Approach Resources looks to exchange all 7% notes due 2021 for stock

By Angela McDaniels

Tacoma, Wash., Nov. 2 – Approach Resources Inc. will exchange $130,552,000 of its 7% senior notes due 2021 and will offer to exchange the remaining notes as part of a plan to substantially reduce its long-term debt, according to a company news release.

The company entered into an exchange agreement with Wilks Brothers, LLC and SDW Investments, LLC, entities beneficially owned by the Wilks Family Office and collectively the largest holder of the company’s 7% notes, to exchange $130,552,000 principal amount of notes for 39,165,600 new shares of common stock, representing an exchange ratio of 300 shares per $1,000 principal amount of notes.

The initial exchange price is $3.33 per share, which represents a 23% premium to the closing share price on Nov. 2.

Accrued interest on the notes held by Wilks will be paid in cash.

Immediately following the close of the initial exchange, Wilks will hold 48.6% of the company’s outstanding common stock.

As part of the exchange agreement, the Wilks holders consented to amendments to eliminate most of the restrictive covenants and some events of default in the indenture governing the notes. These amendments will become effective once the initial exchange closes.

Follow-on exchange offer

Subject to completion of the initial exchange and stockholder approval of an amendment to the company’s certificate of incorporation increasing its authorized capital stock, the company will then offer to exchange its remaining $99,768,000 principal amount of outstanding notes for stock on similar economic terms to the initial exchange.

The follow-on exchange offer will be at the initial exchange ratio or a lesser ratio as determined by the company, which in any event may not be less than a ratio per $1,000 principal amount of notes equal to $953.62 divided by the 30-day volume-weighted average price at the time of launch of the follow-on exchange offer.

Assuming 100% participation in the follow-on exchange offer and assuming the follow-on exchange ratio is equal to the initial exchange ratio, existing (non-Wilks) stockholders would hold 37.5% of the stock, Wilks would hold 35.5% of the stock and other holders of the notes would hold 27% of the outstanding stock immediately following closing of the follow-on exchange offer.

The company expects to close the initial exchange and launch the follow-on exchange offer in the first quarter of 2017.

“The transactions are transformative for Approach, and, if fully completed, will reduce the company’s long-term debt by $230.3 million and save the company $16.1 million in annual interest payments and up to $70 million in interest payments over the life of the notes,” chairman and chief executive officer J. Ross Craft said in the news release.

“In addition the transactions, if completed, will reduce our leverage to bring us closer in line with new OCC-revised leverage guidelines for E&P companies.

“We believe that the transactions are critical to unlocking stockholder value in the company, restoring access to outside capital and positioning the company to resume growth and take advantage of a potential recovery in commodity prices.”

If all holders exchange their notes, the company’s pro forma leverage will decrease to 4.3 times from 8 times as of Sept. 30.

The company’s $275 million senior credit facility will remain outstanding.

Stockholders agreement

The company also will enter into a stockholders agreement with Wilks under which three of Wilks’ designees will be appointed to the board of directors of the company, expanding the board from five members to eight.

Wilks has agreed to vote its shares in proportion with the non-Wilks stockholders on typical annual meeting matters. The proportionate voting restrictions will be removed when the company’s equity market capitalization reaches a designated value of between about $800 million and $1.1 billion, depending on the results of the follow-on exchange offer, or when the stockholders agreement expires in five years.

In addition, if Wilks owns less than 40% of the issued and outstanding common stock on Dec. 31, 2017, then one of the Wilks designees will resign. If Wilks owns 40% or more of the outstanding stock on Dec. 31, 2017, then one of the directors other than the Wilks designees will resign. The board will be reduced from eight members to seven members.

The stockholders agreement also contains certain restrictions on Wilks’ ability to acquire additional shares in excess of the amount they hold immediately following the initial exchange.

Conditions

The initial exchange is subject to some closing conditions, including approval by the company’s stockholders of the initial exchange, but is not conditioned on approval by the company’s stockholders of the amendment to the certificate of incorporation necessary to permit the follow-on exchange offer or any minimum participation in the follow-on exchange offer.

The follow-on exchange offer is subject to approval by the company’s stockholders of an amendment to the certificate of incorporation to increase its authorized capital stock.

The transactions were unanimously approved by the company’s board of directors, according to a company news release.

Approach Resources is a Fort Worth, Texas-based oil and gas company.

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