UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 13D

Under the Securities Exchange Act of 1934

(Amendment No. 3)*¹

 

 

SANDRIDGE PERMIAN TRUST

(Name of Issuer)

Common Units of Beneficial Interest

(Title of Class of Securities)

80007A102

(CUSIP Number)

Stephen C. Pugh

President and Chief Executive Officer

Avalon Energy, LLC

5000 Quorum Drive, Suite 205

Dallas, Texas 75254

(212) 446-8166

Dickie D. Hunter

President

Montare Resources I, LLC

400 East Las Colinas Blvd., Suite 680

Irving, Texas 75039

(214) 676-4434

with a copy to:

 

W. Phillip Whitcomb, Esq. Munsch Hardt Kopf & Harr, P.C. 500 N. Akard Street #3800 Dallas, Texas 75201 (214) 855-7556		Janice V. Sharry, Esq. Haynes and Boone, LLP 2323 Victory Avenue, Suite 700 Dallas, Texas 75219 (214) 651-5000

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

September 2, 2020

(Date of Event which Requires Filing of this Statement)

 

 

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box.  ☐

 

 

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7 for other parties to whom copies are to be sent.

 

 

 

*	The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

 

 

1	This filing constitutes Amendment No. 3 for Avalon Energy, LLC, and Amendment No. 2 for Montare Resources I, LLC.

 

 

 

CUSIP No. 80007A102

 

1.		Names of Reporting Persons   Avalon Energy, LLC
2.		Check the Appropriate Box if a Member of a Group (See Instructions) (a)  ☐        (b)  ☑
3.		SEC Use Only
4.		Source of Funds (See Instructions)   WC; BK
5.		Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e)   ☐
6.		Citizenship or Place of Organization   Texas
Number of Shares Beneficially Owned by Each Reporting Person With				7.		Sole Voting Power   13,125,000
				8.		Shared Voting Power   0
				9.		Sole Dispositive Power   13,125,000
				10.		Shared Dispositive Power   0
11.		Aggregate Amount Beneficially Owned by Each Reporting Person   13,125,000
12.		Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions)   ☐
13.		Percent of Class Represented by Amount in Row (11)   25.00%
14.		Type of Reporting Person (See Instructions)   OO

This Amendment to Schedule 13D (as amended, this “Schedule 13D”) relates to Common Units of Beneficial Interest (“Common Units”) of SandRidge Permian Trust, a Delaware statutory trust (the “Issuer”). This Schedule 13D amends the Schedule 13D previously filed with the Securities and Exchange Commission (the “Commission”) by Avalon Energy, LLC and Montare Resources I, LLC, by furnishing the information set forth below. Except as otherwise specified in this Schedule 13D, all previous Items of the Schedule 13D previously filed with the Commission are unchanged. Capitalized terms used herein which are not defined herein have the meanings given to them in the Schedule 13D previously filed with the Commission.

Item 4. Purpose of Transaction

Item 4 is hereby amended and supplemented by adding the following:

“On September 2, 2020, Avalon Energy sent a letter (the “Avalon Letter”) to the Trust updating the Trustee with respect to its current view of future quarterly Trust distributions. As further outlined in the Avalon Letter, Avalon Energy advised the Trust that it did not believe that the termination of the Trust and the related sales process set forth in the Trust Agreement would occur anytime soon given its current estimates of future Trust distributions. Avalon Energy instead urges the Trustee to discuss a possible transaction with Montare believing that Montare is best positioned to deliver a transaction that provides the highest value to Unitholders for the reasons set forth in the Avalon Letter. This description of the Avalon Letter is qualified in its entirety by reference to the full text of the Avalon Letter, which is attached hereto as Exhibit 99.4 and incorporated by reference herein.”

The disclosures in the Avalon Letter include “forward-looking statements” about the operation of the Underlying Properties and the production from such properties that are subject to risks and uncertainties within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Act. All statements other than statements of historical fact included in the Avalon Letter and this Schedule 13D are forward-looking statements. Actual outcomes and results may differ materially from those projected above. These forward-looking statements have been based upon our current expectations and assumptions about future events. These statements are based on certain assumptions made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks and uncertainties which could affect the future results depicted in the Avalon Letter and this Schedule 13D and could cause these results to differ materially from those expressed in such forward-looking statements.”

Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer

Item 6 is hereby amended and supplemented by adding the following sentence:

“The information set forth in Item 4 of this Schedule 13D is incorporated by reference into this Item 6.”

Item 7. Material to be Filed as Exhibits

Item 7 is hereby amended and supplemented as follows:

“The following exhibits are filed as exhibits hereto:

 

Exhibit		Description of Exhibit
99.4		Letter to SandRidge Permian Trust, dated September 2, 2020”

SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

Date: September 4, 2020

 

EXHIBIT INDEX

 

Exhibit		Description of Exhibit
99.4		Letter to SandRidge Permian Trust., dated September 2, 2020

EXHIBIT 99.4

 

September 2, 2020

VIA EMAIL

SandRidge Permian Trust

c/o The Bank of New York Mellon Trust Co., N.A.

601 Travis Street, Floor 16

Houston, TX 77062

Attention: Sarah Newell, Vice President

RE: Contemplated Transaction between Montare Resources I, LLC (“Montare”) and SandRidge Permian Trust (the “Trust”)

Ladies and Gentlemen:

This letter is delivered as a follow-up to the e-mail response received by legal counsel to Montare on August 24, 2020 from your legal counsel with respect to an ongoing dialogue between representatives of Montare, its legal counsel, you and your legal counsel. As you know, Montare and Avalon Energy, LLC (“Avalon” or “we”) have indicated a desire to negotiate a transaction with the Trust that we believe would be in the best interest of all record and beneficial holders of Trust Common Units (“Unitholders”). We were surprised by the content of the e-mail correspondence received from your counsel on August 24, 2020 and, specifically, the following statements set forth in such correspondence:

 

•

“it is in the best interests of the unitholders for the trustee to follow the termination procedures set forth in the trust agreement, . . .”

 

•

“the sale process contemplated in the trust agreement provides more assurance of that outcome than a transaction negotiated with a single bidder is likely to provide. . . .”; and

 

•

“a merger process would be unlikely to be completed substantially sooner than the sale process may be.”

As the largest Unitholder, the owner of 100% of the working interest attributable to the properties on which producing wells burdened by the overriding royalty interests held by the Trust (the “Royalty Interests”) are located (the “Underlying Properties”), and the operator of the Underlying Properties, we are not in agreement with these statements. In particular, we would note that we do not believe a termination of the Trust and a related sales process is likely to be triggered

 

1

any time soon by the provisions of Section 9.02(c) of the Amended and Restated Trust Agreement of the Trust (the “Trust Agreement”) given the analysis set forth below. We believe this leaves the Unitholders in an unsustainable position, where the fees and expenses of the Trust continue, with diminishing returns to the Unitholders (plus a delisting that will adversely impact the liquidity of the Trust’s Common Units (the “Units”)).

In evaluating the potential options in structuring a transaction we believe to be in the best interest of all Unitholders, we are providing below (1) an analysis of the likelihood that the Trust will be unable to make distributions totaling $5 million during any successive 4-quarter period and (2) a summary of the current state of operations with respect to the oil and gas wells located on the Underlying Properties and the production of hydrocarbons from such wells.

First, we do not foresee an event that will trigger a termination or dissolution of the Trust under its terms without action by the Trustee pursuant to its authority in the Trust Agreement in the near future. Avalon believes that, based on current and future projections of oil prices, there will be sufficient cash for the Trust to make distributions exceeding $5 million per 12-month period until March 31, 2024.

The table attached hereto as Exhibit A sets forth estimated distributions by quarter from the third quarter of 2019 to the first quarter of 2023, as forecasted by Avalon based on current projections. These estimates were prepared using the projected average NYMEX price per barrel of WTI oil during each quarter indicated above and decline curves for production (estimated on the fact that an average of five wells go off-line due to mechanical issues in any given month and are shut-in applying the “Reasonably Prudent Operator Standard” set forth in each Overriding Royalty Interest Conveyance (the “Conveyances”)). Note that hydrocarbon production has declined from approximately 2,400 barrels per day (“BOPD”) since November 1, 2018 (the date which Avalon acquired the Underlying Properties) to approximately 1,630 BOPD currently. These revenues were then adjusted for all costs, Trust expenses, and taxes (using the same methodology as used for each calculation of distributions since the Trust’s inception).

