I thought about submitting an article that merely said “Ditto” when describing the most recent E&P IPO for Vantage Energy Acquisition Corp. (NASDAQ:VEACU). I decided that might not pass muster with the editors on Seeking Alpha, so I will provide actual details here, even though the structure and terms are virtually identical to an earlier offering by Centennial Resource Development (NASDAQ:CDEV) and recent offerings by Silver Run Acquisition Corp. II (NASDAQ:SRUNU) and Kayne Anderson Acquisition Corp. (NASDAQ:KAACU).
For those who may have missed my article on SRUNU (here) or KAACU (here), the structure of VEACU is virtually identical. In the IPO, VEACU raised $480 million by selling 40 million units through Citicorp, Deutsche Bank and Credit Suisse. In a “blind pool” or “SPAC” (special purpose acquisition corporation), a new company with no existing assets raises money to invest in future opportunities, in this case in the energy business. Investors are asked to trust that the founders will identify and act to acquire attractive assets/businesses, while at the same time investors are also given the right to get almost all of their money back if the SPAC does not close on a business combination within 24 months of the IPO or when the initial transaction is proposed by the founders/management.
VEACU, as well as the others mentioned above, structured its offering much like a private equity fund, in which its founders purchase very cheap initial shares and obtain a 20% share ownership. Investors who contributed the $480 million get shares entitling them to the remaining 80% of common shares. Of the total contribution, $5 million is specified as common equity, while $459 million is specified as “Common stock, subject to redemption.” The balance of net proceeds is designated as deferred underwriting commissions.
The units consist of one share and 1/3 warrant to purchase one share at $11.50. Only whole warrants (3 X 1/3) may be exercised. Only the units will trade until 52 days from the IPO, at which point they may be separated by holders into common stock (VEAC) and warrants (VEACW). The warrants become exercisable on the later of the date on which the initial business combination occurs and 12 months after the IPO, and they expire 5 years after the date of its initial business combination transaction. The warrants can be redeemed, at the option of VEACU in its discretion, at any time after which the common stock trades at $18 for 20 days out of a 30-day trading period. Such calls for redemption typically result in warrant owners converting their warrants into common stock, which can require additional cash consideration (i.e. $11.50 per share) or, as has recently been the case in CDEV, by allowing a “cashless” exercise in which investors receive additional shares based on the difference between $11.50 and the then-market price.
NGP is committed to purchase 7.33 million private warrants, exercisable at $11.50/share, for $1.50/share at the closing of the IPO. In addition, a substantial benefit is NGP’s forward commitment to have institutional funds it controls invest $400 million by purchasing 40 million common shares and 13.3 million warrants on the same terms as the IPO, such investment to occur on the closing of the initial business combination. In effect, at that point in time, VEACU will have equity capital of almost $900 million, increasing the size of the deals it can pursue.
The “nearly free look” nature of the transaction is intended to lessen the risk of entrusting funds with no specific usage initially. Assuming a deal is identified, the specifics are set out in detail and investors are given 30 days in which to decide whether to continue to hold their common shares or to require the company to redeem them for what amounts to 95%+ of their investment. In that respect, the initial investment acts more as an option to take advantage of a potentially attractive future acquisition; time will tell whether the market cooperates with the hoped-for result.
Some readers may not recognize Natural Gas Partners (“NGP”), the founder and sponsor of VEACU. NGP is one of the largest private equity, energy-focused firms in the U.S., along with other PE firms like EnCap, Riverstone, Ares, Kayne Anderson and Quantum. More information can be accessed (here). According to the prospectus:
Our sponsor is a portfolio company of NGP XI, and is owned by NGP XI and VEP, an entity controlled by our Chief Executive Officer, Roger Biemans. NGP has considerable experience investing in the energy industry. Since NGP’s founding in 1988 by Kenneth A. Hersh, David R. Albin and John S. Foster, NGP Funds have committed approximately $17.0 billion to more than 200 portfolio companies across eleven private funds. NGP has experience investing across a variety of commodity price cycles and a track record of identifying high-quality assets, businesses and management teams with significant resources, capital and optimization potential.
