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8-K - CURRENT REPORT - PEDEVCO CORP | ped_8k.htm |
Exhibit 99.1
PEDEVCO Delivers Open Letter to the SandRidge Permian Trust, its
Unit Holders, and the Operator of its Assets Regarding an
Indication of Interest to Acquire the SandRidge Permian Trust and
Underlying Assets
HOUSTON, TX / ACCESSWIRE / August 26, 2020/ On August 26,
2020, PEDEVCO Corp. (NYSE American: PED) (“PEDEVCO” or
the “Company”) delivered an open letter to The Bank of
New York Mellon Trust Company, N.A., as trustee of the SandRidge
Permian Trust (NYSE:PER)(the “Trustee” and the
“Trust”), the common unit holders of the Trust, and
Avalon Energy, LLC as a holder of Trust common units and the
operator of the assets underlying the Trust, regarding
PEDEVCO’s previously delivered letter indicating its interest
regarding a potential acquisition of all the common units of the
Trust (the “Trust Units”), its underlying assets, and
operatorship thereof, which open letter is included in this release
below.
As
described in the letter, PEDEVCO believes that the Trust is likely
to be delisted from the New York Stock Exchange and be dissolved with its
assets liquidated in less than a year, and PEDEVCO believes that
the best way for current holders of Trust Units to have a chance of
salvaging, retaining and growing their investment is through the
trustee of the Trust and Avalon engaging in meaningful discussions
with PEDEVCO in contemplation of the potential acquisition of the
Trust, its underlying assets, and their operatorship by PEDEVCO
through the issuance of PEDEVCO common stock as consideration for
Trust Units. PEDEVCO believes a potential transaction could result
in holders of Trust Units gaining ownership in a larger underlying
asset base as well as potential for future price appreciation.
PEDEVCO believes it represents a stable business partner with a
strong balance sheet and familiarity with the Trust’s
underlying assets.
Mr. J.
Douglas Schick, President of PEDEVCO, commented: “In June
2018, SK Energy, owned and controlled by our largest shareholder,
Dr. Simon Kukes, similarly saved PEDEVCO from near-certain
delisting from the NYSE and being taken over by its creditors,
completely turning PEDEVCO around to emerge as the strong and
stable company PEDEVCO is today. We are now hopeful that the
Trustee and common unit holders of the SandRidge Permian Trust, and
Avalon as the operator of the underlying assets, will see the
wisdom and opportunity of the transaction proposed by PEDEVCO,
which we believe will likewise result in a success story for their
equity holders with significant upside potential through ownership
in a stronger combined entity.”
About PEDEVCO Corp.
PEDEVCO
Corp. (NYSE American: PED), is a publicly-traded energy company
engaged in the acquisition and development of strategic, high
growth energy projects in the United States. The Company’s
principal assets are its San Andres Asset located in the Northwest
Shelf of the Permian Basin in eastern New Mexico, and its D-J Basin
Asset located in the D-J Basin in Weld and Morgan Counties,
Colorado. PEDEVCO is headquartered in Houston, Texas.
1
About This Press Release and the Accompanying Letter
This
communication, including this press release and the accompanying
letter, does not constitute an offer to sell or the solicitation of
an offer to buy any securities or a solicitation of any vote or
approval or an exchange offer. If any offer, sale, solicitation or
exchange offer is made, the Company will file with the Securities
and Exchange Commission (“SEC”) a registration
statement, a proxy statement and/or a Schedule TO. IF AND WHEN ANY
SUCH DOCUMENTS ARE FILED, INVESTORS AND SECURITY HOLDERS ARE URGED
TO READ SUCH DOCUMENTS AND ANY OTHER DOCUMENTS THAT WILL BE FILED
WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME
AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT ANY
PROPOSED TRANSACTION. Investors and shareholders will be able to
obtain free copies of any such documents, if and when any such
documents are filed with the SEC, through the website maintained by
the SEC at http://www.sec.gov. Copies of the documents filed with
the SEC by PEDEVCO (File No. 001-35922) will also be available free
of charge on PEDEVCO’s internet website at www.
https://www.pedevco.com under the tab “Investors” and
then under the tab “SEC Filings.”
