P Rospectus S Ummary
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the information under the headings “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes to those financial statements appearing elsewhere in this prospectus. You should read “Risk Factors” for more information about important risks that you should consider carefully before investing in our Class A common stock. Certain oil and gas industry terms used in this prospectus are defined in the “Glossary of Oil and Natural Gas Terms” in Annex A of this prospectus.Roan Inc. was incorporated in September 2018 to serve as a holding company and, prior to our reorganization, had no previous operations, assets or liabilities. Unless otherwise indicated, the historical financial, reserve and operational information presented in this prospectus (i) on and after September 24, 2018, is that of Roan Inc., and (ii) prior to September 24, 2018, is that of Roan LLC, our predecessor. The historical financial and operational information of Roan LLC presented in this prospectus, (i) prior to August 31, 2017, the date of the completion of the Contribution described under “Recent Developments—History and Reorganization” and “Reorganization,” is that of Citizen, the predecessor of Roan LLC for financial reporting purposes and (ii) on and after August 31, 2017, is that of Roan LLC. Therefore, the historical financial and operating information of Citizen prior to August 31, 2017 does not include financial information relating to the Linn Contributed Business.
Our Company
We are an independent oil and natural gas company focused on the development of our assets throughout the eastern and southern Anadarko Basin. The Anadarko Basin, which spans from south-central Oklahoma to the northeast corner of the Texas panhandle, is one of the largest and most prolific onshore oil and natural gas basins in the United States, featuring multiple producing horizons and extensive well production history demonstrated over seven decades of development. We focus our development on formations where we believe we can apply our technical and operational expertise in order to increase production and cash flow. Our objective is to maximize shareholder value and corporate returns by generating steady production growth, strong pre-tax margins and significant cash flow.
Through December 31, 2018, we and our predecessors have drilled 214 gross (72 net) wells in the Merge, SCOOP and STACK plays. Our acreage position is concentrated in areas that we believe demonstrate higher percentage production of oil and NGLs, and provides us development opportunities through multiple stacked prospective development horizons. We believe these development horizons have been substantially de-risked through the development of more than 400 horizontal wells since early 2014, of which 152 were drilled by us or our predecessors, and over 4,450 vertical wells drilled in our development area, as well as associated subsurface data, including well cores and logs and 3-D seismic and the consistent geology surrounding our position. As of December 31, 2018, we operated 163 gross (131 net) horizontal producing wells and had an interest in an additional 317 gross (19 net) horizontal producing wells.
As of December 31, 2018, we held leasehold interests in approximately 383,000 gross (172,000 net) acres in the Anadarko Basin. As of December 31, 2018, our total estimated proved reserves were approximately 305,959 MBoe. For the quarter ended March 31, 2019 our average net daily production was 48.9 MBoe/d (approximately 26% oil, 44% natural gas and 30% NGLs).
We have chosen to focus our development efforts on the Merge play, as we believe it benefits from the following attributes:
As of December 31, 2018, we had assembled a total leasehold position of approximately 172,000 net acres, which is predominantly concentrated in the Merge and SCOOP plays. In addition to the subsurface benefits of our position, we believe our acreage position benefits from the following characteristics:
The table below provides a summary of our acreage position as of December 31, 2018:
Our Drilling Program and Completion Techniques
We intend to target accretive growth in production and cash flow by developing and expanding our significant portfolio of drilling locations. We believe that our recent well results demonstrate that many of our development projects are capable of producing attractive rates of return that are competitive with many of the top performing basins in the United States. We are focused on drilling wells with high rates of return, repeatable production profiles and increasing estimated ultimate recoveries (“EURs”) while at the same time seeking to capitalize on drilling, completion and operating efficiencies. Our management team assumed operation of our properties in the first half of 2018 and has achieved meaningful operational advancements, including (i) improvement in lateral targeting, (ii) reductions in development cycle times, (iii) optimization testing of well completion methods, (iv) well flowback management, and (v) expanded subsurface data coverage, including 3-D seismic.
