Resolute Energy Corp (ticker: REN) is engaged in the acquisition, development and production of onshore domestic hydrocarbons, principally crude oil. Resolute’s producing assets are the Aneth Field in the Paradox Basin of Utah and Hilight Field in the Powder River Basin of Wyoming, in the Permian Basin of West Texas and in the Bakken trend in the Williston Basin of North Dakota.
Resolute’s business strategy is to operate and grow oil production and cash flow from its foundation Aneth Field (a tertiary oil recovery project in Utah with 1.5 billion barrels of original oil in place) in order to reinvest the free cash flow generated from the project into faster-growing oil projects in the Permian and Williston Basins. On December 3, 2012, Resolute announced it will increase its footprint in the Permian Basin with the acquisition of both producing properties and undeveloped acreage for $120 million.
Resolute acquired oil assets in the Permian Basin (Howard County, Texas and Lea County, New Mexico) from a private party for $120 million. The acquired assets produced at a net rate of 1,418 BOEPD during Q3’12 and has estimated proved reserves of approximately 4.1 MMBOE. This announcement not only demonstrates Resolute’s ability to execute on its growth strategy, but the acquisition adds substantial production, reserves and visible growth potential that complements its strategy.
This most recent acquisition brings Resolute’s total position in the Permian Basin to 15,532 net acres, up from 9,000 net acres pre-acquisition and increases production from the Permian by 236% to 2,018 BOEPD, up from about 600 BOEPD in Q3’12. Pro forma for the acquisition, production from the Permian Basin accounts for 17.7% of total Q3’12 volumes, and total production is 21.5% higher than the 9,365 Boe per day produced in Q3’12.
In Howard County, Texas, Resolute acquired mainly non-working interests (~39%) in 1,310 net acres primarily targeting the Wolfberry play. The properties produced 377 BOEPD in Q3’12, and are located within six miles of Resolute’s existing properties in Howard and Martin Counties.
In Lea County, New Mexico, the primary asset acquired is the Denton Field, a conventional producing field covering 2,767 net (2,880 gross) acres that produced a net 833 BOEPD in Q3’12.
Other assets acquired in the Permian total 2,455 net acres and comprise of conventional and unconventional producing properties which produced 208 net BOEPDin Q3’12.
Resolute intends to finance the acquisition with debt, ostensibly from its revolving credit facility. At September 30, 2012, the company had borrowings of $18 million on the credit facility, which has a borrowing base of $300 million.
Permian Basin: “The Gift that Keeps on Giving”
The Permian Basin, like many in North America, is the proverbial “gift that keeps on giving.” Since the first discovery of oil in the Permian in 1921, the area continues to be a focus area for independent E&P companies, large and small, seeking a proven oil region that is friendly to the industry.
Resolute first entered the Permian in early 2011, and the company has looked to its operations there as an important growth engine. As REN’s critical mass in the Permian Basin increases, so does its growth potential in this oil-prone region characterized by multiple, stacked pay zones.
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The acquisition also increased REN’s visible growth potential, and demonstrated that the region will remain a growth driver of oil production and reserves. In addition to the 90 net undrilled locations REN had in the Permian Basin before the acquisition, based on 80-acre spacing, the company increased its drilling inventory with the following:
- 64 vertical drilling locations targeting the Wolfberry play in Howard County
- 66 recompletion opportunities, not including potential horizontal drilling locations for the Wolfcamp and Cline intervals in Howard County
- Additional infill drilling at the Denton Field, subject to 20-acre downspacing (from 40-acres today)
Resolute seems to have settled in on the Permian and Williston basins as the primary growth engines for the company. Although REN continues to build oil production at its legacy Aneth Field, REN is focused on growing production outside of the Paradox Basin. Chairman and CEO, Nicholas Sutton said in a news release, “We plan to realize the growth potential from these new assets, which is largely self-funded, with a drilling program over the next four to five years.”
