Silver Run Acquisition II (SRUNU): A replay of SRA1’s 92% 1-yr return? A year ago, we offered a new IPO company as an Off the Radar Screen choice – Silver Run Acquisition Corp SRA1. Due to increase risks, we don’t usually review IPOs or newly formed companies, especially in the high-risk area of oil and gas exploration. There are plenty of small-cap carcasses discarded along the side of the energy superhighway.
However, SRA1 is different.
The investment strategy is to buy into a “special purpose acquisition corporation” SPAC, which is also known as a “blank check” corporation, and is formed with the specific purpose of building a new company with fresh capital to purchase oil and gas assets. In this type of company, investors are relying on the partners’ management abilities to locate, purchase, and execute a business plan. In the case of SRA1, the attraction is Mark Papa, founder and retired CEO of EOG Resources (EOG), one of the industry’s most revered managers. Papa came out of retirement for the opportunity to develop and manage SRA1. The original $400 million blank check nature of the structure, combined with issuing addition shares over the past year, has allowed Papa to build an $3.6 billion market cap oil and gas E&P company with no debt.
Backed by Riverstone Holdings, SRA1 has morphed into Centennial Development Corp (CDEV) and share prices have risen from a post-IPO price of below $9.48 (including excised warrants) to $18 today. Investors who bought the SRA1 SPAC shares received 1 common share and 1/3 of a warrant. Recently, the warrants were converted into additional shares. CDEV is currently focused on the opportunities in the Permian Basin, one of the hot drilling areas in the US. Of the 809 drilling rigs currently operating across the US, almost 40% are working in the Permian Basin. Analysts at Wunderlin recently upped its price target on CDEV to $28.
Now along comes Silver Run Acquisition II (SRUNU) another Riverstone Holding SPAC. The concept is to duplicate the success of CDEV. Similar to Papa, James Hackett, former CEO of Anadarko Petroleum (APC), is the attraction of SRUNU.
During his CEO tenure at APC from 2003 to 2012, Hackett proved to be a good steward of shareholder capital, taking on a minimum of debt and equity issuance while focusing on delivering above-average returns on invested capital. Hackett’s management style included an insistence on maintaining a strong balance sheet. which has helped APC weather the current low-price environment.
Silver Run Acquisition II recently had its IPO and sold to investors 100 million shares of stock and 33 million warrants, including overallotment, worth $1.0 billion. The IPO proceeds are being held in escrow until the company starts making acquisition transactions.
Riverstone owns 20% of SRUN's current shares, giving them an incentive to make sure subsequent transactions are in the best interest of all shareholders. In addition, Riverstone has given a forward commitment to purchase $400 million in common shares and warrants (40 million shares plus 13.3 million warrants) at $10 per share at the time of the initial purchase transaction. Combined, Riverstone could own upwards of 37% of SRUN.
The SRUNU “units” consists of one share of common stock and 1/3 of a warrant to buy additional shares at $11.50.
While CDEV's CEO Mark Papa had broad experience in onshore oil and gas, it should be noted that Mr. Hackett's expertise also includes companies with significant offshore assets, including Anadarko, Devon, Ocean and Seagull. That is not to say that the offshore arena would be an area of focus, but it is one possibility.
While the use of SPAC structures are becoming more popular, the risks involved have not diminished. As unproven entities, it is extremely important investors feel comfortable with management’s past abilities as this is all they have to evaluate, coupled with the expertise of Riverstone. On this front, I support both Hackett and more importantly Riverstone Holdings.
Speculative investors may want to review SRUNU as the IPO and Riverstone commitment has generated over $1.4 billion in capital for Mr Hackett to spend – one sizeable blank check and definitely sufficent capital to acquire assets that are being offered on the cheap by financially distressed energy firms.
The key to both SRUNU and CDEV is their ability to find undervalued oil and gas assets. In these days of stress and over-leverage in the energy field, private equity firms are offering stiff competition at times. Yet, both SPAC companies have the envious position of carrying no debt in an industry overflowing with bad loans.
Having $1.4 billion in cash and no debt certainly improves SRUNU’s negotiating position. In today’s energy segment, there should be plenty of profitable opportunities to pick from among the dying carcasses lying along the side of the energy superhighway.
However, speculative and unproven it is and investor need to be comfortable with this level of risk.
As an add-on to my position in CDEV, I also bought into SRUNU.
This article first appeared in the April 2017 Issue of Guiding Mast Investments. Thanks for reading. George Fisher