Reserves Information
The following table provides summary information regarding our proved reserves as of December 31, 2018. Approximately 93% of our proved reserve estimates as of December 31, 2018 were prepared by DeGolyer and MacNaughton, our independent reserve engineers (“DeGolyer and MacNaughton”). Our personnel prepared reserve estimates with respect to the remaining approximate 7% of our proved reserves as of December 31, 2018.
Henry Hub spot price of $3.16 per MMBtu as of December 31, 2018, was similarly adjusted for gravity, quality, local conditions, gathering, transportation fees and distance from market. All prices are held constant throughout the lives of the properties. The average adjusted product prices weighted by production over the remaining lives of the properties are $64.49 per barrel of oil, $20.35 per barrel of NGLs and $1.90 per Mcf of natural gas as of December 31, 2018.Our Business Strategies
Our primary objective is to maximize shareholder value across business cycles by pursuing the following strategies:
rate of return associated with the development of a particular unit. According to RS Energy Group, child wells are generally at least 25% more productive if drilled within 1.5 years of the development of the parent well, as compared to child wells drilled 1.5 to 3 years following the development of the parent well. Operational and developmental control positions us to minimize the adverse impacts associated with this time lag.
Our Competitive Strengths
We believe the following strengths will allow us to successfully execute on our business strategies:
onshore oil-weighted basins. While oil represents a significant portion of our total revenues, natural gas and NGLs comprise a majority of our reserves and production. While we believe we have favorable realized price differentials for natural gas and NGLs compared to other basins, our realized natural gas price differential is based on the sales price at multiple hubs and our NGLs are sold on a product by product basis. Oklahoma has a long history of oil and natural gas production, and therefore there is existing midstream infrastructure in place across our acreage position to support our drilling program. In addition, we believe that oilfield services availability is greater in our focus area than in other major U.S. onshore basins and that such availability is a competitive advantage in assuring the ability to access necessary development services at attractive pricing.
Historical Capital Expenditures and Capital Budget
Our 2019 capital budget is approximately $515 million to $555 million. During the three months ended March 31, 2019, capital expenditures were approximately $173.6 million. We expect our 2019 capital budget to be more heavily weighted in the first half of the year as a result of increased completion activity as we develop our inventory of drilled but uncompleted wells from 2018.
Because we are the operator of a high percentage of our acreage and a majority of our acreage is held by production, the amount and timing of our capital expenditures is largely discretionary and within our control. We could choose to defer a portion of these planned capital expenditures depending on a variety of factors, including, but not limited to, the success of our drilling activities, and prevailing and anticipated prices for oil and natural gas. A deferral of planned capital expenditures, particularly with respect to drilling and completing new wells, could result in a reduction in anticipated production and cash flows and loss of acreage through lease expirations. In addition, we may be required to reclassify some portion of our reserves currently booked as proved undeveloped reserves to no longer be proved reserves if such a deferral of planned capital expenditures means we will be unable to develop such reserves within five years of their initial booking.
History and Reorganization
Our predecessor, Roan LLC, was initially formed by Citizen in May 2017. In June 2017, subsidiaries of Old Linn, together with Citizen and Roan LLC entered into a contribution agreement pursuant to which, among other things, Old Linn and Citizen agreed to contribute certain oil and natural gas assets to Roan LLC (the “Contribution”), each in exchange for a 50% equity interest in Roan LLC. On August 31, 2017, Old Linn and Citizen consummated the transactions contemplated by such contribution agreement. Following these transactions, Citizen’s equity interest in Roan LLC was held through its wholly owned subsidiary, Roan Holdings.
In the third quarter of 2018, Old Linn and certain of its subsidiaries undertook an internal reorganization, pursuant to which Old Linn merged with and into a wholly owned subsidiary of New Linn. Following such internal reorganization, New Linn completed the spin-off of substantially all of its assets, other than its 50% equity interest in Roan LLC.
On September 17, 2018, New Linn, Roan Holdings and Roan LLC entered into a Master Reorganization Agreement (the “Master Reorganization Agreement”), to effectuate the reorganization of New Linn’s and Roan Holdings’ respective 50% equity interests in Roan LLC under Roan Resources, Inc. On September 24, 2018, the Company consummated the Reorganization, which resulted in the existing stockholders of New Linn receiving 50% of the Class A common stock of the Company and Roan Holdings receiving 50% of the Class A common stock of the Company. In connection with the Reorganization, the Company became the owner, indirectly through its wholly-owned subsidiaries, of 100% of the equity in, and is the sole manager of, Roan LLC. The Company is responsible for all operational, management and administrative decisions relating to Roan LLC’s business.