PEDEVCO’s
directors and certain of their executive officers, who may be
deemed to be participants in the solicitation of proxies, do not
have any direct or indirect interest in the Trust or Avalon,
through security holdings or otherwise. Other
information regarding the participants in the proxy solicitation
and a description of their direct and indirect interests, by
security holdings or otherwise, will also be contained in any proxy
statement/prospectus and other relevant materials to be filed with
the SEC when they become available.
The
discussions and opinions in this press release are for general
information only, and are not intended to provide investment
advice. Certain information included in this material is based on
data obtained from sources considered to be reliable. No
representation is made with respect to the accuracy or completeness
of such data, and any analyses provided to assist the recipient of
this letter in evaluating the matters described herein may be based
on subjective assessments and assumptions and may use one among
alternative methodologies that produce different results.
Accordingly, any analyses should also not be viewed as factual and
also should not be relied upon as an accurate prediction of future
results.
Cautionary Statement Regarding Forward Looking
Statements
All
statements in this press release, including the accompanying
letter, that are not based on historical fact are
“forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 and the provisions
of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the
“Acts”). In particular, when used in this press release
and the accompanying letter, the words “estimates,”
“believes,” “hopes,” “expects,”
“intends,” “plans,”
“anticipates,” or “may,” and similar
conditional expressions are intended to identify forward-looking
statements within the meaning of the Acts, and are subject to the
safe harbor created by the Acts. Any statements made in this news
release and the accompanying letter other than those of historical
fact, are forward-looking statements. While PEDEVCO has based any
forward-looking statements contained herein on its current
expectations, the information on which such expectations were based
may change. These forward-looking statements rely on a number of
assumptions concerning future events and are subject to a number of
risks, uncertainties, and other factors, many of which are outside
of the Company’s control, that could cause actual results to
materially differ from such statements. Such risks, uncertainties,
and other factors include, but are not necessarily limited to,
those set forth under Item 1A “Risk Factors” in the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2019 and subsequently filed Quarterly Reports on Form
10-Q under the heading “Risk Factors”. The Company
operates in a highly competitive and rapidly changing environment,
thus new or unforeseen risks may arise. Accordingly, investors
should not place any reliance on forward-looking statements as a
prediction of actual results. The Company disclaims any intention
to, and undertakes no obligation to, update or revise any
forward-looking statements, except as otherwise required by law,
and also undertakes no obligation to update or correct information
prepared by third parties that is not paid for by the Company.
Readers are also urged to carefully review and consider the other
various disclosures in the Company’s public filings with the
SEC.
Contacts
PEDEVCO
Corp.
1-713-221-1768
2
August
26, 2020
SandRidge
Permian Trust (the “Trust”)
C/O
Bank of New York Mellon Trust Company, N.A., Trustee
(“Trustee”)
Attn:
Sarah Newell
601
Travis Street, 16th Floor
Houston,
Texas 77002
Via:
electronic mail and U.S. mail
SandRidge
Permian Trust Common Unit Holders (“Unit
Holders”)
Via:
Press Release
Avalon
Energy, LLC (“Avalon”)
Attn:
Board of Directors
5000
Quorum Drive, Suite 205
Dallas,
Texas 75254
Via:
electronic mail and U.S. mail
Re:
Open
Letter to Trustee, Avalon Energy, LLC and all Unit Holders of the
SandRidge Permian Trust Regarding Indication of Interest to Acquire
Trust Units and Underlying Assets.
Dear
Trustee, Unit Holders and Avalon:
PEDEVCO
Corp. (NYSE American: PED) (“PEDEVCO”) is interested in
acquiring all of the publicly-traded unit holdings (the
“Trust Units”) of the SandRidge Permian Trust via an
exchange offer and subsequent merger, ideally with the support of
the Trustee and Avalon. We believe the continued viability of the
Trust as an investment vehicle appears to be in question given the
structural disincentives to developing the properties underlying
the Trust, and that it appears likely the Trust will be delisted
from the New York Stock Exchange (“NYSE”) in the near
future and dissolved with its assets liquidated within the next
year. However, PEDEVCO believes that by joining with PEDEVCO,
holders of Trust Units have the opportunity to retain and grow
their investments with a stable business partner with a strong
balance sheet and familiarity with the assets underlying the Trust,
and that a business combination where shares of PEDEVCO common
stock are exchanged for Trust Units is the best option the holders
of Trust Units have to salvage and maximize the return on their
investment.
