FORT WORTH, Texas, Sept. 14, 2017 /PRNewswire/ -- A fund
affiliated with Q Investments, L.P., announced today that it sent a
letter to the Jones Energy, Incorporated's (NYSE: JONE) Board of
Directors calling on the Board to immediately start a process to
explore all strategic alternatives, which would include selling the
company through an equity transaction to allow stakeholders to
continue to participate in the upside of the merged entity. Q
Investments has a long track record of protecting shareholder
rights and successfully pursuing similar initiatives in numerous
other publicly traded companies such as Citadel Broadcasting,
Corp,, Houghton Mifflin Harcourt Co., Cedar Fair, L.P., and Quorum
Health, Corp.
As outlined in the letter, unless the board takes definitive
steps down this path, Q Investments intends to run its own slate of
directors at the upcoming annual meeting. Q Investments
believes that the board has the opportunity to recover a
significant amount of the value which has been lost by stakeholders
over the last several years, but the time to act is now.
A full text of the letter follows below:
Dear Gentlemen:
Currently, affiliates of Q
Investments, L.P. directly hold equity or shares convertible into
equity equal to approximately 5.7% of your common stock on a fully
diluted basis accounting for conversion of the company's preferred
securities and the Class A and Class B common shares. We also
hold an additional approximately 9.4% of your common stock or
shares convertible into common stock through cash settled swaps on
a fully diluted basis. In total, our exposure equals over 15%
of your common stock on a fully diluted basis.1
On July 20,
2017, as you recall, we sent you the attached letter
(Exhibit A) asking that you merely consider raising money
through a DrillCo structure by hiring an investment bank to
evaluate such a structure.
Your equity started 2017 at
$4.60 per share. Since that
point, oil and gas prices are approximately down only 9% and 8%
across the curve, while your stock has lost approximately 75% of
its value and now trades around $1.00!
We believe the market is clearly
sending you a wakeup call. We hope you are listening.
The market has lost patience. We believe the message is clear
– the company has too much leverage and even if you deliver
positive well results in the future, you are not going to fix that
problem. We believe you need to take immediate action or time
may be running out for the survivability of the
company.
We ask the board to immediately
start a process to explore all strategic alternatives, which would
include selling the company through an equity transaction to allow
stakeholders to continue to participate in the upside of the
combined entity.
We believe the management team has
done a reasonable job getting the company to this point given the
amount of leverage it has on the business. Unlike some of its
competitors, this management team has weathered the downturn, and
the company still has some equity value; however, the time
has come for the management team to cede to market forces and not
over-stay their welcome. If management had not taken action
to preserve capital by laying down rigs and using some of the
company's resulting liquidity to enter the Merge, we would likely
not even have the opportunity to discuss maximizing stakeholder
value.
But today, the market appears to
be telling us that the company is hamstrung with what it can do
because of the exceedingly high leverage, and it has little to no
flexibility. We believe it is detrimental to the value of our
equity for the management team and this board to try to run this
company on a shoestring budget – not only do you miss numerous
attractive opportunities, but you are also forced to make
non-economic decisions for the sole reason of preserving
liquidity.
The recent M&A activity
surrounding the company's Merge acreage is encouraging. Roan
has been launched, Alta Mesa just
sold their acreage, and there are numerous other deals. The
potential transactions available to the company are broad and range
from selling significant assets, raising DrillCo financing, to
merging the business with a company that has a much stronger
balance sheet. This board has the opportunity to create
significant value for the stakeholders, but the time to act is
now.
It is time for the company to
retain advisors, announce it has started to look at all strategic
options and begin to formally field proposals. Assuming
attractive equity participation from any potential merger partner,
we believe the most viable path is to sell the entire company;
however, we are open to any and all alternatives. We believe
the status quo is not sustainable, and we are no longer willing to
simply wait and watch our remaining equity value be destroyed.
Unless the board takes definitive
steps down this path, we intend to run our own slate of directors
at the upcoming annual meeting. With the recent departure of
the two Metalmark directors, we are concerned outside shareholders
are not properly represented on the board, and the lack of any
significant action to address the company's situation only
reinforces our view. We find it hard to understand why a
financial advisor has yet to be hired despite the high leverage and
the paltry stock price hovering around $1.00. How can the company claim to be
working seriously on alternatives if an advisor has yet to be
retained?
As you recall, ownership of your
equity is very concentrated with the four large holders (including
us) having exposure to over 50% of your outstanding
shares. We believe these major shareholders are also
becoming impatient with your current progress and are equally
frustrated seeing the stock fall below $1.00.
We hope that we can work together
through this process, but rest assured we are going to be vigilant
in protecting and maximizing our value.
Sincerely yours,
Q Investments, L.P.
Exhibit A
July 19,
2017
Dear Gentlemen:
First and foremost, we would like
to commend the management team for successfully navigating these
turbulent times in the oil and gas market while also positioning
Jones Energy for profitable growth. We are the first to
acknowledge this has not been an easy task; however, the company is
at a critical juncture.
