Page 6 of 12 – SEC Filing
if you deliver positive well results in the future, you are not
going to fix that problem. We believe you need to take immediate action or time may be running out for the survivability of the
company.
We ask the board to immediately start a process
to explore all strategic alternatives, which would include selling the company through an equity transaction to allow stakeholders
to continue to participate in the upside of the combined entity.
We believe the management team has done a reasonable
job getting the company to this point given the amount of leverage it has on the business. Unlike some of its competitors, this
management team has weathered the downturn, and the company still has some equity value; however, the time has come for
the management team to cede to market forces and not over-stay their welcome. If management had not taken action to preserve capital
by laying down rigs and using some of the company’s resulting liquidity to enter the Merge, we would likely not even have
the opportunity to discuss maximizing stakeholder value.
But today, the market appears to be telling
us that the company is hamstrung with what it can do because of the exceedingly high leverage, and it has little to no flexibility.
We believe it is detrimental to the value of our equity for the management team and this board to try to run this company on a
shoestring budget – not only do you miss numerous attractive opportunities, but you are also forced to make non-economic
decisions for the sole reason of preserving liquidity.
The recent M&A activity surrounding the
company’s Merge acreage is encouraging. Roan has been launched, Alta Mesa just sold their acreage, and there are numerous
other deals. The potential transactions available to the company are broad and range from selling significant assets, raising DrillCo
financing, to merging the business with a company that has a much stronger balance sheet. This board has the opportunity to create
significant value for the stakeholders, but the time to act is now.
It is time for the company to retain advisors,
announce it has started to look at all strategic options and begin to formally field proposals. Assuming attractive equity
participation from any potential merger partner, we believe the most viable path is to sell the entire company; however, we are
open to any and all alternatives. We believe the status quo is not sustainable, and we are no longer willing to simply wait and
watch our remaining equity value be destroyed.
Unless the board takes definitive steps down
this path, we intend to run our own slate of directors at the upcoming annual meeting. With the recent departure of the two Metalmark
directors, we are concerned outside shareholders are not properly represented on the board, and the lack of any significant action
to address the company’s situation only reinforces our view. We find it hard to understand why a financial advisor has yet
to be hired despite the high leverage and the paltry stock price hovering around $1.00. How can the company claim to be working
seriously on alternatives if an advisor has yet to be retained?
As you recall, ownership of your equity is very
concentrated with the four large holders (including us) having exposure to over 50% of your outstanding shares. We believe these
major shareholders are also becoming impatient with your current progress and are equally frustrated seeing the stock fall below
$1.00.
We hope that we can work together through this
process, but rest assured we are going to be vigilant in protecting and maximizing our value.
Sincerely yours,
