Oil and Gas Independent RAM Energy Hunts for a Buyer

On Tuesday, RAM Energy Resources (RAME) put out the sort of press release that is designed to get the attention of investors: The independent oil and natural gas company has hired financial advisers Jefferies & Company (JEF) to assist in a "strategic review process." In other words, the company is considering a sale, refinancing or recapitalization. Shares of RAM jumped 34% on the news to $2.37 in Tuesday's trading.

In light of the recent spate of deal-making in the energy sector, RAM's timing looks spot-on. And despite the increase in the stock price, the company may still be undervalued -- if a deal gets done.

A Look at RAM

RAM's oil and natural gas business is focused mostly in Texas, Louisiana and Oklahoma. The company took its current form as the result of a merger between RAM Energy and Tremisis Energy Acquisition in 2006. Then, a year later, the company acquired Ascent Energy for $303.8 million.

But after that transaction, the oil and gas industry underwent a terrible recession. Today, RAM's market cap is about half of what it paid for Ascent. Still, RAM has proven fields and a strong track record. For example, about 94% of its wells have been successful.

As of the end of last year, RAM had estimated net proved reserves equivalent to 33.9 million barrels of oil. The spread is fairly balanced, with 41% crude, 44% natural gas and 15% natural gas liquids.

The company is also benefiting from some key positive trends: higher prices for hydrocarbon and lower lease expenses. What's more, RAM has been able to reduce its general and administrative costs. As a result, the company posted EBITDA of $15.7 million in the latest quarter, up 34% over the past year.

Good Reasons to Sell

Even with improved results, RAM still faces challenges as an independent operator. After all, energy prices remain volatile and it is still difficult to get credit. RAM does have the resources to finance its capital budget of about $50 million or so. But there will still be limits on growth in terms of acquisitions.

So, a sale looks like a good option. In fact, there is likely to be interest from private-equity players that see the long-term potential. Just look at KKR's recent deal for East Resources, which netted a significant return.

One final key fact to note: The people who would be maneuvering for a deal have great incentives to see one signed. Between them, the directors, executive officers and two principal shareholders own roughly 52% of the outstanding shares of RAM.