RAM Energy Holdings LLC: IVQ 2020 Update

Every quarter we get an update from PennantPark Investment (PNNT) about its portfolio company RAM Energy Holdings, LLC. The BDC and company go all the way back to 2011 when the BDC first advanced $17mn in debt. Now, PNNT – after doubling down again and again – has invested $162.7mn at cost in the E&P company. The investment is currently in the form of non-income producing common stock. RAM is the BDC’s largest investment at cost and deserves our periodic attention.

RAM has has been an underperformer for years. As recently as the IVQ 2019 PNNT converted its first lien debt to equity. By the IIIQ 2020, the discount on the investment was -45%.

PNNT had the following to say on its February 10, 2021 conference call about the latest developments at the company, which we are quoting in full:

The new credit facility led by Vast Bank under the Main Street Lending Program, materially lowered RAM’s cost of capital and provide the runway to execute on its operating plan and time to wait for a recovery in prices. During Q4, RAM was impacted by the lingering impact from COVID and a difficult 2020, which included higher debt, continued lower prices, reduced production and the impact of monetizing its hedge positioning at the time of the refinancing. Additionally, RAM began work on its last 2 uncompleted wells, which were finished recently. While still early, production of these wells is expected to be strong. Even though the December 31 quarter had several impacts, RAM is now on stable operational and financial footing that should benefit from higher prices and production. The company is free cash flow positive after debt service, and we use any free cash flow to service and repay debt”.

The sanguine tone above notwithstanding, the discount increased to -55%, bringing the value to $73mn.

We retain a CCR 4 rating on the company. If the remaining value were to be written off – not inconceivable in an oil & gas investment at the bottom of a balance sheet – PNNT would incur a -$1.09 a share loss, an eighth of its net assets. No wonder management is looking for another way out. Given all the recent “great escapes” we’ve seen in the credit markets of late – admittedly very few in the energy complex – maybe Ram Energy can yet surprise us.