Silver Run Acquisition: New Energy Vulture Fund to Compete with PE Firms

Silver Run Acquisition: New vulture fund in the energy sector.  Silver Run Acquisition (SRAQU) is a new IPO focused on investing in oil and gas opportunities.  Similar to KKR, Blackstone, and other private equity firms, SRAQU was formed to acquire distressed assets from financially shaky E&P firms. Silver Run will look for companies that are fundamentally sound but under-performing due to current commodity prices, according to its IPO prospectus.

Bloomberg reported on February 2 that several major private equity firms, such as Carlyle Group, Apollo Global Management, Blackstone Group, and KKR, are in the midst of taking massive positions in indebted oil companies. KKR, for example, provided $700 million in credit to Preferred Sands LLC, a producer of sand used to frack oil and gas wells. In exchange for the emergency loan, which carried a 15 percent yield, KKR took a 40 percent ownership stake in the company. Blackstone did a similar deal with Linn Energy LLC, another struggling oil firm.

Mark Papa, the "Godfather" of U.S. shale oil, retired from EOG Resources and has come out of hibernation to manage this opportunity.  Papa is known as a pioneer in the shale business and in 2007 switched EOG’s focus from finding natural gas to shale oil. Papa acquired some of the initial (and very low cost) leases in the Eagle Ford and Bakken shale oil plays for EOG.  These have since become prolific producing regions for shale oil.

Mark Papa’s new firm raised $450 million in its IPO in Feb.  From the PR Newswire:  The Company's units began trading on the NASDAQ under the ticker symbol "SRAQU". Each unit consists of one share of the Company's Class A common stock and one-third of one warrant. Each whole warrant entitles the holder thereof to purchase one whole share of the Company's Class A common stock at a price of $11.50 per share. Once the securities comprising the units begin separate trading, the Class A common stock and warrants are expected to be listed on the NASDAQ under the ticker symbols "SRAQ" and "SRAQW," respectively. The warrants become exercisable either 30 days after completion of an initial investment or by Feb 2017 – whichever is later

In Feb, Papa was quoted:  "I would predict in the next six to 12 months, you’re going to see a decimation of the industry — just bodies (companies) all over the place — a lot of bankruptcies, Chapter 7’s and Chapter 11’s.   From those ashes, you’re going to see the companies who survive, a lot of them will be grievously wounded. And the management teams who survive will be a lot more conservative as they go forward. We are pretty much convinced that there are no large shale plays in North America containing oil that are unfound.  It would surprise me very much if the industry discovered another Eagle Ford or Bakken." 

Unlike other vulture funds, Silver Run will be acquiring operational control and ownership, not just offering high interest loans to distressed firms.  

Based on the belief there are no unfound large shale plays in the US, Papa will be looking for existing businesses or land leases that can be acquired within these existing fields. 

Papa now has a $450 million blank check to develop a business around the distressed state of the industry.  Silver Run could leverage its potential asset base by taking on reasonable amounts of debt, by bringing in private equity joint venture partners but must retain a minimum of 50% of voting ownership, or by issuing new shares.

The prospectus is found linked below:

If investors are looking to bottom fish in the energy sector and willing to take on the substantial risk of an IPO, Silver Run is worthy of consideration. As with all IPOs, quality of management is critical, and with the pedigreed of this management, Silver Run has an above average chance of success in this low oil price environment.  

This article first appeared in the April issue of Guiding Mast Investmentsw.  Thanks for reaeding,  George Fisher