SPAC to the Future: Special Purpose Acquisition Companies in the Oil & Gas Capital Landscape

Special Purpose Acquisition Companies (“SPACs”) have always been a component of the oil and gas capital landscape.   Given the current tightness in the capital-raising environment and availability of quality assets for sale, SPACs have seen a resurgence of popularity.  Private equity funds and other financial investors are sponsoring well-known management teams to enter the public market expediently using SPACs.

Special Purpose Acquisition Company

A SPAC is a publicly-traded company that uses initial public offering (“IPO”) proceeds to fund a known private acquisition or an unknown target to be determined after fundraising.  Also called a “blank check company,” the SPAC typically has no other activity or operations, therefore is 100% focused on an acquisition or merger.

IPO’s typically consist of units that are composed of both shares and warrants.  At least 90% of the IPO proceeds are placed in trust and the SPAC management has a strict deadline to complete a transaction.  With no ongoing or historical operations, SPACs are simpler than a traditional IPO, although a registration S-1 is still required by the SEC.

Further, according to SPAC rules, 80% of the IPO proceeds must be deployed in the first acquisition or merger.  SPACs allow public investors to participate in what is usually private equity activity, for example, leveraged buyouts.

Oil & Gas SPACs

In the past eighteen months, $3.5 billion of capital has been raised via SPACs with well-known management teams.

SPAC IPOs kicked off last year with Riverstone’s Silver Run Acquisition Corp.  The company completed a $500 million IPO, including overallotment.  In July 2016, retired EOG CEO Mark Papa led the company in the acquisition of Centennial Resource Development, Inc., focused on the Delaware Basin.  A second Silver Run Acquisition Corp underwent an IPO in March 2017, raising $1.035 billion, including overallotment.  This large SPAC is headed by former Anadarko CEO Jim Hackett.

April 2017 was a busy month for oil and gas SPACs.  Kayne Anderson chose former Williams executive Robert Pugason to lead Kayne Anderson Acquisition Corp.’s $350 million IPO.  NGP tapped former Encana President Roger Beimans to run its Vantage Energy Acquisition Corp., which raised $480 million.  Finally, KLR and Rosemore teamed up with Tema Oil and Gas managers to create Rosehill Resources in a $445 million deal.  Rosehill is focused on the Delaware Basin.

In May 2017, TPG formed TPG Pace Energy Holdings which raised $650 million, including overallotment.

SPACs in the Future

Various forms of alternative financing have been useful in filling the void left by traditional lenders since oil began its decline in 2014.  The industry continues to repair itself via restructurings and investors are becoming more eager to find top managers combined with quality assets.  SPACs will continue to be a fixture in the oil and gas industry in the near future.