PEDEVCO Background and Overview
PEDEVCO
is a Houston-based energy company that is publicly-traded on the
NYSE American Exchange under the ticker symbol “PED.”
PEDEVCO’s current market cap is approximately $60 million and
the Company has a strong balance sheet with cash on hand and zero
debt. The Company previously conducted business as “Pacific
Energy Development,” but began doing business as PEDEVCO in
2019 after an investment group led by SK Energy LLC and American
Resources, Inc. acquired a controlling interest in the Company,
extinguished all of its then-$75 million in debt for approximately
$0.10 on the dollar, and shifted the corporate focus toward
becoming a consolidator of conventional assets with significant
upside in the Permian Basin.
3
Through
several acquisitions coupled with the Company’s legacy assets
in the D-J Basin of Colorado, the Company currently owns
approximately 38,000 net acres with over 150 net high-quality
drilling locations in the Permian Basin and approximately 11,900
net acres with over 150 gross drilling locations in the D-J Basin.
PEDEVCO’s average production for the six-month period ended
June 30, 2020 was 786 barrels of oil equivalent per day
(“BOED”). However, the Company shut in all of its
production for the majority of April and May 2020, due to the
market effects of the COVID-19 pandemic and the recent reductions
in the benchmark price of crude oil, so actual average production
over the period was projected to be significantly higher had
production not been shut in. The Company recently resumed its 2020
development program in the Permian Basin which includes completing
a saltwater disposal well and bringing online several horizontal
wells that were not capable of producing until the saltwater
disposal well was completed.
PEDEVCO’s
Permian assets are geologically analogous to the properties
underlying the Trust’s assets, as they are both assets
producing from the San Andres formation. Additionally,
PEDEVCO’s operations team has significant experience managing
San Andres assets throughout the Permian Basin and managed the
offsetting Furman-Mascho field assets that underlie the
Trust’s assets. One of the main differences between the
underlying Trust assets and PEDEVCO’s Permian assets is that
PEDEVCO’s assets are less than 10% developed whereas the
Trust’s assets are nearly 100% developed. PEDEVCO is
developing its Permian assets primarily through horizontal drilling
(rather than vertical drilling) which the Company has found leads
to superior recoveries.
For
more information on PEDEVCO please visit www.pedevco.com, which
contains general information on PEDEVCO, as well as an investor
presentation under the “Investors -> Presentations”
tab.
Rational for the Proposed Transaction
SandRidge Permian Trust Likely to be Delisted from The New York
Stock Exchange
On
December 27, 2019, the Trust received notice from the NYSE that the
Trust had fallen below the NYSE’s continued listing
requirement that the average closing price of the Trust Units be at
least $1.00 per share. The Trust Units have not traded above $1.00
since February 12, 2020, and as of August 24, 2020, closed at
$0.334 per Trust Unit. On April 23, 2020, the NYSE notified the
Trustee that an extension was granted to the Trust to regain
compliance with NYSE rules by September 5, 2020, due to temporary
NYSE rule changes adopted in response to the COVID-19 pandemic.
However, the Trust Units face delisting if NYSE compliance is not
regained, which appears not to be likely. The Trustee itself has
indicated that the Trustee expects that the NYSE will delist the
Trust Units following market close on September 5, 2020. Once
delisted from the NYSE, we would expect the Trust Units to be
traded on the OTCQB or the OTC Pink Sheets, which we anticipate
would significantly diminish the liquidity of the trading market
for the Trust Units, the ability of the holders of the Trust Units
to publicly buy and sell the Trust Units at prices and in volumes
desired, and further erode the value of the Trust
Units.