The following chart provides a simplified overview of our organizational structure after giving effect to the Reorganization.
On November 9, 2018, the Company’s Class A common stock began trading on the NYSE under the symbol “ROAN.”
Recent Developments
Credit Facility Amendment
On June 19, 2019, we amended (the “Amendment”) Roan LLC’s existing credit agreement, dated as of September 5, 2017 (as amended, amended and restated, supplemented or otherwise modified from time to time, our “credit facility”) to, among other things, (i) reaffirm the borrowing base under our credit facility at $750 million; (ii) temporarily reduce the current ratio for the test period (x) ending June 30, 2019 to 0.85 to 1.00 and (y) ending September 30, 2019 to 0.80 to 1.00; (iii) increase the rates per annum in the borrowing base utilization grid for LIBOR Loans and ABR Loans (each as defined in our credit facility) by 0.25% over the rates set forth in such borrowing base utilization grid until the current ratio is not less than 1.00 to 1.00; (iv) increase the mortgage coverage requirement from 85% to 95% and allows 30 days after the Amendment closing date to mortgage any additional properties not already mortgaged; and (v) restrict Roan LLC, as borrower, from making certain restricted payments to Roan Inc. incidental with any permitted transfer of Roan LLC’s oil and natural gas properties to Roan Inc. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility.”
Common Stock Subscription Agreement
On June 19, 2019, we entered into a commitment letter for a $100 million term loan facility with affiliates of certain of our significant stockholders. In connection with the commitment, on June 26, 2019, we entered into the Common Stock Subscription Agreement with the affiliates of certain of our significant stockholders, pursuant to which in exchange for the commitments, we issued 1,525,395 shares of Class A common stock on June 26, 2019 for an aggregate price of $1,525.40. The terms of the commitment letter and Common Stock Subscription Agreement were evaluated and negotiated by an independent committee of our Board of Directors comprised of board members unaffiliated with the lending parties with the assistance of financial and legal advisors.
Term Loan Facility
On June 27, 2019, we entered into a $100 million credit agreement (the “Term Loan Facility”) between us, as borrower, Cortland Capital Market Services LLC, as administrative agent, and affiliates of certain of our significant stockholders party thereto. The loans under the Term Loan Facility were funded at 97.5% of the original principal amount of such loans and the proceeds of the loans will be used to fund our operations and to pay outstanding borrowings under the credit facility.
Risk Factors
Investing in our Class A common stock involves risks. You should carefully read and consider the section of this prospectus titled “Risk Factors” beginning on page 18 and all other information in this prospectus before investing in our Class A common stock.
Corporate Information
Our principal executive offices are located at 14701 Hertz Quail Springs Pkwy, Oklahoma City, Oklahoma 73134, and our telephone number at that address is (405) 896-8050. Our website is located at www.roanresources.com. We make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (the “SEC”) available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.
The Offering
Summary Historical and Unaudited Pro Forma Financial Data
Roan Resources, Inc. was incorporated in September 2018 to serve as a holding company and, prior to the Reorganization, had no previous operations, assets or liabilities. The historical financial information included in this prospectus (i) on and after September 24, 2018, is that of Roan Inc., and (ii) prior to September 24, 2018, is that of Roan LLC, our predecessor. The historical financial and operational information of Roan LLC presented in this prospectus, (i) prior to August 31, 2017, the date of the completion of the Contribution is that of Citizen, the predecessor of Roan LLC for financial reporting purposes and (ii) on and after August 31, 2017, is that of Roan LLC. Therefore, the historical financial and operational information of Citizen prior to August 31, 2017 does not include financial information relating to the oil and natural gas assets contributed to Roan LLC by Old Linn in connection with the Contribution.
