KLR Energy Acquisition Corp. (NASDAQ: KLRE, KLREU, KLREW), an oil and gas exploration and production focused special purpose acquisition entity, has entered into a Business Combination Agreement with Tema Oil and Gas Company, a private company with assets in the core of the Delaware Basin in Loving County, Texas.
Upon completion of the business combination, KLR Energy will change its name to Rosehill Resources Inc. and will apply to continue to trade on The NASDAQ Capital Market under the new ticker symbols ROSE, ROSEU, ROSEW.
In connection with the business combination, certain institutional investors will purchase $75 million of Rosehill Resources Series A Preferred Stock at $1,000 per share and warrants (the "Private Placements"). In addition, Tema's parent, Rosemore Inc. and KLR Energy's sponsor have agreed to purchase up to $20 million of Series A Preferred Stock or Class A Common Stock in certain circumstances to backstop redemptions. Together, the proceeds of the Private Placements and backstop by Rosemore and KLR Energy's sponsor will be used to fund a portion of the cash consideration required to effect the business combination and for general corporate purposes. Following the closing of the transaction, Rosemore and its affiliates will collectively be the single largest stockholder of Rosehill Resources. KLR Energy is expected to retain a significant equity stake in Rosehill Resources and will have two representatives on Rosehill Resources' Board of Directors.
Gary Hanna, CEO of KLR Energy, will serve as chairman of the board of directors of Rosehill Resources following the business combination. Tema's management team will run Rosehill Resources post-transaction, led by J. A. (Alan) Townsend, president of Tema, who will serve as CEO of Rosehill Resources.
"Rosehill Resources will have an excellent existing production base, a strong balance sheet with significant liquidity and a deep bench of technical, land and operations expertise," said Townsend. "Tema has approximately 200 potential drilling locations on its existing acreage. That is about nine years of inventory assuming a 2-rig drilling program and doesn't include significant upside potential through a downspacing program. Following the business combination, we will immediately begin to accelerate development of the Tema assets while also pursuing focused acquisitions."
The anticipated pro forma enterprise value of the combined company is approximately $445 million, implying a projected adjusted EBITDA multiple of 9.8x and 5.8x for calendar 2017 and 2018, respectively, and post-closing equity and preferred capitalization of $507 million at $10.40 per share (the foregoing assuming no stockholder redemptions). Rosehill Resources expects to have $117 million of projected liquidity to fund its development plan.
Rosehill Resources operating highlights
- 4,771 net acres in the core of the Delaware Basin, greater than 80% held by production and 99% operated
- Net production expected to be greater than 6,000 barrels of oil equivalent per day in January, 2017
- 70.1 million net barrels of oil equivalent of total 3P reserves as of June 2016, based on Ryder Scott reserve report
- Approximately 200 potential drilling locations on current leaseholds, includes stacked pay consisting of 10 benches totaling 3000 ft. of reservoir thickness
- Expected nine years of inventory (using a 2-rig program) with significant upside through downspacing program
Pursuant to the agreement, Tema will contribute oil and gas properties and related assets to Rosehill Operating and KLR Energy will acquire 39% of the equity on a fully diluted basis of Rosehill Operating for $35 million in cash, and the assumption of $55 million in debt and the contribution of remaining cash proceedsadditional cash resulting from KLR Energy's initial public offering and the Private Placement. Including which, including the $310 million in equity of Rosehill Operating retained by Tema, this assumes an enterprise value of Rosehill Operating of $400 million.
In order to facilitate the transaction, Rosemore and KLR Energy's sponsor have agreed to backstop redemptions by the public stockholders of KLRE in excess of 30% of the outstanding shares of Class A Common Stock by purchasing Class A Common Stock or Series A Preferred Stock in an amount up to $20 million.
The transaction was unanimously approved by the respective boards of directors of the companies and is expected to close in the first half of 2017, subject to certain closing conditions, including receipt of KLR Energy shareholder approval.
In connection with the business combination, KLR Energy also announced that it has entered into Subscription Agreements with certain institutional investors to issue and sell in private placements a total of 75,000 shares of Series A Preferred Stock and 5,000,000 warrants (each entitling the holder to purchase one share of Class A Common Stock for $11.50) for gross proceeds of $75 million. The Series A Preferred Stock is entitled to 8.0% annual dividends, payable in cash or in-kind, and is convertible into shares of Rosehill Resources' Class A Common Stock based on a conversion price of $11.50 per share. The proceeds of the private placement will be used to fund the cash portion of the consideration required to effect the combination and for general corporate purposes, including to finance development and potential acquisition activities following completion of the business combination. The private placement is conditioned upon, and is expected to close concurrently with, the business combination.
BMO Capital Markets and KLR Group LLC acted as capital market advisors and private placement agents to KLR Energy. Vinson & Elkins LLP acted as legal counsel to KLR Energy and KLR Group. Petrie Partners, LLC acted as financial advisor and Norton Rose Fulbright US LLP acted as legal counsel to Rosemore and Tema.