Structural Disincentives to Enhancing the Value of the Underlying
Properties
As
originally structured, the Trust receives the majority of the
revenue from the underlying oil field. However, the Trust does not
pay any of the corresponding oil field costs, all of which are the
sole responsibility of Avalon as the operator of the field. In a
lower price environment, this structure disincentivizes the
operator from performing workover activities when a well goes down
(e.g., stops producing due to mechanical problems) because the
operator cannot afford to do maintenance work as it is uneconomic
to their interest given that the operator only receives a small
portion of the revenues from the field. Every time a well goes down
and is not fixed, it is removed from the assets underlying the
Trust, thereby further eroding the value of the Trust.
4
This
was not an issue for the operator when the Trust was formed in
2011, as oil prices were above $85/barrel and field production was
significantly higher at the time. To illustrate, according to the
Trust’s public filings, in the six-month period ended June
30, 2014, the realized oil price per barrel of oil equivalent
(“BOE”) was $90.04 per barrel, production attributable
to the Trust was approximately 4,200 BOED, total revenue attributed
to the Trust was $69.003 million, and distributable income was
$63.850 million. Fast forward to the six-month period ended June
30, 2020, where the realized oil price per BOE was $47.89,
production attributable to the Trust was approximately 1,200 BOED,
total revenue was $5.292 million, and distributable income was
$4.210 million, however,
the distributable income was not paid by Avalon for Q1 2020, due to
Avalon’s severely distressed financial situation, so the
Trust unit holders did not receive their dividend that quarter, and
only approximately $0.6 million was distributed for Q2
2020.
Below
is an excerpt from the press release issued by the Trust on April
23, 2020 explaining the non-payment of the Q1 2020 distribution by
the operator:
“HOUSTON--(BUSINESS
WIRE)-- SANDRIDGE PERMIAN TRUST (NYSE: PER) announced today that
the quarterly distribution for the three-month period ended March
31, 2020 (which primarily relates to production attributable to the
Trust’s interests from December 1, 2019 to February 29, 2020)
of approximately $3.73 million, or $0.071 per unit, will not be
paid in May 2020 because Avalon Energy, LLC (“Avalon”),
as the assignor under the Conveyances described below, has informed
The Bank of New York Mellon Trust Company, N.A., the trustee of the
Trust (the “Trustee”), that Avalon is unable to pay on
a timely basis the approximately $4.65 million it owes the Trust,
which reflects the quarterly distribution amount together with
approximately $0.73 million of Trust expenses and $0.19 million to
be withheld by the Trustee for the Trust’s previously
disclosed cash reserve for future known, anticipated or contingent
expenses or liabilities of the Trust. Consequently, the Trustee
will not be able to make the quarterly distribution to unitholders.
In accordance with the terms of the conveyances granting the Trust
its Overriding Royalty Interests as described below (the
“Conveyances”), the unpaid amount owed the Trust will
accrue interest at the rate of interest per annum publicly
announced from time to time by The Bank of New York Mellon Trust
Company, N.A. at its “prime rate” in effect at its
principal office in New York City until paid to the Trust. Avalon
has informed the Trustee that Avalon intends to make the payment of
the distribution to the Trust, with interest in accordance with the
Conveyances, as soon as possible. All information in this press
release has been provided to the Trustee by
Avalon.”
The Trust is Likely to be Terminated and Dissolved Within a
Year
PEDEVCO
believes the Trust is likely to be liquidated and dissolved in less
than a year. As described in the Trust’s filings with the
Securities and Exchange Commission (the “SEC”), the
Trust Agreement provides that the Trust will terminate if cash
available for distribution for any four consecutive quarters, on a
cumulative basis, is less than $5.0 million. If this early
termination event occurs, the Trust Agreement will require the
Trustee to sell the Trust’s royalty interests, either by
private sale or public auction. In the event of a termination,
Avalon has a right of first refusal to buy the Trust assets. After
the sale of all of the royalty interests, payment of all Trust
liabilities and establishment of reasonable provisions for the
payment of additional anticipated or contingent Trust expenses or
liabilities, the Trustee will distribute the net proceeds of the
sale to the holders of Trust Units.
