2015 Asset Sales to Date Reach $275 Million
Resolute Energy (ticker: REN) has agreed to sell its Gardendale assets for $177.5 million, concluding a “limited marketing process” that began in late September. The buyer was not named.
The company has now sold nearly $275 million in assets since March 2015, including the divestures of its Midland Basin and Powder River Basin assets for $42 million and $55 million, respectively. The proceeds of all asset sales to date are being used to pay down debt. Prior to the most recent Gardendale sale, REN management said it had already reduced borrowings by $150 million pending the completion of its Power River Basin acreage. The Gardendale divesture is expected to close before year-end 2015.
Raymond James Equity Research called the news “yet another big positive step in the right direction,” and the market responded favorably. Shares of Resolute closed 17% higher on the day of the announcement. The company appears to be in a position to pay off the entirety of its borrowings, which was $85 million on September 30, 2015. Raymond James estimates Resolute’s Net debt/2016 EBITDA will drop to 4.6x from the pre-sale estimate of 5.8x, marking progress on the balance sheet. Management may also elect to restructure its secured debt facilities – a trend recently followed by many E&Ps in accordance with borrowing base redeterminations.
The $177.5 million selling price exceeded the estimates of analyst firms like Raymond James ($166 million) and Johnson Rice & Co. ($125 to $175 million). In its Q3’15 conference call, REN management mentioned it is “investigating monetization options” related to its midstream buildout in Reeves County.
REN did not provide current production rates and reserves at the Gardendale properties, but Capital One Securities noted the asset holds many legacy vertical wells with minimal horizontal development. Three previous horizontals completed by REN delivered average 30-day rates of 536 BOEPD from the Wolfcamp B formation. In the call, Nick Sutton, Chairman and Chief Executive Officer of Resolute, referred to the Gardendale as a “pretty stable asset” regarding its low decline rates.
Precursor to the Drilling Program?
A four-well horizontal program is underway in the Delaware Basin, and the company initially planned on spudding the first well in mid-November. In the Q3’15 conference call, Sutton said a divesture of the Gardendale or midstream assets would prompt the company to accelerate its development program. In prepared remarks, Sutton said the company is now in position to execute on the program even though the midstream assets remain in the portfolio.
Drilling and completion economics for the first two wells of the project are estimated at $9.6 million apiece, with an internal rate of return of 22%.
Volumes from the divested Gardendale assets weren’t updated in recent REN releases, but analyst reports from earlier in the year estimated output at about 1,600 BOEPD. Factoring that estimate into Q3’15 numbers, production has declined by about 14% on a year-over-year basis even though the company has divested roughly $275 million in assets – equal to about 85% of its revenue for fiscal 2014. Its credit facility at year-end 2014 had about $235 million drawn, and, as previously mentioned, may be wiped clean depending on how management decides to spend the proceeds once the sale is finalized.