Oil & Gas
Resolute Energy (
) hosted the company's first-ever analyst day on June 19, 2013, at
the Westin Denver Downtown.
Resolute's primary business strategy is to re-invest free cash
flow generated from its Aneth Field, located in the Paradox Basin
of Utah, into faster-growing oil-prone regions. Over the past two
years, Resolute built positions in both the Bakken oil shale in
North Dakota and the Permian Basin in Texas. In Q4'12, Resolute
announced it had made two acquisitions of a combined 16,882 net
acres in the Permian Basin for $245 million, which it closed during
Q1'13. See our previous write-up "
Resolute Energy Corp. Powered Up in the Permian
The acquisitions in December 2012, doubled Resolute's Permian
Basin exposure to 16,882 net acres, up from 8,850 net acres at
September 30, 2012. Combined, REN purchased the new assets for
$99,271 per BOEPD or $26.63 per BOE proved. Given the company's
subsequent announcement to divest its Bakken assets in the
Williston Basin to help reduce debt taken on to buy the Permian
assets, it was clear that the Permian Basin would be REN's primary
growth asset moving forward.
With the strategic clarity that the Permian Basin is Resolute's
primary oil growth engine, REN was determined the time was right to
provide more transparency of its asset portfolio and growth
Nick Sutton, Chairman and Chief Executive Officer, kicked off
the meeting, which was a detailed operational overview on the
company's positions in Southeast Utah, the Permian Basin and
Northern Rockies. The core theme of the event was better defining
the potential of REN's asset portfolio and providing the investment
community the nuts and bolts needed to assess the value of the
company's multiple projects.
Production Growth - The Permian IS in the Driver's
Before getting into the detail of the analyst day presentation,
we thought it would be insightful to evaluate the contribution of
each of Resolute's major producing areas to the company's overall
The chart below illustrates the composition of the company's oil
production increase. In Q1'13, Resolute produced an average of
11,633 BOEPD, up 37% from the same quarter in the prior year.
Substantially all of the growth was driven by its Permian Basin
assets, which in Q1'13 produced an average of 3,111 barrels of oil
equivalent per day (BOEPD), an increase of 833% over the prior
(click to enlarge)
To put some perspective on how oil production growth in the
Permian has impacted Resolute, it bears noting that Aneth Field
(Utah) contributed 52% of total production in Q1'13, which was down
from 70% in the prior year period. We anticipate that increased
investment in the Permian Basin assets will continue to drive
production in that region at a faster rate than at Aneth Field,
which we expect will reduce Aneth Field production as a proportion
to total production in the quarters and years ahead.
Resolute's portfolio includes three prolific oil-rich assets
including the Aneth Field, the Permian Basin and exploratory
opportunities in Wyoming's Powder River Basin.
The graphic below illustrates where we assess the various assets
and projects in REN's portfolio on the "S-curve" of the asset
portfolio lifecycle. Phase 1 starts with exploration and
development of the asset where a company invests in exploration and
optimizes completion techniques. Phase 2 is followed by rapid
expansion of the asset where completion techniques become refined
and EURs become maximized. Finally, Phase 3 is when an asset enters
maturity. At Phase 3, most of the large capital expenditures have
been completed, production begins to peak and cash flows are
harvested. This lifecycle is key to REN's business strategy of
funding its growth and early stage assets with cash flow generated
from maturing operations.
(click to enlarge)
Aneth Field - The Cash Machine.
The Aneth Field produced 11,665 BOEPD (6,037 net BOEPD) in Q1 2013
and production given current infrastructure is expected to peak as
early as 2017. With a reserves-to-production ratio of 25 years,
this long-lived oil asset has the ability to produce positive cash
flows that can be re-invested into other growth prospects for years
to come. Those projects include continuing to expand the existing
CO2 flood project, expanding the waterflood project into the Desert
Creek IIC zone, drilling new lateral infill wells and re-drilling
pairs of older producing and injection wells. Rates of return for
infill and short laterals are expected to range between 40% to 60%,
while new drills are expected to generate rates of return between
20% and 35%.
Permian Basin - The Growth Engine.
Resolute has made the Permian Basin its primary growth engine for
the foreseeable future. The company has accumulated a position of
41,100 gross (20,300 net) acres in the Permian Basin, which is 90%
operated, allowing REN to control the pace of development and
capture economies of scale as operations grow.