5
Below
are excerpts from the Trust’s most recent Quarterly Report on
Form 10-Q filing (for the three months ended June 30, 2020), which
indicate that the Trustee believes that the Trust Units are likely
to be delisted from the NYSE, that the unit holders will not
receive the owed distribution, and that the Trust will likely be
dissolved in less than a year (bolded text added for
emphasis):
“Potential
Early Termination of the Trust. The Trust Agreement
provides that the Trust will terminate if cash available for
distribution for any four consecutive quarters, on a cumulative
basis, is less than $5.0 million. If this early termination event
occurs, the Trust Agreement will require the Trustee to sell the
Royalty Interests, either by private sale or public auction,
subject to Avalon's right of first refusal to purchase the
Royalty Interests. After the sale of all of the Royalty Interests,
payment of all Trust liabilities and establishment of reasonable
provisions for the payment of additional anticipated or contingent
Trust expenses or liabilities, the Trustee will distribute the net
proceeds of the sale to the Trust unitholders.
Based on Avalon's estimates for the next
twelve months regarding projected production from the Underlying
Properties and estimated pricing for WTI crude oil based on futures
prices as of August 1, 2020 readily available in the public
market, adjusted for differentials, and assuming that Avalon is
unable to make the quarterly payment to the Trust for the
three-month period ended March 31, 2020 as discussed below
under “Liquidity and Capital Resources—Future Trust
Distributions to Unitholders”, cash available for
distribution for the four consecutive quarters ending
December 31, 2020, on a cumulative basis, may fall below $5.0
million, which would
require the Trust to commence termination shortly after the
required quarterly cash distribution is to be made in
February 2021. If that occurs,
the Trustee would be required to sell all of the Trust’s
remaining assets and liquidate the Trust. Due to this uncertainty,
there is substantial doubt regarding the Trust’s ability to
continue as a going concern within one year after the date that the
financial statements are issued. The Trust’s financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Status of NYSE Delisting. As
previously disclosed, on December 27, 2019, the Trust received
written notification from The New York Stock Exchange
(“NYSE”) that the Trust no
longer satisfied the continued listing compliance standards set
forth under Rule 802.01C of the NYSE Listed Company Manual
because the average closing price of the Trust units fell below
$1.00 over a 30 consecutive trading-day period. If the Trust were
unable to regain compliance with the applicable standards within a
six-month cure period, the NYSE would commence suspension and
delisting procedures. Although the Trust units continue to be
traded on the NYSE, the Trust might be unable to maintain
compliance with the NYSE’s listing standards and could again
become subject to the NYSE delisting procedures. On April 23,
2020, the NYSE notified the Trustee that pursuant to temporary NYSE
rule changes adopted in response to the dramatic fluctuations
in the capital markets resulting from the COVID-19 pandemic, the
cure period in which the Trust may regain compliance with the
applicable listing standards has been extended to September 5,
2020. As the average 30-day closing price of the Trust units has
remained below $1.00 since receipt of the notification,
the Trustee expects that the NYSE
will delist the Trust units following market close on September 5,
2020 and that shortly thereafter trading of the Trust units likely
would be transferred to the over-the-counter
market.”
6
Potential Solutions
As
described above and based on publicly available information from
the Trust, it appears likely that the Trust Units will be delisted
from the NYSE following the September 5, 2020 compliance deadline,
and the Trust’s assets will likely be sold in early 2021. In
addition, as discussed above, the underlying operator, Avalon, will
be provided a right of first refusal to buy the Trust assets. We
believe that the best way for the holders of the Trust Units to
have a chance of retaining, protecting and growing their
investments is through a business combination with a
publicly-traded company whereby the holders of Trust Units can gain
value by exchanging their Trust Units for publicity-traded shares
of a stable entity with a strong balance sheet. If the transaction
proposed by PEDEVCO is consummated, the holders of Trust Units will
gain ownership in a larger underlying asset base that is not
subject to a fiscally struggling third party operator (Avalon), and
the prospect of future price appreciation in their shares with an
improved market. Following consummation of a business combination
between the parties, PEDEVCO would seek to invest capital to
recommence production on the idle wells currently underlying the
Trust’s assets as the Trusts structural disincentives will be
eliminated, as well as to drill and complete wells to increase
production in its legacy asset base.