The summary historical statement of operations data for the years ended December 31, 2018, 2017 and 2016 was derived from the audited historical financial statements of Roan Inc. included elsewhere in this prospectus. The summary historical balance sheet data as of December 31, 2018 and 2017 was derived from the audited historical financial statements of Roan Inc. included elsewhere in this prospectus. The summary unaudited historical interim condensed financial data as of and for the three months ended March 31, 2019 and 2018 was derived from our unaudited interim condensed financial statements included elsewhere in this prospectus. The summary unaudited historical condensed interim financial data has been prepared on a consistent basis with the audited financial statements of Roan Inc. In the opinion of management, such summary unaudited historical condensed interim financial data reflects all adjustments (consisting of normal and recurring accruals) considered necessary to present our financial position for the periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year because of the impact of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results and other factors.
Our historical results are not necessarily indicative of future results. You should read the following table in conjunction with “Selected Historical and Unaudited Pro Forma Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical and pro forma financial statements and accompanying notes included elsewhere in this prospectus.
The summary unaudited pro forma condensed statement of operations data for the year ended December 31, 2018 has been prepared to give pro forma effect to the Reorganization as if it had occurred on January 1, 2018. The summary unaudited pro forma condensed financial data is provided for illustrative purposes only and is not indicative of the results that actually would have occurred had the transactions been in effect on the dates or for the periods indicated, or of results that may occur in the future.
Non-GAAP Financial Measure
Adjusted EBITDAX and Net Debt Adjusted EBITDAX is a supplemental non-GAAP financial measure that is used by management and other users of our financial statements. We define Adjusted EBITDAX as net income (loss) adjusted for interest expense, depreciation, depletion, amortization and accretion, income tax expense, exploration costs, non-cash equity-based compensation expense, gain on early termination of derivative contracts, non-cash (gain) loss on derivative contracts, reorganization transaction costs, expense for allowance for doubtful accounts and gain on sale of assets. Adjusted EBITDAX is not a measure of net income as determined by GAAP. Our predecessor, Roan LLC, passed through its taxable income to its owners for other income tax purposes and thus, we have not incurred historical income tax expenses.
We believe Adjusted EBITDAX is useful because it allows our management to more effectively evaluate the operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We add the items listed above to net income (loss) in arriving at Adjusted EBITDAX because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDAX should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDAX are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDAX.
Net Debt is a non-GAAP financial measure equal to long-term debt outstanding less cash on hand as of the date presented. Our computations of Adjusted EBITDAX and Net Debt may not be comparable to other similarly titled measures of other companies or to such measure in our credit facility or any of our other contracts. The following tables presents a reconciliation of Adjusted EBITDAX to net income (loss), and a reconciliation of Net Debt to long-term debt, our most directly comparable financial measures calculated and presented in accordance with GAAP for each of the periods indicated.
PV-10
PV-10 is a non-GAAP financial measure and represents the present value of estimated future cash inflows from proved oil and gas reserves, less future development and production costs, discounted at 10% per annum to reflect the timing of future cash flows. Calculation of PV-10 does not give effect to derivatives transactions. Management believes that PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and natural gas companies. Because there are many unique factors that can impact an individual company when estimating the amount of future income taxes to be paid, management believes the use of a pre-tax measure is valuable for evaluating the Company. PV-10 should not be considered as an alternative to the standardized measure of discounted future net cash flows as computed under GAAP.
Summary Historical Reserve and Operating Data
The following table presents, as of December 31, 2018, summary data with respect to our estimated net proved reserves.
Approximately 93% of our proved reserve estimates as of December 31, 2018 were prepared by DeGolyer and MacNaughton. Our personnel prepared reserve estimates with respect to the remaining approximate 7% of our proved reserves as of December 31, 2018. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business—Oil and Natural Gas Data—Proved Reserves” in evaluating the material presented below.
industry use PV-10 as a measure to compare the relative size and value of proved reserves held by companies without regard to the specific tax characteristics of such entities. Please see “Summary Historical and Unaudited Pro Forma Financial Data—Non-GAAP Financial Measure—PV-10.”The following table reconciles the GAAP standardized measure of discounted future net cash flows to PV-10 at December 31, 2018 (in thousands):
The following table sets forth information regarding net production of oil, natural gas and NGLs, and certain price and cost information for each of the periods indicated: