Glazer Capital Issues Open Letter to Shareholders of QEP Resources; Strongly Urges Vote Against the Acquisition of QEP by Diamondback
On March 9, 2021, Glazer Capital, which owns 5.7% of QEP Resources shares, issued a letter urging fellow shareholders to reject the proposed acquisition by Diamondback Energy, scheduled for a vote on March 16, 2021. The letter argues that the merger consideration of 0.05 shares of Diamondback per QEP share is grossly inadequate, especially given recent surges in small-cap exploration and production company valuations. Glazer believes QEP is worth between $5.74 and $6.34 per share based on comparative valuations, significantly higher than the current acquisition terms.
- None.
- Merger consideration of 0.05 shares of Diamondback is deemed materially inadequate.
- Current terms undervalue QEP shares by 50% compared to peer performance.
- Potential for significant value loss for QEP shareholders upon merger support.
NEW YORK, March 9, 2021 /PRNewswire/ -- Glazer Capital, LLC, a manager of investment funds and separate accounts that collectively beneficially own over 13,800,000 shares, or approximately
The letter states, in part:
"If QEP shareholders were to support the Diamondback Acquisition, we believe that QEP shareholders would forfeit substantial value in return for grossly inadequate consideration. We intend to vote AGAINST the Diamondback Acquisition at the Special Meeting of QEP stockholders next week on March 16, 2021 and we encourage other QEP shareholders to do likewise."
The letter further details Glazer Capital's beliefs that:
(i) The merger consideration of 0.05 shares of Diamondback per QEP share is materially inadequate and the proposed acquisition (the "Diamondback Acquisition") would prevent shareholders of QEP from realizing the benefits of the recent surge in small cap exploration and production ("E&P") company valuations,
(ii) The best means available for QEP shareholders to achieve full and fair value for their QEP shares is to reject the Diamondback Acquisition at the upcoming Special Meeting,
(iii) Using traditional comparative valuation methodologies similar to those utilized by Evercore, QEP's financial advisor, in its fairness opinion results in a standalone valuation range of
(iv) Evercore would no longer be able to re-render its fairness opinion today based on current comparable company valuations.
In light of these reasons, and the material surge in comparable company valuations since ISS conducted its original analysis, Glazer Capital believes that ISS should rescind its recommendation of the proposed Diamondback Acquisition.
The letter further states:
"Utilizing the same peer group as Evercore and employing a virtually identical public company trading multiple methodology, we believe there is considerably more upside potential in QEP shares today as a standalone company than the value offered to QEP shareholders under the current terms of the Diamondback Acquisition. It appears easily observable that current trading multiples of E&P companies similar to QEP are highly supportive of significant upside for QEP's stock and they reinforce our contention that the current terms of the Diamondback Acquisition are value destructive to QEP shareholders."
The full text of the letter follows below:
March 8, 2021
Dear Fellow QEP Shareholders:
On December 21, 2020, QEP Resources announced1 that it had entered into a definitive agreement to be acquired by Diamondback Energy, Inc. ("Diamondback") in an all-stock transaction (the "Diamondback Acquisition"), in which stockholders of QEP will receive 0.05 shares of Diamondback common stock (the "current terms"), then valued at
Since the announcement of the Diamondback Acquisition, valuations and share prices of exploration and production ("E&P") companies have surged, rendering inadequate the current terms of the Diamondback Acquisition. If QEP shareholders were to support the Diamondback Acquisition, we believe that QEP shareholders would forfeit substantial value in return for grossly inadequate consideration. As a significant QEP shareholder, we intend to vote AGAINST the Diamondback Acquisition at the Special Meeting of QEP stockholders next week on March 16, 2021 and we encourage other QEP shareholders to do likewise. We further urge Institutional Shareholder Services ("ISS") to rescind its previously issued recommendation in favor of the Diamondback Acquisition. The overwhelming evidence presented below supports our assertion that the current terms of the Diamondback Acquisition shortchanges QEP shareholders due to the change in circumstances.
Glazer Capital, LLC ("we" or "Glazer Capital"), on behalf of investment funds and separate accounts that it manages, is the beneficial owner of over 13,800,000 shares, or approximately
I. Share Prices of Comparable Companies Have Surged
The terms of the Diamondback Acquisition currently value QEP shares at
If QEP's share price were to have appreciated since December 1, 2021 in line with the average of its Small Cap E&P Peers, QEP's share price would presently be
Table 1: Share Price of QEP's Small Cap E&P Peers Since Unaffected Date | ||||
Evercore's Selected Comparable Small Cap Companies | 12/1/2020* | 3/5/2021 | % Change | |
CALLON PETROLEUM | ||||
CENTENNIAL RESOURCE | ||||
SM ENERGY | ||||
Average: | ||||
Median: | ||||
QEP RESOURCES - Actual | ||||
QEP RESOURCES - Projected Based on Small Cap E&P Peers Average | ||||
*Unaffected date utilized by ISS in its report dated 2/26/2021 Source: Bloomberg, Refinitiv |
QEP's share price has lagged its Small Cap E&P Peers by almost
II. Public Company Trading Multiples Support Significantly Higher Valuation
Pages 86 and 87 of QEP's definitive proxy statement5, dated February 10, 2021, outline a "Selected Public Company Trading Analysis for QEP on a Standalone Basis" conducted by QEP's financial advisor, Evercore. Evercore selected an EV / EBITDAX multiple "Reference Range" with which to value QEP that bracketed the mean and median of two groups of comparable companies that it curated. Reproduced in the table below is Evercore's analysis.
Table 2: Evercore's Selected Public Company Trading Analysis | ||
Consensus Dec 18, 2020 | Enterprise Value / EBITDAX | |
2021E | 2022E | |
Selected Mid Cap Companies | ||
Cimarex Energy Co. | 5.0x | 4.3x |
Matador Resources Co. | 5.7x | 5.1x |
PDC Energy, Inc. | 3.7x | 3.4x |
Median | 5.0x | 4.3x |
Mean | 4.8x | 4.3x |
Selected Small Cap Companies | ||
Callon Petroleum Company | 4.6x | 4.1x |
Centennial Resource Development, Inc. | 4.2x | 3.8x |
SM Energy Company | 3.4x | 2.8x |
Median | 4.2x | 3.8x |
Mean | 4.1x | 3.6x |
QEP - Analyst Estimates | 4.2x | 3.6x |
QEP- Forecasts | 4.0x | 3.2x |
"Reference Range" Selected By Evercore | 3.5x - 4.5x | 3.0x - 4.0x |
Source: QEP's Definitive Proxy Statement, dated 2/10/2021 |
If one were to recalculate current TEV / EBITDAX valuation metrics today for the comparable companies curated by Evercore, utilizing current TEV figures and consensus estimates of EBITDAX available on Bloomberg and Refinitiv, the results would suggest a standalone share price range for QEP of
Table 3: Updated Public Company Trading Analysis | ||
Consensus March 5, 2021 | Enterprise Value / EBITDAX | |
2021E | 2022E | |
Selected Mid Cap Companies | ||
Cimarex Energy Co. | 6.3x | 5.7x |
Matador Resources Co. | 7.0x | 6.1x |
PDC Energy, Inc. | 4.9x | 4.6x |
Median | 6.3x | 5.7x |
Mean | 6.1x | 5.5x |
Selected Small Cap Companies | ||
Callon Petroleum Company | 6.2x | 5.0x |
Centennial Resource Development, Inc. | 5.9x | 5.0x |
SM Energy Company | 4.8x | 3.6x |
Median | 5.9x | 5.0x |
Mean | 5.6x | 4.6x |
Average Multiple Expansion Since Fairness Opinion | ||
Selected Mid Cap Companies | +1.3x | +1.2x |
Selected Small Cap Companies | +1.6x | +1.0x |
QEP Adjusted Standalone Multiple (Reflecting Peer Multiple Expansion) | ||
vs. Selected Mid Cap Companies | 5.5x | 4.8x |
vs. Selected Small Cap Companies | 5.8x | 4.6x |
QEP Adjusted Standalone Price (Reflecting Peer Multiple Expansion) | ||
vs. Selected Mid Cap Companies | ||
vs. Selected Small Cap Companies | ||
QEP Upside vs. Current Price | ||
vs. Selected Mid Cap Companies | ||
vs. Selected Small Cap Companies | ||
Source: Bloomberg, Refinitiv |
Utilizing the same peer group as Evercore and employing a virtually identical public company trading multiple methodology, we believe there is considerably more upside potential in QEP shares today as a standalone company than the value offered to QEP shareholders under the current terms of the Diamondback Acquisition. It appears easily observable that current trading multiples of E&P companies similar to QEP are supportive of significant upside for QEP's stock and they reinforce our contention that the current terms of the Diamondback Acquisition are value destructive to QEP shareholders.
