Since its founding in 2004, Resolute Energy (NYSE: REN) has focused on developing legacy oil assets that provide long-term production growth opportunities and stable cash flows. Recently, REN began adding oil development assets to its portfolio with acquisitions in the Permian Basin. In Q2’11, the company produced an average of 8,012 BOEPD net from oilfields located in Wyoming, the Williston Basin in North Dakota, Utah, and more recently, the Permian Basin.
Resolute had an enterprise value of $733 million as of October 7, 2011, which included $66.5 million of debt outstanding on its $500 million revolving credit facility (the company has not made an announcement on its redetermination process as of this writing). The company has a large inventory of oil projects, including tertiary recovery and development drilling in some of the most attractive basins providing additional growth catalysts for a company with a strong balance sheet.
A Unique Twist to the Traditional Oil Exploration Story:
In 2008 Resolute acquired the Aneth Field complex in Utah from ExxonMobil (NYSE: XOM). Originally discovered in 1956, the Aneth Field is estimated to hold 1.5 billion barrels of oil originally in place (OOIP) and of that, 422 MMBO have been produced (or 28% of total OOIP). Since acquiring Aneth, Resolute implemented a tertiary CO2 flood program and expects to increase recovery to 34%. The project is supplied by a natural CO2 resource from the McElmo Dome, located approximately 20 miles from the company’s operations. REN has a nine-year long-term transportation contract with Kinder Morgan and a 25-mile company owned pipeline to get the CO2 to Aneth. REN has a four phase injection program ongoing on its Aneth Unit, with phase four being initiated in 2011. Since 2009, the company has increased production by 10% to nearly 6,000 BOEPD; however, through additional infill drilling programs and phase four of its tertiary techniques, the company plans to ramp-up production by 84% over the next five years by investing $297 million. REN has reported in recent presentations that the Aneth field requires minimal maintenance CAPEX and that at current service costs and prices, only $11 million annually is required to keep production flat. In addition, Resolute estimates that for every 1% incremental increase in recovery another 8 MMBO of proved reserves is added, net to Resolute. The Aneth Field growth plan is self-funded and gives Resolute a foundation asset to grow free cash flow for reinvesting into other oil growth projects.
Mowry Oil Shale Play in Wyoming; Targeting New Horizons:
REN acquired the Hilight Field in the Powder River Basin in 2008. The company has been exploring the Mowry oil shale play on its 45,000 acres that are HBP. In 2011, Resolute completed three Mowry recompletions and plans to make a total of twelve during this year. As of September 2011, REN had finished four Mowry recompletions bringing the total to six and of those, two were declared commercial and four were waiting on results. The company expects to conduct eight more Mowry recompletions in the last half of 2011. In addition, REN has identified 40 additional Mowry recompletion locations for 2012 and beyond. REN plans to conduct a 3-D seismic shoot over the Hilight Field in Q4’11 to high-grade the best Mowry recompletion opportunities and identify additional uphole potential of the existing vertical wells. Keep an eye out for the Niobrara and Turner plays to the Southwest of the company’s Hilight acreage. The zones have been deemed productive by the company and steady increases in industry activity have been ongoing.
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In the Big Horn Basin, REN is also testing the Mowry play on its 70,000 acres. The company has reported “interesting” results from wells that the company has recompleted in the Mowry. Cirque Resources, a private company based in Denver has permitted three Mowry horizontal wells to the North of REN’s acreage. Plains Exploration (NYSE: PXP) has permitted four Mowry horizontals and has drilled and completed one well.
Bakken Oil Shale Play – Williston Basin:
With approximately 23,528 net acres in its New Home joint venture exploration agreement with GeoResources (NASDAQ: GEOI), the company has exposure to the red-hot Bakken oil shale play. The company has drilled eight gross wells with five wells producing as of August 2011. Resolute has a 29% average WI in the partnership. The partnership is looking to add a third rig to ramp up its ongoing drilling program.
Permian Basin Upside Potential:
Resolute entered the oil-prone Permian Basin in June 2011 through a $50 million acquisition of an operated interest in 18,400 gross acres (7,900 net acres) in the oil-prone Wolfbone play in the Delaware Basin of West Texas (Reeves County). Resolute obtained permits for its initial wells, and has secured rigs and other services. REN estimates it has more than 100 gross potential drill sites on 160-acre spacing. As of September 2011 year-to-date, REN reported it has drilled two wells and is currently drilling a third well with plans to drill eight additional wells by the end of 2011.
In addition to the Reeves County acreage, REN purchased 450 BOEPD net production (from seven wells) and 4.5 MMBOE of proved reserves for $50 million from a private seller in Martin and Howard Counties. The current wells are producing from the Mississippian formation with some contribution from the up-hole Pennsylvanian, Wolfcamp and Spraberry formations.
Strong Balance Sheet:
Resolute’s debt to market capitalization at October 11, 2011 was 9%, as compared to an average of 48% for Resolute’s peer group consisting of 13 companies sourced from EnerCom’s E&P database. REN’s net debt to BOE at October 11, 2011 was $1.02 per BOE, as compared to an average of $4.16 per BOE for Resolute’s peer group. Low debt means low financial risk and more cash flow available for reinvesting into growth.
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Resolute’s enterprise value to reserves on October 11, 2011 was $12.02 per BOE as compared to an average of $24.26 per BOE for Resolute’s peer group implying upside potential to its current valuation.
In summary, Resolute offers investors the security of a low-risk, stable production from the company’s foundational Aneth Field, a multi-year inventory of oil growth projects combined with strong cash flow and low financial risk.
