HNR Acquisition Goes Public To Seek Oil & Gas Target (NYSE:HNRA)

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A Quick Take On HNR Acquisition

HNR Acquisition Corp. (NYSE:HNRA) has raised $86.25 million from an IPO at a price of $10.00 per unit, according to the terms of its most recent S-1/A regulatory filing.

The SPAC (Special Purpose Acquisition Company) intends to pursue a merger with a company in the sectors of exploring, developing, producing, transporting, storing, gathering, processing, fractionating, refining, distributing or marketing of natural gas, natural gas liquids, crude oil or refined products in North America.

Management has significant industry experience, but their lack of a SPAC track record combined with the strong potential of overpaying for temporarily high valuations in asset targets, or simply being unable to make a reasonable merger deal, leads me to be on Hold for HNRA.

HNR Sponsor Background

HNR has 2 executives leading its sponsor, HNRAC Sponsors LLC.

The sponsor is headed by:

– Chairman and CEO Donald H. Goree, who is the founder of Houston Natural Resources and has more than 40 years’ experience in the oil and gas industry.

– President Donald W. Orr, who was previously Senior Geologist at Seven Energy and has over 42 years’ experience in geological studies in the oil and gas industry.

The SPAC is the first vehicle by this executive group.

HNR’s Market

According to a 2021 market research report by Mordor Intelligence, the global market for shale oil in 2019 was led by the United States, with the Permian Basin being the most productive shale oil field there.

This represents a forecast CAGR of over 2% from 2021 to 2026.

The main drivers for this expected growth are continued development of new technologies increasing the efficiency and yield from a single wellhead.

Also, recent geopolitical developments stemming from the war in Ukraine will likely result in increased demand for shale oil and gas sourced from the United States and other large producers.

HNR’s SPAC IPO Terms

Houston, Texas-based HNR sold 7.5 million units of units of common stock and 3/4 warrant per share. at a price of $10.00 per unit for gross proceeds of approximately $86.25 million, not including the sale of customary underwriter options.

The IPO also provided for 3/4 of one warrant per share, exercisable at $11.50 per share on the later of 30 days after the completion of the SPAC’s initial business combination and the first anniversary of the effective date of the registration statement and expiring 5 years after completion of the initial business combination or earlier upon redemption or liquidation.

The SPAC has 18 months to complete a merger (initial business combination). If it fails to do so, shareholders will be able to redeem their shares/units for the remaining proceeds from the IPO held in trust.

Stock trading symbols include:

  • Units (HNRAU)

  • Warrants (HNRAW)

  • Common Stock (HNRA)

Founder shares are 20% of the total shares and consist of common stock.

The SPAC sponsor also purchased 505,000 units at $10.00 per unit in a private placement. The units are identical to the public units but have certain transfer restrictions and registration rights.

Conditions to the SPAC completing an initial business combination include a requirement to purchase one or more businesses equal to 80% of the net assets of the SPAC and a majority of voting interests voting for the proposed combination.

The SPAC may issue additional stock/units to effect a contemplated merger. If it does, then the Class B shares would be increased to retain the sponsor’s 20% equity ownership position.

Commentary About HNR Acquisition

The SPAC has interesting timing due to its proposed focus on natural gas companies in North America, especially in light of the sanctions on Russia from its Ukraine war.

Management has extensive experience in the oil & gas industry in the U.S., so that is a clear positive in its favor, both in terms of operating expertise and potentially better deal flow opportunities.

However, as the price of gas has risen, it may make it more difficult to deal with rising asset valuations as the SPAC seeks to find a suitable merger target.

Investing in a SPAC before a proposed business combination is announced is essentially investing in the senior executives of the SPAC, their ability to create value and their previous SPAC track record of returns to shareholders.

So, in a sense, investing in a SPAC can be likened to investing in a venture capital firm as a limited partner.

The cost of that investment is roughly the same, 20% of the upside to the SPAC sponsor, but the time frame for realizing a significant gain can be far faster, a 1- to 3-year time period for a SPAC versus 10 or more years for a typical venture capital fund.

Also, unlike a venture capital fund, a SPAC is liquid, providing public investors with an added liquidity benefit should they need to sell.

In the case of this particular management group, there is no previous SPAC track record, which is a negative.

While management has significant industry experience, their lack of a SPAC track record combined with the strong potential of overpaying for temporarily high valuations in asset targets, or simply being unable to make a reasonable deal leads me to be on Hold for HNRA.

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