Resolute Energy Corp (ticker: REN) is an independent oil and gas company focused on the acquisition, exploration, exploitation and development of oil and gas properties primarily in the Aneth Field in the Paradox Basin of Utah, the Powder River Basin of Wyoming, the Permian Basin of Texas and the Bakken trend in the Williston Basin of North Dakota. Resolute’s primary business model is to enter big oil fields and make them bigger through development drilling and enhanced oil recovery projects.
The company’s business strategy is to grow production at its foundation Aneth Field (a CO2 tertiary recovery project) in Utah and reinvest the cash flow into oil-prone growth assets in the Permian and Williston Basins. Resolute took initiatives to diversify its asset portfolio into oil-weighted, growth areas in late 2011.
Resolute reported earnings and provided an operations update on Monday, November 5, 2012. The company reported that total production in Q3’12 increased 18% over the prior year to 9,365 BOEPD. Sixty eight percent of the year-over-year growth was attributed to the company’s continuous drilling programs in the Permian Basin of Texas and the Bakken oil shale play in North Dakota where production increased by 11% and 362%, respectively.
Recent Financial Results:
For the nine months ended September 30, 2012, Resolute reported net income of $19.6 million or $0.32 per share. This compares to net income of $46.5 million, or $0.70 per share during the 2011 period. Revenue during the first nine months of 2012 totaled $191.4 million, an increase of 14% from 2011 levels. Production for the nine months ended
September 30, 2012 averaged 9,058 BOEPD, an increase of 14% from production levels during the first nine months of 2011. Resolute confirmed its previously announced guidance of 15% production growth for full-year 2012.
The Aneth Field is currently viewed as the company’s stable cash generator. REN’s ongoing CO2 flood program in the Aneth Field continues to record positive production results. Production in the field of 6,399 BOEPD represents an 8% increase when compared to Q3’11 and a 22% increase when compared to January 2012. As additional CO2 operations ramp up in the play (level 4 C02 injection), the Aneth Field could become a solid growth engine for Resolute beyond 2012.
Simultaneous to assuming additional operatorship from its partners in the play, Resolute has increased production to average 919 BOEPD during Q3’12, an increase of 362% from Q3’11 and an increase of 20% increase from last quarter. OAG360 notes that through the replacement of a conventional rig with a new walking rig, REN has been able to reduce well costs from $8.0 million to approximately $7.7 million – a feat many operators in the Bakken are trying to achieve. With the reduction in well costs, and the increase in production, we believe the Williston Basin could significantly drive profits in future quarters.
Resolute produced 600 BOEPD from the Permian Basin during Q3’12, an increase of 111% from Q3’11 and an increase of 41% from Q2’12. In the Midland Basin, Resolute’s drilling performance significantly improved during the quarter. REN reduced total drilling days by approximately five days, which decreased drilling and completion costs to $2.8 million, a reduction of 10% from $3.1 million in the prior quarter. In the Delaware Basin, REN has reduced well costs to $3.4 million from $4.1 million.
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The company did report that lease operating expense increased by 10% year over year, however, the company has taken initiatives to reduce operating costs. First, REN has replaced well site leased generators in its growing Permian Basin operations with municipal power brought in from new power lines. This eliminates lease payments and the high cost of supplying the generators with fuel. Eliminating rental generators will reduce power costs to $5,000 per month per location, down from $25,000 per month per location. Second, the company has drilled a salt water disposal (SWD) well, and is laying flow lines. Once operational, the new SWD well will reduce water disposal cost to $0.50 per barrel, down from $4.50 per barrel today.
Final Thoughts on Resolute:
Resolute appears to be moving forward with plans to accelerate drilling in its oil-weighted plays focused on reducing drilling and completion costs, investing in new infrastructure and testing alternative production methods all aimed at supporting an accelerating drilling pace which we expect to further drive increases in oil production, reserves and profitability. One important factor when assessing Resolute’s growth potential is the Asset Intensity metric, or the amount of free cash flow that a company must reinvest to hold production flat. Resolute enjoys a relatively low Asset Intensity of 48%, as compared to the average of 109% for EnerCom’s small-cap group. What does this mean? Resolute can invest 52% of its free cash flow (mostly generated by Aneth) into its growth projects (Permian and Bakken). Full steam ahead!
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