We estimate that REN bought the assets at a price of $84,626 per flowing BOEPD, which compares favorably to recent Permian acquisitions and as compared to $149,376 average for four E&P companies with operations weighted to the Permian in EnerCom’s E&P database. On a per-Boe basis, Resolute paid $29.27 per proved BOE, which is higher than the average enterprise value to proved reserves of $26.55 per BOE for the four E&P companies weighted to the Permian Basin.
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Resolute following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
SunTrust Robinson Humphrey
Growing Permian footprint. Resolute purchased Permian Basin assets with net production of 1,418 Boepd and proved reserves of 4.1 Mmboe (73% oil) for $120 million. Transaction metrics work out to ~$85,000/Boepd and ~$29/Boe. For comparison, Concho Resources (CXO, $80.26, Neutral) recently disposed of assets for ~$90,000/Boepd and ~$20/Boe. Given the similar flowing metric we believe Resolute acquired the assets at a fair price. Further, this transaction is accretive as Resolute trades at ~$100,000/Boepd.
Asset description. The assets consist of Howard County (1,310 net acres, 377 Boepd, non-operated Wolfberry), Lea County (2,767 net acres, 833 Boepd, operated conventional Denton field) and various assets (2,455 net acres, 208 Boepd). Resolute indicates growth potential comes from participating in additional vertical wells or drilling Wolfcamp/Cline wells in Howard County and deepening existing wells or infill drilling to 20-acre spacing in Lea County.
Debt financing doable, appropriate. The company indicated it planned to finance the deal with debt, which we believe is feasible. Net debt should approximate 3.2x trailing 12 month EBITDA at year-end 2013, up from our previous 2.9x estimate. We forecast Resolute has revolver availability through 2014. In our view, the company is appropriately using supportive debt markets to acquire assets at an accretive valuation. While its leverage is ~50% higher than the industry as a whole, we see its posture as appropriate given the long-lived reserves associated with the Aneth field.
Raising target to $10. Our 2014 CFPS estimate rises to $2.48 from $2.25, while our target rises to $10 from $9. Our target applies a 4.0x multiple to 2014E CFPS, in line with the industry average but below the 4.5x peer average owing to a relatively higher debt load. We retain our Neutral rating as we see less upside to our target than for peers.
REN agreed to acquire oil assets in the Permian Basin in Howard County, TX and Lea County, NM from a private party for approximately $120 million. The acquired assets produced at a net rate of 1,418 BOE/d during 3Q12 and had estimated proved reserves of 4.1 MMBOE (73% oil, 63% developed), implying valuation metrics of $84,626 per BOE/d of production and $29.27 per BOE of proved reserves. The acquisition boosts REN’s efforts to build its Permian presence and adds an inventory of low-risk development projects.
The assets include 9,654 gross (6,532 net) acres across several fields, 90% of which is held by production. This transaction substantially boosts REN’s position in the Permian Basin, where the company reported production of ~600 BOE/d in 3Q12. Pro forma, REN’s 3Q12 Permian production would have approximated 2,000 BOE/d, a 233% increase from reported volumes. Further, the transaction would represent a 15% lift to 3Q volumes. The acquisition is expected to close on December 21, 2012.
The primary asset in the package is the Denton field which was discovered in the 1950s and is located in Lea County, New Mexico. REN’s interests will cover 2,767 net (2,880 gross) acres which are held by production. REN will operate the assets. Third quarter production from the field was 833 BOE/d (89% oil) from 39 producing wells, representing 59% of the acquired production. Management believes the field offers incremental development potential through deepening existing wells and infill drilling.
In Howard County, Texas, REN acquired non-operated working interests of approximately 39% spread across 1,310 net acres primarily targeting the Wolfberry play. These properties produced at a net rate of 377 BOE/d in 3Q12 (64% oil) from 23 existing wells. The company believes that this play has growth potential from 64 vertical drilling locations targeting the Wolfberry interval and 66 recompletion opportunities not yet categorized as proved. In addition, REN believes there may be upside in horizontal development in the Wolfcamp and Cline. Most of the acreage is held by production, and a one-rig program for the next two years should be able to hold the remaining leases.
REN also acquired additional Permian Basin conventional and unconventional properties, which include 2,455 net acres (3,380 gross) and had net production of 208 BOE/d in 3Q12.
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