Benzinga | Nov 9, 2020 07:48AM EST

PEDEVCO Makes Second Public Request to Avalon and Montare to Provide Transparency to the Holders of SandRidge Permian Trust Common Units Regarding the Sale of Assets Resulting in Release of 31.8% of the Trust's Royalty Interests for $4.9M

PEDEVCO Corp. (NYSE:PED) ("PEDEVCO") today issues this public statement to Avalon Energy, LLC ("Avalon") and Montare Resources I, LLC ("Montare"), requesting information regarding their transaction announced October 14, 2020 wherein Montare acquired certain wells and leasehold interests from Avalon (the "Asset Sale") releasing royalty interests representing 31.8% of the total fair value of all royalty interests owned by the SandRidge Permian Trust (OTC Pink Sheets: PERS) (the "Trust"), for which Avalon has paid the Trust approximately $4.9 million.

PEDEVCO requests information from Avalon and Montare demonstrating that the Asset Sale truly reflected an arm's-length transaction done between non-affiliated parties at fair value. Based on public information, it appears that these entities are under common ownership and control, with Carter Montgomery (Executive Chairman of Avalon), Steve Pugh (President and CEO of Avalon), and Brandon Hall (CFO of Avalon) not only serving as executive officers of Avalon, but also as "Principals" of Montare Partners Holdings I, Ltd and Montare Partners I, Ltd., a "Principal" of each, Dickie D. Hunter, also serves as the President of Montare and certain of its related entities. Further, Avalon and Montare have entered into multiple agreements, including a Contribution and Support Agreement dated August 26, 2020 and a Joint Filing Agreement dated August 26, 2020 as filed with the SEC, demonstrating their commonality of interest. Even the Trustee of the Trust has referred to Avalon and Montare's "close relationship." Specifically, related to Avalon's ability to sell up to $5 million of Trust royalty interests per year per the Trust Conveyance Agreement, the Trustee stated in its September 4, 2020 letter to Avalon: "The Trustee believes that the purpose behind that provision, however, was not to enable Avalon to employ that sale procedure to force the Trust to enter into a merger with an entity with which Avalon has a close relationship" (emphasis added). If Avalon and Montare are indeed affiliates, under common ownership and control, or even in a "close relationship," it begs the question how they fairly arrived at $4.9 million as fair value for 31.8% of the Trust's total assets?

Further, if $4.9 million is truly fair value for 31.8% of the Trust's total assets, then that would imply the full value of the Trust's assets prior to the Asset Sale were worth only $15.4 million, leaving the Trust now with remaining assets with an implied value of only approximately $10.5 million. If the Trust was really only worth $15.4 million prior to the Asset Sale, then why, as of October 15, 2020, had Montare acquired 2,773,067 Trust Common Units on the open market at a cumulative weighted average price of $0.4366 per unit, which implies a Trust value of $22.9 million? Notably, PEDEVCO's exchange offer for the Trust's Common Units, when initially made on October 13, 2020, valued the Trust at $28.1 million.

Based on these actions by Avalon and Montare, PEDEVCO strongly believes that Avalon and Montare have significantly undervalued the Trust's royalty interests in the Asset Sale, resulting in the stripping of assets and potentially 31.8% of future distributable revenues that the Trust could expect to receive from future production from the underlying assets operated by Avalon, and perhaps more depending upon which underlying assets were sold by Avalon. PEDEVCO is concerned that one of the primary reasons for doing so is to almost guarantee that the cumulative quarterly distributions payable by Avalon to the Trust will fall below $5 million over the four quarters ended December 31, 2020, which will automatically trigger the Trustee to commence dissolution of the Trust, in which event Avalon will be entitled to exercise its right of first refusal to acquire all remaining Trust assets at auction at potentially deeply discounted prices.

PEDEVCO demands, on behalf of all interested parties and Common Unit holders of the Trust, that Avalon and Montare publicly release, or provide to the Trustee for public release: (i) details as to which Trust royalty interests were released in the $4.9 million Asset Sale; (ii) a detailed analysis to support the $4.9 million valuation ascribed to these royalty interests; and (iii) an explanation as to why Avalon and Montare were able to effectuate a cash closing of $4.9 million in the Asset Sale that stripped assets from the Trust before Avalon paid to the Trustee the $4.65 million distribution from the period ending February 29, 2020 that remains unpaid and outstanding?

PEDEVCO requests the above information by 5:00 p.m., Central Time, November 13, 2020, as these details are critical to PEDEVCO's evaluation of the Asset Sale and its impact on the value to ascribe to the Trust in its pending exchange offer.