Like the previous SPAC offerings, NGP has teamed up with an experienced E&P executive as its CEO. VEACU’s CEO, Roger Biemans, has 35 years of experience in E&P, as described below:
Mr. Biemans was most recently Chairman and CEO of Vantage Energy LLC, a private company he founded in 2006, before selling to Rice Energy Inc. in a $2.7 billion transaction in October 2016. Prior to forming Vantage Energy, he was President of EnCana Oil & Gas (USA) Inc., where he led EnCana Corp.’s USA growth platform from 2000 through 2006, and from 1996 through 2000, served as Vice-President & Team Lead for AEC Oil & Gas (EnCana Corp.) in Alberta, Canada. Mr. Biemans holds a BSc in Mechanical Engineering from the University of Calgary.
Obviously, the relationships already established do not directly help VEACU, but do serve as a potential conduit for transactions and show the depth of management VEACU has. NGP likely sees most deals that are being marketed and can also seek out its own candidates, with a very broad mandate and experience in upstream, midstream and services businesses. While the scope of NGP’s involvement in E&P may well create potential conflicts of interest in deciding which deals get “allocated” to which entity, there will be independent conflict reviews and fairness opinions given in some fashion, and/or such issues will be clearly disclosed at the time of any future transactions. The redemption feature for the initial deal also gives investors the right to put back shares without explanation if investors do not feel comfortable with what is proposed. NGP will have a great deal of invested time and a capital incentive to ensure that VEACU is as successful as it can be in the current environment, not to mention a reputation to protect.
Why now? NGP has existing private/institutional funds already, but having a public vehicle that can grow offers many potential synergies if they are successful. Also, I would expect that the other offerings by Riverstone (CDEV, SRUNU) and Kayne, and particularly the strong performance by CDEV, have raised interest throughout the investment management industry. It is likely not a coincidence that the filing comes only a few months after NGP completed a huge deal with a “predecessor” of Vantage, the $2.5 billion sale of Vantage Energy affiliates to Rice Energy (NYSE:RICE). The assets, primarily in the Marcellus/Utica, were originally funded for a fraction of what they sold for.
VEACU’s mandate is very broad and flexible, allowing it to take advantage of whatever energy transaction comes along that meets its acquisition criteria. It obviously thinks that the market for assets will be active, what with companies restructuring their own asset bases to take advantage of their best assets, as well as potentially distressed situations. The nice thing is that there is no need to speculate (much) now, since the redemption feature allows investors to react at the time of an initial proposed business combination. My own opinion is that leveraged companies will have a difficult, if not impossible, time surviving in a pricing environment of $50-60/bbl.
How should readers differentiate the SPACs that have come to market recently? SRUNU and VEACU are very similar, with strong sponsors, experienced managements and forward commitments for additional equity capital to be employed largely in upstream companies. I believe KAACU may focus more on midstream opportunities, and it does not have the same size or commitment level the other two have. Without seeing what each company will propose as their initial business combination, it is tough to know which one will do better (or worse), and my approach will be to invest in all three companies as “options” to invest in their identified deals in the future. By sizing positions to avoid putting all eggs in one basket, investors may reap those benefits and still achieve diversification of risk based on the source and specifics of the deals identified.
In summary, VEACU, much like its fellow SPAC companies CDEV, SRUNU and KAACU, offers a near ground-floor opportunity to take advantage of an investment manager’s expertise without risking much on the front end. Nothing about any of the 3 companies suggests that investors need to focus on only one, and a “portfolio” approach of investing in them all might well make sense. While it is always possible that no successful business combinations will be achieved, I think the market will continue to be very active ($20 billion already in M&A YTD and another $35 billion in assets being marketed). That makes VEACU a worthwhile speculation for me, and in any event a company that should be followed by E&P investors.
In addition to stocks mentioned in the article, readers might consider the following ETFs to be relevant to oil and natural gas product pricing (including leveraged long and/or short positions that may pose substantial risks): USO, OIL, UWTI, UCO, DWTI, SCO, BNO, DBO, DTO, USL, DNO, OLO, SZO, OLEM, OILX, UGAZ, DGAZ, ERY or ERX.
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Disclosure: I am/we are long SRUNU, KAACU, VEACU.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.