Silver Run II was created by the Riverstone Holdings LLC, the bank that successfully started the blank check company over a year ago now known as Centennial Resource Production LLC. The original stock sale for Silver Run Acquisition Corp I, which raised $900 million is expected to exceed $1 billion.  If the banks managing the deal exercise their options to buy shares, which they generally do, the Company would be tied for the record largest blank-check offering.  Before we review the recent uptick in investment in oil and gas blank check companies, we will review the basics of blank check companies and special purpose acquisition companies (SPACs).

What Is a Blank Check Company?

A blank check company, as defined by the SEC, is a “development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person.”  Because the acquisition opportunity has yet to be identified, investors do not know how their funds will be spent, so they write a blank check to the company.  One kind of blank check company is a special purpose acquisition company (SPAC).

What Is a SPAC?

Alice Hsu, Partner at Akin Gump Strauss Hauer & Feld LLP, explained “SPACs are newly formed shell companies, without any revenue or operating history, that raise proceeds in an IPO” in order to finance a merger or acquisition in a specific timeframe.  The money raised goes into a separate trust that can only be used for an eventual merger or acquisition.  At least 80% of the assets held in the trust account must be used to fund the acquisition of the target business or businesses.  If a SPAC does not meet certain goals within a specified time frame, generally 18 to 24 months, then the company will liquidate and return the pro-rata share of funds to investors.

SPACs raise capital through IPOs, in which one unit and its attached warrant is typically priced at $10, making them “penny stocks.”  A short period after the IPO, the common stock and the warrants comprising one unit will begin separate trading at which point holders have the option to continue to hold their units or separate them.  SPACs are usually sponsored by an industry guru whose experience and knowledge of the industry gives them a unique position in to pursue acquisitions.   In 2007, there were 58 SPACs that completed IPOs.  But until 2016, oil and gas SPACs were uncommon.

Oil and Gas SPACs

Since the crash in oil prices in 2014, many oil and gas companies found themselves in dire need of capital.  Many distressed companies sold off non-core assets for heavy discounts in order to quickly generate cash to pay off debt and avoid bankruptcy. This gave investors a unique opportunity to pick up assets at low prices and SPAC’s provide a source of private capital to do this.

The first oil and gas SPAC, Avondale Acquisition (AACOU) founded in April 2015, never completed an IPO as its original sponsor former CEO of Chesapeake Energy & founder of American Energy Partners, LP, Aubrey McClendon, died in a car crash in March 2016.  The Company formally withdrew its plans for an IPO to raise $200 million in November 2016.

In early-2016 two oil and gas special purpose acquisition companies (SPACs) successfully completed IPOs.  This included 2016’s largest U.S. IPO as of February 23, 2016: Silver Run Acquisition Corp.  Corrie Driebusch and Ryan Dezember of the WSJ said the size of the deal in “an otherwise frozen market for initial public offering” […] “reaffirms investors’ appetite for bottom-feeding in the oil and gas business.”  The timing the deal shows that investors believed in early 2016 that the oil and gas market had bottomed out and would rebound within the next two years when its term to make a deal would expire.

Where Are Oil and Gas SPACs Investing?

Silver Run Acquisition Corp (SRAQU) was sponsored by Mark Papa, former CEO of EOG Resources.  Silver Run Acquisition Corp raised $500 million when it began trading on the NASDAQ.  In July 2016, Silver Run acquired a controlling interest in Centennial Resource Production LLC, an independent natural gas company located in the core of the Delaware Basin.  Centennial has acreage in Reeves, Ward, and Pecos Counties.  The transaction was financed by Riverstone Holdings LLC, an energy investment banking firm.  After the transaction Silver Run was renamed Centennial Resource Development Corp (CDEV).

KLR Energy Acquisition Corp. (KLRE) raised approximately $85.1 million in its IPO.  It is sponsored by Gary Hanna, former CEO of EPL Oil and Gas Inc.  The Company announced a meeting date for stockholders to vote on the business combination with Tema Oil and Gas Company.  The meeting is scheduled for April 26, 2017.  Tema Oil and Gas Company is a privately held company operating in Texas and New Mexico and holds acreage in the core of the Deleware Basin in Loving County.  After the Closing of the transaction the Company will change its name to Rosehill Resources Inc. and will trade on the NASDAQ under the tickers ROSE, ROSEU, and ROSEW.

Kayne Anderson Acquisition Corp. started by a Los Angeles private equity firm which focuses on pipelines, raised $350 million in an IPO on March 30, 2017.   This SPAC is different than most others in the oil and gas space as they do not have one industry guru as a sponsor but rather are sponsored by Kayne Anderson Sponsor, LLC which is most likely run by a team of investors at Kayne Anderson Capital Advisors, LLC.

After listing on the NASDAQ just last week, Vantage Energy Acquisition Corp. (VEACU), a blank check special purpose acquisition company, raised $480 million.  Vantage Energy Acquisition Corp. is sponsored by Roger Biemans who was the CEO of Vantage Energy until it sold to Rice Energy last October.  It is likely that Vantage Energy will pursue investment opportunities in the Marcellus Shale, as Roger Bieman’s former experience was centered there.

Additionally, it is rumored that Occidental Petroleum is in the talks to launch a SPAC sponsored by former CEO Stephen Chazen.

Conclusion

While the majority of M&A has been focused in the Permian Basin over the last year, the varying investments of oil and gas SPACs demonstrate that the knowledge of the industry experts is what investors find valuable.  Investment by SPACs has been higher of course in the Delaware Basin, but some of the SPACs are focusing on natural gas in the Marcellus and Utica as well.

The continuation of investment in oil and gas SPACs shows that investors still believe that there are opportunities to find bargain investments in the oil and gas space throughout many basins.  The emergence of oil and gas SPACs however is still recent and there is little history to understand the success of such companies.

Mercer Capital has significant experience valuing assets and companies in the energy and construction industries.  Our valuations have been reviewed and relied on by buyers and sellers and Big 4 Auditors. These valuations have been utilized to support valuations for IRS Estate and Gift Tax, GAAP accounting, and litigation purposes. Contact a Mercer Capital professional today to discuss your valuation needs in confidence.