III. A Path Forward
We believe that 2020 marked a pivotal period for QEP. Prior to the merger, QEP's management adopted a revised operating plan that focused on cash flow generation and liability management. QEP also implemented a reduction in its capital budget and suspended its quarterly dividend.
QEP's FY 2020 10-K6 highlights the reduction that it achieved in cost per barrel:
"During the year ended December 31, 2020, LOE decreased
Source: QEP's 2020 10k
In November 2018, QEP announced a definitive agreement to sell its Williston Basin assets to Vantage Energy Acquisition Corp. for upwards of
We believe that QEP's Permian assets, wrapped in a more modestly indebted corporate entity (sans the Williston assets), represents an attractive acquisition target or merger partner. QEP's ability to generate cash flow and drive efficiency will create a highly attractive pure-play Permian operator. We urge shareholders to not leave meaningful value on the table.
IV. Conclusion
Diamondback contacted QEP on November 30, 2020, with an interest in making an offer for QEP. Only three weeks later, a merger agreement was signed9. In hindsight, the shotgun wedding seems entirely unnecessary, and fortunately QEP shareholders still have the ability to prevent that from consummating.
In just the past week, OPEC announced an agreement to extend oil output cuts and Saudi Arabia agreed to extend its voluntary cut of 1 million barrels per day10. Goldman Sachs raised its Brent forecast to
With the rebound in E&P valuations, historically strong interest by multiple parties in QEP's assets, and QEP's success in its own standalone plan, there appears to be no rationale for QEP shareholders to forfeit significant upside to Diamondback at the current terms of the Diamondback Acquisition.
Table 4: Summary of QEP Standalone Share Price Analyses
Illustrative Price | Potential Upside | |
Share Price Performance of Comparable Companies | ||
Evercore's Selected Public Company Trading Analysis | ||
Average |
Although the board of QEP is compelled by the merger agreement that it signed with Diamondback to maintain its recommendation in favor of the Diamondback Acquisition, we and fellow shareholders can and should vote to reject the merger on its current terms. If QEP shareholders support the Diamondback Acquisition at the Special Meeting next week, they will collectively facilitate a substantial transfer of value from QEP shareholders to existing Diamondback shareholders for grossly inadequate consideration.
In light of this, we believe ISS should rescind its recommendation in support of the Diamondback Acquisition.
We recognize that the preponderance of merger and acquisition transactions involving public company E&P targets during the past year have provided little to no premium to existing shareholders. We grasp that consolidation has been necessary in order to shore up balance sheets and create operators with the scale and financial strength to survive the next decade. But a
Accordingly, we intend to vote AGAINST the value destructive Diamondback Acquisition at the upcoming Special Meeting on March 16, 2021 and we believe that it is in the best interests of all QEP shareholders to do likewise.
