Page 7 of 12 – SEC Filing
Q Investments,
L.P.
Exhibit A – Letter Sent to Board of Directors
of the Issuer on July 20, 2017
Dear Gentlemen:
First and foremost, we would like to commend
the management team for successfully navigating these turbulent times in the oil and gas market while also positioning Jones Energy
for profitable growth. We are the first to acknowledge this has not been an easy task; however, the company is at a critical juncture.
While Jones Energy is well positioned to participate
in the highly-economic emerging plays in the Anadarko basin, we suggest the company retain an investment bank to explore raising
$150 million of DrillCo capital, which we believe will be to the advantage of all shareholders. A facility of this size would be
adequate to fund up to 100% of all disclosed, planned drilling and completion capital expenditures in the Cleveland for at least
the next twelve months. To be clear, we are not advocating for spending more money in the Cleveland (neither for drilling more
wells nor for going after new zones), but rather preserving the company’s asset based lending availability so that the company
ensures it has the liquidity to pursue potentially more attractive options.
Why we believe a DrillCo structure makes sense
for Jones Energy:
| · | Very few E&P companies have the level of experience and track record that Jones Energy has in the Cleveland. Having drilled hundreds of horizontal wells in the play should allow Jones Energy to raise DrillCo capital far cheaper than most competitors, especially those competitors looking to use someone else’s capital to exploit an unproven asset. |
| · | Raising fresh capital to fund all drilling and completion activity in the Cleveland would preserve significant liquidity and allow management to keep all of its options open. |
| · | Generating additional liquidity at the asset-level will allow management to be able to pursue other opportunities without the massive dilution associated with raising equity at today’s depressed share price. The cost of raising equity capital is huge. The cost of raising DrillCo capital is likely between 12%-15% based on recent deals. |
| · | Preserving availability on the company’s asset based lending facility will provide management with further flexibility, and it essentially de-leverages the balance sheet. |
| · | Private Equity firms have recently raised hundreds of billions of dollars and, as shown by Carlyle’s recent partnership with EOG Resources, Inc. in Ellis County, Oklahoma, these firms have shown an appetite for asset-level drilling and completion facilities. We believe Jones Energy would have little trouble finding cost-competitive DrillCo funding. |
| · | While we acknowledge DrillCo capital is going to be more expensive than borrowing under the company’s asset based lending facility, we do not believe this is relevant. Whether the cost is 12% or 20%, if management believes they can generate returns well in excess of these rates, it is all incremental value creation for shareholders, and we would urge you to consider a DrillCo in this light. The key to focus on is the spread between cost of funds and the IRR obtainable. Yes, it would be ideal to borrow a limitless amount at 3% and invest at 35%, but if your liquidity is already stretched and you will need additional funds for 35% to 50% IRR projects, then accepting a 20% spread between cost of funds and IRR while increasing liquidity and de-leveraging by transferring risk away from equity holders to DrillCo makes a lot of sense. |