For
further reference, printed below are excerpts of the Trust’s
original conveyance documents, publicly available in the
Trust’s filings with the SEC, which sections address early
dissolution of the Trust, sale procedures, and business
combinations. Trust Unit holders will note that their Trust Unit
holdings will likely be of much more value in a business
combination under Section
9.04 than in an asset sale described in Section 9.03. (bolded text
added for emphasis and italicized text included for further
explanation):
Section 9.03. Disposition and Distribution of Assets and
Properties.
Notwithstanding the
dissolution of the Trust pursuant to Section 9.02, the Trustee and
the Delaware Trustee shall continue to act as trustees of the Trust
Estate and as such shall exercise the powers granted under this
Agreement until their duties have been fully performed and the
Trust Estate finally distributed so that the affairs of the Trust
have been wound up. Upon the sale of all or a portion of the Trust
Estate pursuant to Section 3.02 of this Agreement or the
dissolution of the Trust pursuant to Section 9.02, the Trustee
shall sell for cash in one or more sales all of the properties
other than cash then constituting the Trust Estate after any
reconveyance of assets to [Avalon] pursuant to the Conveyances;
provided, however, [Avalon] shall
have a right of first refusal to acquire the subject properties
being offered in each sale pursuant to the following
procedures: [The operator
(Avalon) has the right of first refusal to buy the underlying
assets. If the underlying operator (Avalon) buys the assets through
the exercise of its right of first refusal, it could immediately
fix all the downed wells to significantly increase production and
the value of the assets, and/or seek to divest the assets with no
obligations to the Trust. All of this added value will go to the
operator rather than the holders of Trust Units as they will only
get whatever cash the operator pays for the assets through the
operators’ exercise of its right of first refusal. It is of
great importance to note that the acquisition markets for oil and
gas assets are currently severely depressed and there will likely
not be any market offers for the underlying
assets.]
(a)
Within 30 days of the Liquidation Date, or after the date such sale
pursuant to Section 3.02 is approved, as applicable, the Trustee
shall use commercially reasonable efforts to retain a third-party
advisor to market the subject properties;
(b) If
the Trustee receives a bona fide purchase offer from a proposed
purchaser other than [Avalon] and desires to sell all or part of
the subject properties pursuant to this Section 9.03, then the
Trustee shall give notice (the “Offer Notice”) to
[Avalon], identifying the proposed purchaser from whom it has
received a bona fide offer and setting forth the proposed sale
price, payment terms and other material terms and conditions under
which the Trustee is proposing to sell such subject properties to
the proposed purchaser. [Avalon] shall have 30 days from its
receipt of the Offer Notice to elect, by written notice to the
Trustee, to purchase the subject properties offered for sale on the
terms and conditions set forth in the Offer Notice.
7
(c) If
[Avalon] makes such election, the notice of election shall state a
closing date not later than 60 days after the date of the Offer
Notice (subject only to customary closing conditions that could
delay such closing date, including obtaining necessary governmental
approvals). If [Avalon] makes such election and actually completes
the purchase of the subject properties, the proposed purchaser
identified in the Offer Notice shall be entitled to receive
reimbursement of its reasonable and documented expenses incurred in
connection with its review and analysis of the subject properties
and bid preparation. [Avalon] shall pay the proposed purchaser 50
percent of such reimbursement, and the Trust shall pay the proposed
purchaser 50 percent of such reimbursement; provided, however, the
amount of such reimbursement shall be limited to 5 percent of the
sales price received by the Trust for the subject
properties.
(d) If
[Avalon] does not give notice within the 30-day period following
the Offer Notice that it elects to purchase such subject
properties, the Trustee may, within 60 days after the end of such
30-day period, sell such subject properties to the identified
purchaser on terms and conditions that are substantially the same
as those previously set forth in such Offer Notice. In the event
the Trustee shall desire to offer such subject properties for sale
on terms and conditions other than terms and conditions that are
substantially the same as those previously set forth in an Offer
Notice, the procedures set forth in this Section 9.03 must again be
initiated and applied with respect to the terms and conditions as
modified.
