Page 8 of 12 – SEC Filing
| · | A DrillCo is able to transfer risk away from equity holders in the same way the sale of a working interest spreads development risk across multiple parties. While drawing on the asset based lending facility might have a cheaper “headline” cost of capital, we think using a DrillCo to fund a portion of the existing development plan will decrease equity cost of capital by sharing some new development risk with the DrillCo provider. This preserves liquidity, de-risks the equity and de-levers the capital structure. |
| · | It costs the company very little to explore the DrillCo option. Alternatively, the cost of identifying an attractive acquisition opportunity after fully utilizing the asset based lending facility could be substantial (in the form of either a missed opportunity or massive dilution to your shareholders – neither of which we want to see). |
We, presumably like many Jones Energy shareholders,
are very excited about the upside potential of Jones Energy’s Merge acreage. We would like to see the company preserve as
much capital as possible to both delineate and opportunistically acquire incremental acreage in the Merge – although there
are many possible uses for newly available asset based lending facility capacity, which can be discussed!
Preserving $150 million of availability on the
company’s asset based lending facility in this environment will be viewed as very smart by shareholders and analysts, as
we believe it will guarantee access to capital if Jones Energy identifies an attractive acquisition target or has a need for capital
to ensure liquidity in the future. The alternative is raising unsecured debt at the exorbitant current market implied levels or
further diluting your shareholders at today’s share price, both of which we believe will be viewed very unfavorably by your
equity and debt investors.
In the past, management has expressed openness
to selling an equity participation in some acreage as a means to raise capital; we would like to emphasize that a DrillCo facility
is effectively the same thing. However, a DrillCo facility would allow Jones Energy and its shareholders to keep a higher proportion
of the equity upside. In this way, we believe DrillCo capital is preferential to the outright sale of a participation.
We have spoken with many of your larger shareholders
and believe all are very supportive of at least exploring a DrillCo. We urge you to do the same. All we are asking is that
you explore this option by hiring an investment bank. We will be disappointed if management is not open to at least exploring
what could be an extremely attractive option. To be clear, we are completely agnostic as to what firm you might choose as a DrillCo
financing partner – the most important thing is that you at least explore the option.
If the terms end up being unattractive based
on the facts and circumstances at the time, shareholders will no doubt support passing on the DrillCo, but that is something that
remains to be seen.
In closing, we are very excited about the future
of Jones Energy. We hope that you receive this letter in its intended spirit of collaboration and that we can continue to work
together. We look forward to what the futures holds.
In connection with the above letter, the Reporting
Person also issued a press release, which is attached hereto as Exhibit 99.1.
Except as set forth in this Item 4, the Reporting
Person has no present plans or proposals that relate to or that would result in any of the actions specified in clauses (a) through
(j) of Item 4 of Schedule 13D of the Act.
