May I have a blank check?

J.P. Szafranski, BridgeTower Media Newswires

Imagine you are at lunch with two acquaintances. They both happen to have successful business histories. Suddenly and with very little context, one of them hands over a blank check to the other. The recipient says thanks and promises to use it wisely but has no concrete plans or time frame as of yet.

This somewhat bizarre scenario metaphorically describes special purpose acquisition companies. While they have been around public markets for decades, blank check companies, as they are popularly known, have recently risen in popularity in the energy sector.

Investment bankers realized that, without seeing any meaningful business plan, investors would willingly invest fresh capital in a new security simply if a star executive or management team was committed to run the company. Investors buy in simply on the basis of the successful reputation of an executive with the hope that he or she might make acquisitions with the new capital and replicate prior successes.

Past performance is no guarantee of future results. Successfully making acquisitions and creating new economic value is exceedingly difficult. It requires not only great management skill but a fair degree of luck. Some SPAC investors have not been so lucky.

In March 2017, Riverstone Holdings partnered with Jim Hackett, former CEO of Anadarko Petroleum, to create Silver Run Acquisition Corp II and successfully raised about $1 billion in an initial public offering priced at $10 per share. Later that year, Silver Run announced a deal valued at $4 billion to merge Alta Mesa Holdings, an Oklahoma STACK-focused exploration and production company, with Kingfisher Midstream LLC, a STACK-based midstream company, creating Alta Mesa Resources Inc.

The deal closed in February 2018 and trouble ensued. Kingfisher Midstream was forced to cut its financial guidance as it struggled to ramp up its expected third-party customer volumes. Meanwhile, Alta Mesa aggressively increased drilling activity, spending over $700 million in capital expenditures in 2018.

Unfortunately, drilling results greatly disappointed expectations, leading to depressed earnings and pressure on the company's balance sheet. Alta Mesa also disclosed problems with its financial reporting and its required SEC filings are delinquent. This series of unfortunate events moved the stock from its $10 offering price to a low of around 12 cents as investors fear a bankruptcy or significant financial restructuring is coming soon.

Noted alternative investment firm Kayne Anderson got into the SPAC game with Kayne Anderson Acquisition Corp. in March 2017, raising close to $400 million in its IPO at $10 per share. In 2018, Kayne used those funds to partner with Apache Corp., creating Altus Midstream Co. Altus was billed as a $3.5 billion pure-play Permian Basin midstream C-corp. It was promoted as a new type of midstream company, with a strong balance sheet, no dividend (until cash flows increased significantly) and a simpler corporate structure instead of a more complex partnership like its MLP competitors.

Regrettably, the company debuted with a high concentration of midstream assets tied to Apache's development of its position in the Alpine High play in the Delaware Basin. When Apache elected to dial back its growth trajectory in the area due to some challenges, Altus Midstream's growth expectations were forced lower as well. The stock price hit a new low of $3.58 earlier this month. A thoughtfully considered corporate structure turned out to be less important than the fundamentals of the underlying business. Go figure.

SPACs raise money by leveraging the halo effect of past reputations, but such halos can be ephemeral at times. Good management is vitally important but it's only one component of many to be analyzed in a sound investment process.


J.P. Szafranski is CEO of Meliora Capital in Tulsa (

Published: Mon, Jul 22, 2019