Part of the Permian's attraction is its multi-stacked pay zones,
which increase REN's effective acreage position. While the current
primary horizontal target is the Wolfcamp B, other stacked pay
zones exist across the REN acreage including the Wolfcamp A, Basal
Spraberry and the Cline. If we consider the captured resource
contained in the multiple pay zones, REN's 20,300 net surface acre
position in the Permian could be closer to an 80,000 net effective
acre position. Upside from additional zones and potential for
commercial development could significantly increase the range of
estimated resource potential. Currently, Resolute estimates it has
46 million barrels of oil equivalent (MMBOE) to 204 MMBOE under its
existing footprint in the Permian Basin.
We believe that Resolute's Permian Basin asset is on the verge
of larger-scale development and just beginning to enter stage 2 of
its lifecycle, based on the relatively low-risk development
opportunities from the primary targets. Resolute estimates rates of
returns for their development opportunities to range between 25%
and 45%, at commodity prices of $90.00 per barrel and $3.25 per Mcf
for oil and natural gas, respectively.
Powder River Basin (Wyoming) - Turner and Mowry Targets
Provide Exploration Upside.
Resolute controls approximately 45,000 net acres in the Hilight
Field in Wyoming's Powder River Basin, all of which are held by
production. This established oil producing region is home to oil
exploration prospects in the Turner sandstone and Mowry shale
formations. Industry is beginning to de-risk the Turner. For
example, Petro-Hunt has started drilling the Turner on acreage that
is immediately offset by Resolute's position. The most recent of
the Petro-Hunt wells achieved a peak 30 day IP rate as high as 660
BOEPD. Nick Sutton said, "When you look to the Petro-Hunt wells,
they are immediately offsetting our acreage and are the strongest
Turner wells in the vicinity. Is our well a development well or an
exploratory well? I don't know. All I know is I think it's got
great potential and I'm looking forward to getting after it."
Resolute plans to drill one horizontal Turner well in 2013, which
should help the company better understand the properties of the
The graph below illustrates the mid-point estimate of captured
resource in each of the company's identified opportunities,
starting with its year-end 2012 proved reserves of 87 MMBOE. One of
the biggest takeaways was reserve upside from identified projects.
The Permian Basin had the highest resource potential with a
mid-point range of 125 MMBOE, followed by the Aneth Field at 13.5
MMBOE and then the Turner potential at 9.5 MMBOE.
(click to enlarge)
As of June 24, 2013, Resolute had a weighted average cost of
capital of 9.9% (sourced by Bloomberg). The chart below compares
the company's rates of return for its various projects to the
weighted average cost of capital. The diversity of the inventory
portfolio provides a strong lineup of oil-prone projects for
generating profitable returns.
(click to enlarge)
As of June 14, 2013, Resolute's enterprise value to 2012
reserves ratio (EV/Res) was $13.36 per BOE. The average EV/Res peer
group having Permian Basin operations of $18.83, a difference of
$5.47 per BOE (sourced from EnerCom's E&P database). The
addition of the Permian Basin and Aneth field resource potential,
excluding any Turner contributions, equates to a proforma EV/Res of
approximately $4.62 per BOE which is less than a quarter of the
Permian peer multiple. Including the Northern Rockies properties
increases the disparity.
In summary, the Aneth Field provides a foundation for
reinvesting cash flows into near-term growth prospects like the
Permian Basin while the Turner and Mowry formations in Wyoming
create upside opportunity.
During the analyst day, Resolute laid-out the potential of its
extensive asset portfolio and now the Company is gearing-up to
convert it into value. The analyst day mapped out Resolute's
journey to value creation, and the next step is to convert the
potential of its captured resource into realized value.
You can listen to the replay of
the webcast here
, or see the
presentation slides here
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
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Oil & Gas 360® did not receive compensation for the publishing
of this company note. None of the professionals associated with Oil
& Gas 360® hold any investment position in Resolute, nor does
it intend to in the course of the next five business days. Although
Resolute pays Oil & Gas 360® a monthly fee to be a profiled
company on the website, Oil & Gas 360® reserves the right to
publish notes and observations on any company that is sees fit to
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