Resolute Energy (ticker: REN) 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 Basin” .
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 opportunities.
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 Seat
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 production stream.
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 period quarter.
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.
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.
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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 formation.
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.
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.
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.
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