Sincerely,
Mark Ort
Portfolio Manager
Glazer Capital, LLC
About Glazer Capital, LLC
Founded by Paul J. Glazer in 1998, Glazer Capital LLC is a New York City based investment management firm specializing in investment strategies that are intended to be non-directional, market neutral, and liquid. Glazer Capital aims to achieve uncorrelated absolute returns in all market environments through its disciplined investment approach and research-driven methodology. The firm had assets under management of
Media Contacts
Zach Kouwe
Dukas Linden Public Relations
646-808-3665
glazercapital@dlpr.com
FORWARD-LOOKING STATEMENTS
Certain statements contained in this letter, and the documents referred to in this letter, are "forward-looking statements" and are prospective. These statements may be identified by their use of forward-looking terminology such as the words "expects", "projects", "believes", "anticipates", "intends" or other similar words. Forward-looking statements are not based on historical facts, but rather on current expectations and projections about future events, and are therefore subject to risks and uncertainties which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. These statements are subject to inherent risks and uncertainties surrounding future expectations. Important factors that could cause actual results to differ materially from the expectations set forth in this letter include, among other things, the factors identified under the section entitled "Risk Factors" of QEP's proxy statement/prospectus for the special meeting and other risk factors contained in QEP's filings with the Securities and Exchange Commission. Such forward-looking statements should therefore be construed in light of such factors, and Glazer Capital is under no obligation and expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
1 Transaction Announcement Press Release: http://ir.qepres.com/news-releases/news-release-details/diamondback-energy-inc-acquire-qep-resources-all-stock
2 Page 87 of the Proxy Statement lays out the selected comparable group: http://ir.qepres.com/static-files/a7a0aba0-293d-4d74-a493-414ed779ecf4
3 All figures presented or referred to herein as current, presently, or today reflect data observed as of the close of business on March 5, 2021
4 Selected by Evercore Group, consisting of Callon Petroleum (CPE), Centennial Resources (CDEV), and SM Energy (SM), as presented on page 87 of QEP's Proxy Statement
5 QEP's Definitive Proxy Statement, dated 2/10/2021, https://www.sec.gov/Archives/edgar/data/0001108827/000119312521036492/d16880ddefm14a.htm
6 QEP FY 2020 10K https://www.sec.gov/ix?doc=/Archives/edgar/data/1108827/000110882721000012/qep-20201231.htm
7 Vantage Energy press release, 11/7/2018, https://www.globenewswire.com/news-release/2018/11/07/1646757/0/en/Vantage-Energy-Acquisition-Corp-Announces-1-65-Billion-Acquisition-of-Williston-Basin-Assets-from-QEP-Resources-to-Form-Publicly-Traded-Vantage-Energy-Inc.html
8 QEP's Definitive Proxy Statement, dated 2/10/2021, https://www.sec.gov/Archives/edgar/data/0001108827/000119312521036492/d16880ddefm14a.htm#toc16880_55
9 Excerpt from Page 71 of the Proxy: "On November 30, 2020, Mr. Stice contacted Mr. Cutt to inform him that Diamondback would be interested in making an offer to acquire QEP. Mr. Cutt responded that management of QEP and the QEP board would be willing to consider an offer." http://ir.qepres.com/static-files/a7a0aba0-293d-4d74-a493-414ed779ecf4
10 OPEC+ extends most oil output cuts into April, Saudi keeps voluntary curb https://www.reuters.com/article/idUSKBN2AW0WA
11 Goldman hikes Brent forecast, says 'shale discipline' behind OPEC strategy https://www.reuters.com/article/us-global-oil-research-goldman/goldman-hikes-brent-forecast-says-shale-discipline-behind-opec-strategy-idUSKBN2AX0O5
View original content to download multimedia:http://www.prnewswire.com/news-releases/glazer-capital-issues-open-letter-to-shareholders-of-qep-resources-strongly-urges-vote-against-the-acquisition-of-qep-by-diamondback-301242806.html
SOURCE Glazer Capital, LLC
FAQ
What is Glazer Capital's position on the Diamondback Acquisition of QEP?
What evidence does Glazer Capital provide against the Diamondback Acquisition?
When is the special meeting for the QEP stockholders to vote on the acquisition?
How much of QEP's shares does Glazer Capital own?