(e)
If, after a reasonable marketing
period, no bona fide purchase offer is received with respect to any
or all of the subject properties from any party other than
[Avalon], then [Avalon] shall obtain, at the Trust’s expense,
and deliver to the Trustee, a fairness opinion from a
nationally-recognized valuation firm with expertise in valuing oil
and natural gas properties stating that the proposed sale price to
be paid by [Avalon] to the Trust for the subject properties is fair
to the Trust. [PEDEVCO believes that this does not guarantee
an acceptable price as the market for oil and gas acquisitions has
been depressed for over 2 years and pricing is low. Even if a
fairness opinion is given, PEDEVCO expects that the Trust will be
selling out at or near the absolute bottom of the
market.]
The Trustee shall not be required to obtain
approval of the Trust Unitholders [In a business combination as PEDEVCO is
proposing, the holders of Trust Units will get to vote as to
whether or not to accept the terms of the
combination] prior to performing any of its
duties pursuant to this Section 9.03. Notwithstanding anything
herein to the contrary, in no event may the Trustee distribute the
Royalty Interests to the Trust Unitholders. Upon completion of the
dissolution and winding up of the Trust in accordance with Sections
9.02 and 9.03 hereof and Section 3808 of the Trust Act, the Trustee
shall direct the Delaware Trustee to execute and file, and the
Delaware Trustee shall execute and file or cause to be filed, a
certificate of cancellation of the Trust’s Certificate of
Trust in accordance with Section 3811 of the Trust Act. Upon the
filing of such certificate of cancellation, the Trustee shall have
no further duty or obligation or any further liability under this
Agreement except as provided in Section 6.01.
Section 9.04. Reorganization or Business Combination.
(a)
The Trust may merge or consolidate
with or into, or convert into, one or more other Entities in
accordance with Section 3815 of the Trust Act if such transaction
(i) is agreed to by the Trustee, (ii) is approved by the vote of a
Unit Majority at a meeting duly called and held in accordance with
Article VIII and (iii) is permitted under the Trust Act and any
other applicable law. [A business combination is allowed under the
Trust’s organizational documents and gives the holders of
Trust Units the right to vote in their best economic interest
– PEDEVCO would anticipate a merger being accomplished
following the exchange offer, assuming we were able to obtain a
sufficient percentage of Trust Units as part of the
exchange.] The Trustee shall give prompt notice of such
reorganization or business combination to the Delaware Trustee.
Pursuant to and in accordance with the provisions of Section
3815(f) of the Trust Act, and notwithstanding anything else herein,
an agreement of merger or consolidation approved in accordance with
this Section 9.04 and Section 3815(a) of the Trust Act may effect
any amendment to this Agreement or effect the adoption of a new
trust agreement if it is the surviving or resulting trust in the
merger or consolidation.
8
(b)
Upon the effective date of a certificate of merger duly filed in
accordance with the Trust Act, the following shall be deemed to
occur, in addition to such effects as may be specified under the
Trust Act as then in effect:
(i) all of the rights, privileges and powers
of each of the business entities that have merged or consolidated,
and all property, real, personal and mixed, and all debts due to
any of those business entities and all other things and causes of
action belonging to each of those business entities shall be vested
in the surviving business entity and, after the merger or
consolidation, shall be the property of the surviving business
entity to the extent they were part of each constituent business
entity; [Holders of Trust
Units will become shareholders of PEDEVCO, and the Trust’s
assets will become assets of PEDEVCO upon closing of a
combination.]
(ii)
the title to any real property vested by deed or otherwise in any
of those constituent business entities shall not revert and shall
not
be in
any way impaired because of the merger or
consolidation;
(iii)
all rights of creditors and all liens on or security interest in
property of any of those constituent business entities shall be
preserved unimpaired; [PEDEVCO
has zero debt]
(iv)
all debts, liabilities and duties of those constituent business
entities shall attach to the surviving or resulting business
entity, and may be enforced against it to the same extent as if the
debts, liabilities and duties had been incurred or contacted by it;
and [PEDEVCO has zero
debt]
(v) if
the Trust is the surviving or resulting entity, the governing
instrument of the Trust shall be amended or a new governing
instrument adopted as set forth in the certificate of
merger.
