Mikaila Adams
OGFJ Associate Editor
In a transaction valued at roughly $1.8 billion, privately-held oil and gas exploration and production company Chaparral Energy Inc., will merge with United Refining Energy Corp. (URX), a publicly-held special purpose acquisition company (SPAC) to become a publicly-traded company.
SPACs were popular in the 90s and, with the help of new guidelines, have seen a resurgence in recent years. In some cases, SPACs raise money to buy firms, but in this case, the SPAC is merging with the oil and gas company to help it go public. A similar transaction was recently completed when Denver-based independent oil and gas company Resolute Natural Resources Co. merged into Hicks Acquisition Co. I Inc.
In the case of Oklahoma City-based Chaparral, the merger with URX solidifies the company's "strategic goal" of listing with a major stock exchange.
The road to merger
In the fall of 2008, Chaparral looked on the verge of attaining its public listing when it entered into a merger agreement with publicly-traded Edge Petroleum Corp. In December of 2008 the deal fell through due to financing issues. Edge Petroleum filed for Chapter 11 bankruptcy in early October of this year.
Chaparral is hoping the pairing with URX, formed in December 2007 for the purpose of acquiring businesses or assets in the energy industry, is the right fit. Upon closing of the transaction and approval from the exchange, the combined company, to be named Chaparral Energy Inc., anticipates moving from the NYSE Amex to the NYSE under the symbol "CPR".
John A. Catsimatidis, URX’s current CEO and chairman, noted, "We have spent almost two years looking for the right target for our SPAC, and I believe this is the best opportunity that we have considered. Chaparral's management team has demonstrated the ability to find lucrative oil and gas properties at prices that have resulted in superior returns on investment."
It has approximately $452 million in trust as of September 30, 2009.
Formed in 1988, Chaparral has acquired and enhanced properties in its core areas of the Mid-Continent and the Permian Basin, as well as in the Gulf Coast, the Ark-La-Tex region, North Texas and the Rocky Mountains.
As of June 30, 2009, Chaparral’s proved reserves were 146 million barrels of oil equivalent, 62% of which is oil, and its average daily production for the first half of 2009 was 21,000 barrels of oil equivalent per day. Since 2003, management has increased Chaparral’s reserves and production by approximately 21% per year.
Additionally, Chaparral holds several EOR projects, some under way and some in the initial stages.
"This merger will give Chaparral access to capital we need to exploit our large inventory of drilling and development opportunities and to significantly step up our EOR program."
Transaction details
The senior management of Chaparral, including Mark A. Fischer, its co-founder, chairman and CEO; Joseph O. Evans, CFO; and Robert W. Kelly II, senior vice president and general counsel, will continue to lead Chaparral. Catsimatidis will become executive chairman of the board of the combined company.
Chaparral expects 2009 production to be approximately 7.6 million barrels of oil equivalent and 2010 production to be approximately 9.9 million barrels of oil equivalent, a 30% increase over 2009. The 2010 estimates were prepared on a well-specific basis and based on capital expenditures of approximately $410 million. At current strip prices, Chaparral's 2010 EBITDA estimate would be approximately $335 million.
Its 2010 capital expenditures will be funded through discretionary cash flow, anticipated to be around $250 million, and additional liquidity provided by the combination with URX. Assuming a combined company stock price of around $10 per share, total enterprise value would be $1.8 billion, implying a multiple of 2010 estimated EBITDA of 5.3 times.
Pro forma for the proposed transaction Chaparral will have total debt to projected 2010 EBITDA ratio of 2.6x and total debt to proved reserves ratio of $6.02 per barrel of oil equivalent (using June 30, 2009 reserve estimates).
Chaparral shareholders will own 59% of the combined company, URX shareholders will own 35% and the URX Sponsor will own 6%.
Closing of the transaction, which is expected no later than December 11, is subject to certain conditions, including the refinancing of Chaparral’s existing revolving senior secured credit facility and receipt of a minimum of $250 million of cash from URX upon closing.
Both companies anticipate Chaparral will receive roughly $300 million in cash upon closing. The cash will be used to reduce Chaparral's outstanding debt and for working capital and general corporate purposes.
Deutsche Bank Securities Inc. and Maxim Group LLC are acting as financial advisors to URX and New Century Capital Partners Inc. provided a fairness opinion. URX’s legal counsel is Ellenoff Grossman & Schole LLP.
Morgan Stanley & Co. Inc. is acting as financial advisor to Chaparral and McAfee & Taft is serving as the company's legal counsel.
Shares of URX closed trading the day of the announcement at 9.96.