Second, as you know, the royalty trust model no longer works. It does not provide a potential for growth to the Unitholders given the fact that the Underlying Properties are no longer economical, based on current and projected oil and gas prices and the fact that we, as the operator, given our net revenue interest (“NRI”) (15.0 to 22.5% before its attributed ownership interest in the Trust) is not economically compelled to rework the wells. At present, there are approximately 650 inactive wells burdened by the Trust’s overriding royalty interest where rework is unlikely to occur.

We believe that Montare, together with Avalon, is best positioned to deliver a transaction to the Unitholders and one that provides the highest value to all Unitholders for, among others, the following reasons:

 

1.

We know that Montare has the necessary capital to effect a cash transaction for the Unitholders that is substantially greater than the total amount of distributions the Unitholders can be expected to receive prior to the time the Trust would dissolve pursuant to Section 9.02(c) of the Trust Agreement. No other entity that has approached Avalon or publicly approached the Trust has this capability.

 

2

2.

Montare has teamed with Avalon by entering into an agreement whereby Avalon has subject to the consummation of a transaction with the Trust, among other things, (a) Avalon has agreed to sell the Underlying Properties and all related assets to Montare, (b) granted exclusivity and an irrevocable proxy with respect to the voting of its Units to Montare, (c) agreed to support a transaction involving the Trust and Montare, and take all actions available to Avalon (including under the Trust Agreement) in connection therewith, and (d) agreed not to take any actions or fail to take any actions that would inhibit or impair such a transaction.

 

3.

Avalon holds a right of first refusal to purchase the assets that the Trustee proposes to sell pursuant to a sale transaction contemplated by Section 9.02 of the Trust Agreement (which could chill other potential buyers of the assets).

 

4.

Avalon has the right to sell a portion of the Underlying Properties, free from and unburdened by the Royalty Interests, without the consent of the Trustee or the other Unitholders (so long as the Trust receives fair value in the form of cash for the Royalty Interests having a fair value of not more than $5 million when combined with all Underlying Properties sold by Avalon during the preceding 12-month period), thus potentially complicating any alternative transaction.

 

5.

The Unitholders will continue to bear the significant expenses of operating the Trust as a publicly-traded company, as well as the cost of the increasing reserves being built up by the Trustee, while the Trustee is passively waiting for a possible termination event to occur.

 

6.

The fact that, among other items, Montare could structure a transaction so as to avoid adjustments to the purchase price for pre-closing occurrences or price changes, provide clarity to the Unitholders in terms of the amount to be received for their Units, and eliminate all liabilities of the Trust as a result of its consummation (which would have to otherwise be satisfied by the Trust before it could finally liquidate the Trust, resulting in further burdens on the value of the Trust assets to the detriment of the Unitholders).

Because of these and other reasons, we believe the Trustee’s failure to discuss a possible transaction with Montare is in no way in the best interests of the Unitholders. The positives of a transaction with Montare are clear. Montare would be willing to offer a premium over the average market value of the Units (and given the delisting of the Units, the market for Units will soon be limited). We believe that a transaction with Montare could be completed on an expedited basis before year end as Montare has the capital commitments necessary to complete the transaction.

The Trustee has contractual obligations under the Trust Agreement and has other obligations to the Unitholders, including the obligation to act prudently and in good faith in accordance with Delaware law. The Trustee has the express power under the Trust Agreement to approve transactions. This would not be outside the scope of what the Trust Agreement itself contemplates.

 

3

A potential transaction with Montare cannot and should not be dismissed by the Trustee. Please know that Avalon and Montare are each committed to moving forward with a transaction and will continue to pursue alternatives that it believes will benefit all Unitholders if the Trustee continues to act in a manner that does not recognize the value to the Holders.

Please contact the undersigned at (713) 670-6088 and spugh@avalonenergy.com or our legal counsel, Phil Whitcomb at (214)855-7556 and pwhitcomb@munsch.com, Montare via Dickie Hunter at (214) 676-4434 and Hunter@montare-resources.com or Montare’s legal counsel, Janice Sharry at (214) 651-5562 and Janice.Sharry@haynesboone.com, at your earliest convenience to address any questions or comments the Trustee may have with respect to a transaction with Montare or any other matter related to the information provided in this letter as time is of the essence.

Sincerely,

Avalon Energy, LLC

 

By:		/s/ Stephen C. Pugh
		Stephen C. Pugh, President & CEO

Attachment

 

cc:	Brandon Hall

Carter Montgomery

Dickie Hunter

Phil Whitcomb

Janice Sharry

 

4