(c)
A merger or consolidation effected
pursuant to this Section 9.04 shall not be deemed to result in a
transfer or assignment of assets or liabilities from one entity to
another having occurred. [Trust Unit holders will continue to have an
interest in the current underlying assets of the Trust through
their ownership in PEDEVCO, plus an expanded asset base that
includes all of PEDEVCO’s asset.]
PEDEVCO
believes that the best way for current holders of Trust Units to
have a chance of retaining and growing their investment is through
the Trustee and Avalon engaging in meaningful discussions with
PEDEVCO in contemplation of the potential acquisition of the Trust,
its underlying assets, and their operatorship by PEDEVCO through
the issuance of PEDEVCO common stock as consideration for Trust
Units and underlying assets. PEDEVCO believes a potential
transaction could result in holders of Trust Units gaining
ownership in a larger underlying asset base as well as potential
for future price appreciation. PEDEVCO believes it represents a
stable business partner with a strong balance sheet and familiarity
with the Trust’s underlying assets.
If
PEDEVCO is successful in acquiring the Trust Units, assets
underlying the Trust, and operatorship thereof, PEDEVCO plans to
invest capital to recommence production on the idle wells currently
underlying the Trust assets, as well as to drill and complete wells
in PEDEVCO’s legacy asset base to increase production and
cash flow.
For all
the reasons stated above, we strongly urge that the Trustee and
Avalon consider our proposal and enter into serious discussions
with PEDEVCO in contemplation of the potential acquisition of the
Trust, its underlying assets, and their operatorship by PEDEVCO
through the issuance of PEDEVCO common stock as consideration for
Trust Units and underlying assets. We look forward to the
possibility of working with you to consummate a
transaction.
Regards,
/s/ J. Douglas Schick
J.
Douglas Schick
President
PEDEVCO
Corp.
9
Cautionary Statement Regarding Forward Looking
Statements
All
statements in this correspondence that are not based on historical
fact are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 and the provisions
of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the
"Acts"). In particular, when used in the preceding discussion, the
words "estimates," "believes," "hopes," "expects," "intends,"
"plans," "anticipates," or "may," and similar conditional
expressions are intended to identify forward-looking statements
within the meaning of the Act, and are subject to the safe harbor
created by the Act. Any statements made herein other than those of
historical fact, about an action, event or development, are
forward-looking statements. While management has based any
forward-looking statements contained herein on its current
expectations, the information on which such expectations were based
may change. These forward-looking statements rely on a number of
assumptions concerning future events and are subject to a number of
risks, uncertainties, and other factors, many of which are outside
of PEDEVCO’s control, that could cause actual results to
materially differ from such statements. Such risks, uncertainties,
and other factors include, but are not necessarily limited to,
those set forth under Item 1A "Risk Factors" in PEDEVCO’s
Annual Report on Form 10-K for the year ended December 31, 2019 and
subsequently filed Quarterly Reports on Form 10-Q under the heading
"Risk Factors". PEDEVCO operates in a highly competitive and
rapidly changing environment, thus new or unforeseen risks may
arise. Accordingly, readers should not place any reliance on
forward-looking statements as a prediction of actual results.
PEDEVCO disclaims any intention to, and undertakes no obligation
to, update or revise any forward-looking statements, except as
otherwise required by law, and also takes no obligation to update
or correct information prepared by third parties that are not paid
for by PEDEVCO. Readers are also urged to carefully review and
consider the other various disclosures in PEDEVCO’s public
filings with the Securities Exchange Commission (SEC).
This
correspondence letter shall not be deemed an offer to sell (or
exchange) securities or the solicitation of an offer to buy
securities, nor an offer for any unit holder to tender any units,
nor shall there be any solicitation, offer, sale or purchase of
securities in any jurisdiction in which such offer, solicitation,
purchase or sale would be unlawful prior to registration or
qualification under the securities laws of such jurisdiction.
Furthermore, this release does not constitute an offer or
invitation to make a sales offer or a tender offer to purchase or
solicit acceptance of any tender offer (or exchange
offer).
10