While Jones Energy is well positioned to participate
in the highly-economic emerging plays in the Anadarko basin, we suggest the company retain
an investment bank to explore raising $150
million of DrillCo capital, which we believe will be to the
advantage of all shareholders. A facility of this size would
be adequate to fund up to 100% of all disclosed, planned drilling
and completion capital expenditures in the Cleveland for at least the next twelve
months. To be clear, we are not advocating for spending more
money in the Cleveland (neither
for drilling more wells nor for going after new zones), but rather
preserving the company's asset based lending availability so that
the company ensures it has the liquidity to pursue potentially more
attractive options.
Why we believe a DrillCo structure
makes sense for Jones Energy;
- Very few E&P companies have the level of experience and
track record that Jones Energy has in the Cleveland. Having
drilled hundreds of horizontal wells in the play should allow Jones
Energy to raise DrillCo capital far cheaper than most competitors,
especially those competitors looking to use someone else's capital
to exploit an unproven asset.
- Raising fresh capital to fund all drilling and completion
activity in the Cleveland would
preserve significant liquidity and allow management to keep all of
its options open.
- Generating additional liquidity at the asset-level will allow
management to be able to pursue other opportunities without the
massive dilution associated with raising equity at today's
depressed share price. The cost of raising equity capital is
huge. The cost of raising DrillCo capital is likely between
12%-15% based on recent deals.
- Preserving availability on the company's asset based lending
facility will provide management with further flexibility, and it
essentially de-leverages the balance sheet.
- Private Equity firms have recently raised hundreds of billions
of dollars and, as shown by Carlyle's recent partnership with EOG
Resources, Inc. in Ellis County,
Oklahoma, these firms have shown an appetite for asset-level
drilling and completion facilities. We believe Jones Energy
would have little trouble finding cost-competitive DrillCo
funding.
- While we acknowledge DrillCo capital is going to be more
expensive than borrowing under the company's asset based lending
facility, we do not believe this is relevant. Whether the
cost is 12% or 20%, if management believes they can generate
returns well in excess of these rates, it is all incremental value
creation for shareholders, and we would urge you to consider a
DrillCo in this light. The key to focus on is the spread
between cost of funds and the IRR obtainable. Yes, it would
be ideal to borrow a limitless amount at 3% and invest at 35%, but
if your liquidity is already stretched and you will need additional
funds for 35% to 50% IRR projects, then accepting a 20% spread
between cost of funds and IRR while increasing liquidity and
de-leveraging by transferring risk away from equity holders to
DrillCo makes a lot of sense.
- A DrillCo is able to transfer risk away from equity holders in
the same way the sale of a working interest spreads development
risk across multiple parties. While drawing on the asset
based lending facility might have a cheaper "headline" cost of
capital, we think using a DrillCo to fund a portion of the
existing development plan will decrease equity cost of
capital by sharing some new development risk with the DrillCo
provider. This preserves liquidity, de-risks the equity and
de-levers the capital structure.
- It costs the company very little to explore the DrillCo
option. Alternatively, the cost of identifying an attractive
acquisition opportunity after fully utilizing the asset based
lending facility could be substantial (in the form of either a
missed opportunity or massive dilution to your shareholders –
neither of which we want to see).
We, presumably like many Jones
Energy shareholders, are very excited about the upside potential of
Jones Energy's Merge acreage. We would like to see the
company preserve as much capital as possible to both delineate and
opportunistically acquire incremental acreage in the Merge –
although there are many possible uses for newly available asset
based lending facility capacity, which can be discussed!
Preserving $150 million of availability on the company's
asset based lending facility in this environment will be viewed as
very smart by shareholders and analysts, as we believe it will
guarantee access to capital if Jones Energy identifies an
attractive acquisition target or has a need for capital to ensure
liquidity in the future. The alternative is raising unsecured
debt at the exorbitant current market implied levels or further
diluting your shareholders at today's share price, both of which we
believe will be viewed very unfavorably by your equity and debt
investors.
In the past, management has
expressed openness to selling an equity participation in some
acreage as a means to raise capital; we would like to emphasize
that a DrillCo facility is effectively the same thing.
However, a DrillCo facility would allow Jones Energy and its
shareholders to keep a higher proportion of the equity
upside. In this way, we believe DrillCo capital is
preferential to the outright sale of a participation.
We have spoken with many of your
larger shareholders and believe all are very supportive of at least
exploring a DrillCo. We urge you to do the same.
All we are asking is that you explore this option by hiring
an investment bank. We will be disappointed if management is not
open to at least exploring what could be an extremely attractive
option. To be clear, we are completely agnostic as to what
firm you might choose as a DrillCo financing partner – the most
important thing is that you at least explore the option.
If the terms end up being
unattractive based on the facts and circumstances at the time,
shareholders will no doubt support passing on the DrillCo, but that
is something that remains to be seen.
In closing, we are very excited
about the future of Jones Energy. We hope that you receive
this letter in its intended spirit of collaboration and that we can
continue to work together. We look forward to what the
futures holds.
Media Contact:
Jonathan
Morgan
Perry Street Communications
212-333-5525
jmorgan@perryst.com
1For SEC
reporting purposes, direct ownership is 9.5%, and cash settled swap
exposure is 14.9% or approximately 25% in total.
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SOURCE Q Investments, L.P.