Resolute Energy Corp. (ticker: REN) is an exploration and production company with producing assets in the Permian Basin (Texas), the Hilight Field of the Powder River Basin (Wyoming) and the Aneth Field of the Paradox Basin (Utah). REN is developing its assets through horizontal drilling, resulting in a 10% production increase for the trailing twelve months ended September 30, 2014 as compared to the prior year period, while spending largely within cash flow.
Resolute posted a net profit of $15 million ($0.20 per share) and generated Adjusted EBITDA of $37.5 million in its Q3’14 results, announced on November 10, 2014. The Company posted production gains in all three of its current areas of operations and company-wide production in Q3’14 averaged 12,651 BOEPD, up 13% over the same quarter last year. The exit rate reached approximately 14,000 BOEPD due to two wells coming online late in the quarter.
A total of six wells in the Permian and Powder River Basins have been placed online since May 2014. The Permian contributed four of the wells, all of which targeted the Wolfcamp B formation. Three of the wells averaged initial production rates of 1,300 BOEPD apiece, with laterals of 5,210 and 7,442 feet returning 1,352 and 1,521 BOEPD, respectively. The two Powder River Basin wells targeted the Turner/Frontier formation and had average initial production rates of 480 BOEPD apiece, although those rates were constrained due to new flaring regulations, which limited flow rates. The wells are roughly three miles away from the Castle 3-21TH well, which was REN’s first horizontal Turner well. This well reached payout after approximately one year of production and has cumulatively produced 132 MBOE in 10 months.
Resolute published the table below in their operations updates on October 20, 2014, and summarizes their type curves in Reeves County, Texas. Based on the information below, REN’s drilling and completion costs in the Permian Basin amount to $13.43/BOE and $12.09/BOE for wells having lateral lengths of 5,000 and 7,500 feet, respectively. Those drilling and completion costs are 34% and 41% lower than the median three-year finding and development cost of $20.36 for the EnerCom E&P universe.
|Permian Type Curves (assuming NYMEX prices of $80-$90/barrel)|
|Lateral Length||Cost||EUR (MBOE)|
“In 2014, we have managed to grow production while constraining costs,” said Nicholas Sutton, Chief Executive Officer of Resolute, in a conference call following the release.
Aneth Field Update
Sutton also mentioned the company’s decision to “press pause” on divesting a portion of its Aneth Field assets. “We yielded several proposals from, and extensive negotiations with, sophisticated energy investors,” explained Sutton. “However, recent market volatility and the rapid decline in oil prices created a market dynamic which was not conducive to completing an Aneth transaction at this time… Aneth is still a very valuable asset to us, and when there becomes more clarity about the markets then the Aneth will be available for further utilization.”
Upcoming Catalysts That Oppose the Market View
Although the market responded unfavorably to the decision regarding the Aneth Field, EnerCom’s E&P Weekly Database consisting of 85 companies puts a few things in perspective. Note all metrics are as of November 21, 2014.
- Resolute’s Enterprise Value/2013 Proved Reserves ratio is $16.12/BOE, slightly below the industry median of $17.21/BOE.
- Similarly, Resolute’s Enterprise Value/trailing twelve months production ratio is $76,207 BOEPD, below the industry median of $86,173.
- Resolute’s Price/Cash Flow per Share multiple is 1.9x, 47% lower than the industry median of 3.6x, which we attribute to REN’s relatively high debt at 332% of market capitalization at November 21, 2014, as compared to 60% for the EnerCom universe.
EnerCom estimates Resolute’s baseline Net Asset Value, defined as the PV-10 value of proved reserves (as of year-end 2013) as adjusted for working capital and debt, at $3.88 per share – roughly 30% above its current share price. We note this NAV estimate does not include the value of undeveloped acreage in the Permian or Powder River Basins, where Resolute is actively drilling.
OAG360 believes a handful of drivers will benefit Resolute moving forward, including:
A consistent cash flow source with Permian upside. The Aneth Field provides Resolute a reliable production flow and the company has just begun its operations in the Permian. In the conference call, management said 75% of production is sourced from low decline assets (mostly Aneth Field), meaning the majority of capital can be invested in growth projects. The company indicated its 2015 capital allocation would “lean” towards the Permian, which currently provides the most compelling economics of REN’s drilling projects.
Meeting guidance, spending within cash flow. Barring any unforeseen issues, production is expected to fall within the company’s original 2014 guidance of 4.5 to 4.9 MMBOE. Operations continue to be funded entirely through internally generated cash flow. A research note from Capital One Securities, dated November 11, 2014, says “Despite a reduced valuation, we like the ‘spend within cash flow’ strategy given the existing debt load and look for the company to revisit a partial Aneth monetization or other divestiture at a more favorable time.”
Good hedges in place. In the conference call, Sutton said, “We have stress tested our project economics, and even at $70 per barrel, these projects warrant continued investment.” The company has hedged 6.6 MBOEPD (about 45% of the Q3’14 exit rate) for 2015 at an average strike price of $87/barrel.
Permian drilling requirements are not an issue. REN said the majority of its Permian properties are held by production and the company will not be pressed by leasing or drilling requirements. “We think that we will be able to absolutely hold all of our existing acreage with the kind of capital program that we envision in this constrained environment,” said Sutton. “Most of the acreage will be held by drilling and we might have to spend a few dollars to extend some leases. But even at that rate, those leases are relatively small in the big picture.”
No deal is better than a bad deal. Resolute management refers to the Aneth Field as “a vault of value that’s there to be utilized.” The company said it received plenty of interest in the assets before the oil price swoon, but discussions on the partial divesture will surface again once there is more clarity in the markets. Until then, Aneth Field’s reliability is a key asset in the current commodity environment.
Permian operations increasing. REN’s horizontal Permian program contributed to 4,640 BOEPD in the most recent quarter, which was 4% and 27% higher than Q2’14 and Q3’13, respectively. Permian production for the first nine months of 2014 is 21% higher than the same period in 2013. Two new horizontal wells were completed late in Q3’14 and two more are expected to be placed online no later than Q1’15, which will bring REN’s total operated Permian well count to six.
Permian costs expected to drop. Management expects the implementation of lower-cost, naturally flowing horizontal wells to reduce the overall average weighted cost. The company transitioned to a full-scale horizontal operator in 2013. A well was completed in less than 30 days in the quarter – a company record, indicative of increased operational efficiency. Lease operating expenses also dropped 3% and 7% on a quarterly and yearly basis, respectively.
Sell side price targets. The earnings per share results from the quarter were in line with market estimates. Capital One Securities set a price target of $6.50 and Wells Fargo Securities affirmed its “Buy” rating on Resolute. Wells Fargo also placed an “Outperform” tag on REN, defined by the group as “The stock appears attractively valued, and we believe the stock’s total return will exceed that of the market over the next 12 months.”
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