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Resolute’s new Delaware Basin acreage producing 1,200 BOEPD

Resolute Energy (ticker: REN) announced that it has entered into a definitive agreement with Firewheel Energy LLC, a portfolio company of EnCap Investments, to acquire 3,293 acres of oil and gas properties located in Reeves County, Texas.

The purchase price for the acquisition is $135 million, consisting of $90 million in cash and the issuance to Firewheel of 2.1 million shares of Resolute’s common stock, valued at $45 million, according to the company’s press release which was put out after markets closed Tuesday.

The assets consist of 13 horizontal and 15 vertical wells, which produce approximately 1,200 BOEPD. Approximately 95% of the acreage and substantially all of the production and proved reserves are located within the Resolute-operated Mustang project area in Reeves County. The remainder of the acreage is also in Reeves County.

The Firewheel properties contain estimated proved reserves of 6.2 MMBOE with PV-10 of $45.8 million, using strip pricing at June 30, 2016. The acquisition also includes Firewheel’s interest in the Earn-Out Agreement (to which we are also a party) with Caprock Permian Processing LLC and Caprock Field Services LLC. Following the closing of the acquisition, Resolute will receive 100% of all payments from Caprock under the Earn-Out Agreement.

The acquisition will represent an approximately 25% increase in the company’s net acreage in Reeves County while leaving REN’s gross acreage position essentially unchanged as Resolute already owns interest in all of the same properties.

Production growth without adding additional staff or infrastructure

The completion of this acquisition will result in a higher interest in the production and cash flow generated from operated wells, “further leveraging the work of our field staff,” the company said.

“This transaction allows us to add acreage, production and opportunity without either the uncertainty associated with acquiring more speculative acreage or adding to our staffing and infrastructure needs,” said Resolute CEO Nicholas Sutton. “We believe that the Firewheel acquisition is exactly the kind of targeted, focused, consolidating opportunity that leverages the strengths of our team and our assets.”

Resolute finances acquisition with private equity offering and debt

In order to cover a portion of the $90 million cash payment of the acquisition Resolute announced a private offering of 55,000 shares of 8.125% Series B Cumulative Perpetual Convertible Preferred Stock, priced at $1,000 per share, according to a separate press release. The company has also granted the initial purchaser a 30-day option to pursue up to an additional 7,500 shares of convertible preferred stock.

The company expects to receive, before offering expenses, $52.8 million in net proceeds from the offering (or $60.0 million if the initial purchaser exercises its option to purchase 7,500 additional shares of convertible preferred stock in full). Resolute plans to use the proceeds from the private placement to cover general corporate purposes, if the acquisition does not close.

Dividends on the shares of convertible preferred stock will be payable in cash on a cumulative basis when, as and if declared by the company’s board of directors, at an annual rate of 8.125% on a liquidation preference of $1,000 per share, on January 15, April 15, July 15 and October 15 of each year, beginning on January 15, 2017.

Holders may convert their shares of convertible preferred stock at any time into shares of the company’s common stock based on an initial conversion rate of 33.86 shares of Resolute’s stock per share of the convertible preferred stock, which is equivalent to an initial conversion price of approximately $29.53 per share of REN’s common stock. The company said that it could increase the conversions rate.

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