KLR Energy, Tema Oil and Gas to merge, form Delaware basin operator

KLR Energy Acquisition Corp. and Tema Oil and Gas Co. have agreed to merge, creating a new firm named Rosehill Resources Inc. with 4,771 net acres in the core of the Delaware basin in Loving County, Tex.

Rosehill Resources intends to accelerate drilling on the acreage and pursue strategic acquisitions. The deal is expected to close in first-half 2017.

The new firm’s acreage, contributed by Tema, is more than 80% held by production and 99% operated. Net production is expected to be greater than 6,000 boe/d in January 2017. Based on a Ryder Scott reserve report, the acreage had 70.1 million net boe in total 3P reserves as of June 2016.

The position has 200 potential drilling locations, including stacked pay consisting of 10 benches totaling 3000 ft of reservoir thickness. The firm says that represents about 9 years of inventory assuming a 2-rig drilling program and doesn’t include significant upside potential through a downspacing program.

Tema’s management team will run Rosehill Resources, led by Tema President JA Townsend, who will serve as chief executive officer.

KLR Energy is sponsored by KLR Energy Sponsor LLC, an affiliate of KLR Group Holdings LLC and KLR Group, a Houston-based, energy-focused investment bank founded in 2012. Tema, founded in 1999, is a wholly owned subsidiary of privately-held, Baltimore-based Rosemore Inc.

Combination details

Pursuant to the business combination agreement, Tema will contribute its 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, assume $55 million in debt, and contribute remaining cash proceeds from its initial public offering and private placement.

Including $310 million in equity of Rosehill Operating retained by Tema, this assumes an enterprise value of Rosehill Operating of $400 million.

To facilitate the deal, Rosemore and KLR Energy’s sponsor have agreed to backstop redemptions by the public stockholders of KLR Energy of more than 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.

Following the closing of the deal, Rosemore and its affiliates will collectively be the single largest stockholder of Rosehill Resources. KLR Energy is expected to retain a significant equity stake.

The anticipated pro forma enterprise value of the combined company is $445 million. Rosehill Resources expects to have $117 million of projected liquidity to fund its development plan.

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