In February of 2016, Silver Run Acquisition Corporation went public, and raised $450 million. This IPO was the largest one to occur at that point in 2016, but what is interesting about this specific IPO is that Silver Run’s value is composed exclusively of the money raised from the IPO. Basically, the firm has no assets when it is formed; it is just composed of equity and debt that the company then uses to acquire other companies or assets. This innovative structure, dubbed a “blank check company,” is becoming a popular business type in the energy field, and has the potential to reshape the industry.

Blank check companies are officially known as Special Purpose Acquisition Companies (SPACs), and in order to earn this specific designation, the company must meet certain requirements. According to the Securities and Exchange Commission, a SPAC “is a development stage company that has no specific business plan or purpose,” and the company has indicated that it plans to only engage in mergers and acquisitions. Simply put, the company provides no product, and can only buy up other companies and assets. Additionally, the investors have no idea how the SPAC will spend their money, so the SPAC must receive shareholder approval for any acquisition it undertakes and use 80% of investor funds in any deal.

Due to this unique structure, there are some additional regulations that the SEC puts in place on these companies. For instance, when these SPACs raise equity on a stock exchange, they must place all the proceeds from the IPO and further stock sales in an escrow account. This means that the money can only be used to finance an acquisition, nothing else, and the money has to be used within a predetermined period of time, typically within 2 years. If the money is not used to finance a deal, then the SPAC is liquidated and the shareholders recoup their investment.

SPACs have been around for a very long time, and reached a peak in 2007 and 2008 when 80 SPACs raised a record $1.6 billion, according to The Wall Street Journal. Off late, there have been numerous SPACs targeted toward the energy sector, with Silver Run Acquisition Corp. the most notable one. Silver Run’s goal is to buy up oil and gas assets, such as drilling equipment and machinery, that are undervalued due to the drop in oil prices. The company’s CEO, Mark Papa, originally ran EOG Resources, whose drilling techniques helped unlock some of the largest shale fields in the United States, according to The Wall Street Journal.

These blank check companies have a leg up over traditional energy companies, in the sense that they have no assets to worry about. Drilling and pipeline operators have been losing money since the price of oil started declining, which in turn reduced the value of their assets. This hampers the ability of traditional energy companies to invest in new technologies or expand, and the only way to reinvigorate the company is to either sell the assets for a loss or wait for the oil and gas prices to rebound. SPACs aren’t hampered by undervalued assets, so they are free to acquire and expand however they choose.

In July of 2016, Silver Run acquired its first target, Centennial Corporation, for $810 million, and then renamed itself after Centennial. A further acquisition of Silverback Exploration gave the new Centennial owns 80,000 acres in the oil-rich Permian Basin, and Papa predicts that output will increase 500% between now and 2020. Papa’s SPAC has no debt and a $2.9 billion market cap according to Forbes, and world demand for oil is rising rapidly due to growth in Asia. In response to this, more SPACs are popping up in the energy field, recently with TPG Pace Energy Holdings raising $600 million on the New York Stock Exchange in May 2017. The blank check company structure is making a comeback in the energy industry, and coupled with the favorable business climate, these companies may be the key to catalyzing an energy boom in the United States.

Please reach out to Abhiram Karuppur at karuppur@princeton.edu for any questions, comments, or concerns.

Written by thefinancier

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