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The Hawk Flies Again

posted Jan 3, 2012, 5:46 AM by Jeff Davies   [ updated Jan 6, 2012, 7:50 AM ]
Floyd Wilson, most recently of Petrohawk fame, is at it again and his latest move made it a very merry Christmas for RAM shareholders.  As the saying goes, if something is working, don't change it and Mr. Wilson is sticking to the same template he's used in the past, including bringing in the same partners, and going with a twist on the same name.  Halcon Resources LLC is Wilson's new vehicle and wouldn't you know it, Halcon is Spanish for hawk.  As a refresher for his past escapades:

- After starting, growing and IPO'ing Hugoton Energy, Wilson sold it to CHK in 1998 for $380mm.
- In 1999, Wilson teamed with EnCap Investments to form 3TEC Energy, then selling the company to PXP in 2003 for $440mm.
- Later in 2003, Wilson - via then privately held Petrohawk Energy - teamed with EnCap and Liberty Energy Holdings to recap/acquire Beta Oil & Gas, in a deal eerily similar to the RAM transaction (Petrohawk formation).  Additional acquisitions were done before Petrohawk was eventually sold in 2011 to BHP for $15 billion.
- Finally, on December 22, 2011, it was announced that Wilson had teamed with EnCap, Liberty and Mansefeldt Investment Corp. for a $550 million recap of Ram Energy Resources, Inc. (RAM).

The RAM recap investment includes:
- $275mm common stock (220mm shares @ $1.25)
- $275mm convertible note (183mm shares @ $1.50)
- Warrants for an additional 110mm common shares @ $1.50

After rocketing from $1.10 a share before the recap announcement to $3.13 on 12/30/11 for an incredible 185% move one has to wonder if the market has already priced in much of Wilson's midas touch.  Betting against Wilson has been a bad bet, but with a PF enterprise value of $1.25 billion, the 'Floyd premium' appears difficult to justify at the moment.  Incredibly, based on the current stock price, it appears that Wilson has more than doubled his $550 million investment in a mere six trading days.  Using the PF enterprise value, RAM is trading at about 20x its LTM EBITDAX and at about $45/BOE using YE10 reserves.  So what gives?

He may have more up his sleeve, but by all appearances, the takeover of RAM by Wilson is a play on the Mississipian Lime oil field where RAM holds 56,320 net acres in Osage county, OK.  RAM has yet to drill any horizontals, but has been doing vertical testing and shooting seismic on its acreage which lies on the far east side of the play where the wells are expected to be shallower and oilier.

The Mississippian Lime (ML) has been gaining traction recently and Wilson's timing couldn't have been better as Repsol bought into Sandridge's ML acreage for a cool $1 billion on the same day the RAM deal was announced.  Public companies in the play include the two largest landholders SD and CHK, in addition to RRC, PQ, Shell, DVN and some small fries such as Red Fork, Osage Exploration, EnerJex and Bluegrass Energy.  Private companies involved include Vitruvian Exploration, run by former SWN exec. Richard Lane, Riverstone-backed Eagle Energy, Pablo Energy, Chaparral Energy, Calyx, Ceja Corp. and Spyglass, among others.

Some facts about the Mississipian Lime include:

- High permiability, conventional carbonate oil play encompassing 6.5+ million acres
- >17,000 vertical wells drilled in area over five-plus decades; > 500 horizontal wells; no 3D needed due to data from vertical wells
- Requires low HP rigs (1,000 HP) and pressure pumping equipment (10,000-12,000 HHP vs 40k HHP for deeper, tighter plays)
- 50-100% oil, 38-42 degree gravity
- Lower initial IP's but shallower declines than other unconventional oil plays
- Permeability several hundred times that of shale oil plays
- Porosity of 5-25%
- Relatively simple fracs - water, acid and abundant sand
- More oil-ly from west to east, oilier window east of Nemaha Ridge
- Large amounts of saltwater produced, 5-15x oil produced, creates difficulties around saltwater handling and need for SWD wells 
- Arbuckle formation below ML can be used for SWD 
- Roughly one frac stage per 400-500 ft of lateral
- Sufficient take-away capacity
- ESPs needed for dewatering 
- Avg peak 30-day IPs, 300-500 Boe/d

So what does RAM valuation look like PF for the recap.  The 183mm shares in the convert and the 110mm shares from the warrants are deep in-the-money at the moment, so combined with the existing shares and new common stock, pf diluted shares are around 513mm for a market cap of $1.6 billion as of 12/30/11.  EV is lower at $1.1b as the injected cash will leave a negative net debt position and very healthy liquidity of around $650mm assuming the revolver borrowing base is unchanged at $150mm.  Despite the liquidity to continue to build the company, Wilson will really need some magic in the near term to justify the current price, in my opinion.  As is shown below, backing out the value for assets other than the Osage concession leaves an implied price per acre nearly 325%  above any recent transactions.

One interesting twist to this entire story is that Eagle Energy is a relatively large and early entrant into the ML play and they are run by Steve Antry, who founded Beta Oil & Gas, which was the platform that started Petrohawk.  Eagle puts it acreage on the block but apparently has pulled it to achieve higher valuation after additional development.  Is it possible, Floyd and Steve pull off another deal to create a large Mississipian player a decade or so after their deal to create Petrohawk??

Please note that information is sourced from Sandridge, Chesapeake, Range, Eagle Energy, Osage, and O&G Investor.  Links to maps and data below: