January 24, 2018, by Ryan Collins
For so-called blank-check companies focused on energy, the party’s over.
In 2017, investors plowed $2.5 billion into energy-centric special purpose acquisition companies, or SPACs, the vehicles typically led by rock-star management teams. But with more than 40 percent of last year’s cash still prowling for deals, the appetite for new SPACs to tackle the sector is fading.
SPACs are popular with a certain class of investor because they are a way to essentially bankroll a marquee name with a proven track record of making people rich: think shale visionary Mark Papa, formerly of EOG Resources Inc., or ex-Anadarko Petroleum Corp. CEO James Hackett.
In exchange for a cash injection, SPAC managers typically promise to build a new company from scratch through smart acquisitions within two years or so. Failing that, investors get their money back, plus interest.
But after last year’s binge, the pool of top-notch executive talent has dwindled as the competition between SPACs for ripe energy targets escalated. In fact, there have never before been so many energy SPACs chasing acquisitions as there are now, according to the NASDAQ Stock Market.
“There are three, four times the amount of SPACs established and focused on the energy space than have really been successful,” J.P. Hanson, managing director and head of the exploration and production group at investment bank Houlihan Lokey Inc. in New York, said by phone. “It’s not so much there isn’t a role or space for SPACs, I just don’t see a whole lot more dollars raised because there already are SPACs out there with capital available that haven’t yet found the right investment.”
Because SPACs are essentially empty vessels when they’re formed, their value derives almost entirely from the talent leading them. The list of possible leaders appears to be shrinking.
“The quality management teams will always arise to the top, but there are only so many Mark Papas and Jim Hacketts out there,” Hanson said.
Josh Sherman, an Opportune LLP partner who has helped Papa and other SPAC chiefs acquire targets, said the talent drain is challenging, but the pool isn’t empty.
“There’s relatively few out there with a pristine record, but I think there’s still potential management teams that could enter the space,” Sherman said. “Time will tell how much talent is left to go around.”
Energy SPACs are also facing the challenge of finding deals big enough to matter. That’s because Securities and Exchange Commission rules require they spend at least 80 percent of their initial capital on their first deal. So as the cash infusions behind new SPACs grew in recent years, so did the magnitude of the acquisitions managers had to ferret out.
“Most of these guys want to be able to deploy a billion dollars instantly,” Subash Chandra, senior equity analyst at Guggenheim Securities LLC in New York, said by phone. “It’s very hard to do that.”
As blank-check companies continue to seek out “mega-deals,” it puts them on a collision course with major oil and natural gas explorers looking expand, said Vincent Piazza, senior analyst at Bloomberg Intelligence.
“Competition for assets is growing, not shrinking,” Piazza said. “These above-billion deals, it’s going to be pretty hard to get these to the goal line because there is a lot of focus on capital discipline.”