Staying focused on what is within the company’s control
Low oil prices are out the control of individual E&P companies, and every single producer has felt the pain from the 40% commodity price haircut stemming from OPEC’s decision last November to maintain production levels.
Resolute Energy (ticker: REN) is focusing on the costs they can control in its oil-weighted asset base to persevere in the current price environment.
During the company’s first quarter conference call, Chairman and CEO of REN, Nick Sutton, said the company’s approach to remaining a strong and competitive operator is to focus on maintaining production volumes, lowering controllable costs, increasing liquidity and reducing capital spending in order to reduce debt.
Resolute detailed its plan of action to achieve those goals in its Q1’15 release, announced on May 11, 2015. Company-wide production averaged 13,500 BOEPD in the three months ended March 31, a new record for REN. “This level was 7% higher than the same quarter last year, and 1% above the fourth quarter rate of 13,341 BOEPD,” said Sutton. “First quarter production was driven by increases in volumes from both Aneth Field and the Permian Basin, offset partially by a decline in the Powder River Basin.”
The company lowered its lease operating expense (LOE) to $16.59 per BOE, down 33.7% from Q1’14 and 22% sequentially. “Cost reductions were driven by a beneficial combination of working constructively with our service partners, and having our own people assume many tasks that we previously would have outsourced,” said Sutton.
REN sold non-core assets to strengthen its liquidity during the quarter, divesting its assets in Howard and Martin counties in Texas for $42 million. According to the company’s quarterly report, outstanding indebtedness at the end of the quarter consisted of $240 million in revolving credit facility debt, $149.6 million of a second lien term loan and $400 million of senior notes. The company holds a current borrowing base of $270 million.
Theodore Gazulis, executive vice president and CFO of REN, said the company does not have any meaningful debt maturities. “Our revolving credit line and senior notes mature in 2018 and 2020 respectively,” he said. “We’re in compliance with our debt covenants and have sufficient liquidity and forecast cash flow from operations to both fully fund our 2015 capital budget and to reduce debt.”
Focus on the Permian
During the first quarter, REN spent $22.1 million, nearly half of the company’s full-year budget of $45 to $50 million, on completing three horizontal wells in the Permian Basin. It’s no surprise the company is focusing its capital in the Permian after seeing a 17% increase in year-over-year production.
The three Permian (all targeting the Wolfcamp B formation) wells averaged a peak 30-day rate of 1,140 BOEPD, with the Great Divide 1402BR reaching 911 BOEPD (52% oil), the Harpoon 1401BH well climbing to 1,275 BOEPD (37% oil) and the Queen City 302BH well topping out at 1,235 BOEPD (46% oil). The 24-hour rates of those wells averaged 1,313 BOEPD – nearly 200 BOEPD higher than the combined average of four Wolfcamp B wells completed in the area last year.
Financial Joint Venture Opportunities in the Permian Assets
During the conference call, Sutton said the company was also considering “financially-oriented” joint ventures within Resolute’s Permian asset base. “Think of it as development financing more than as a typical industry joint venture,” he said.
“Proposals cover a range of possible structures from, for example, one where Resolute would put up no capital and earn a 90%-plus reversionary interest in the wells drilled once the investor has earned its targeted rate of return. Another example is a structure where Resolute would fund part of the capital cost at the time of drilling and own 100% of our current working interest in the well, subject only to the investor earning a stated rate of return.”
Aneth Field
The remainder of the company’s 2015 capital budget is expected to be focused on its assets in Aneth Field. Sutton said REN expects that 60% of Aneth’s capital budget will be used to purchase CO2 and to fund a power system upgrade to support the production rate in the region.
The remainder will be used for electrical power upgrades for well and facility work that should improve operating efficiencies.
“It bears mentioning that during this down cycle it is advantageous to have a legacy oil asset like Aneth Field,” said Sutton. “Its low decline production profile is a steady source of consistent and predictable cash flow, giving us a stable platform, from which to manage through this product price cycle.”
LOE in Aneth Field was reduced by 32% per BOE to $18.88 from $27.68 in the first quarter of 2014, a difference of $4.5 million overall.
Moving forward
Resolute has been helped by its strong hedge book, which will continue out into 2016. Approximately 74% of 2015 forecasted daily oil volumes, or 6,600 BOPD at a weighted average floor price of $86.40 per barrel, Sutton said during the conference call. REN also has 6,500 BOPD in 2016 at a weighted average price of $80.42 per barrel and has started layering in some hedges for 2017.
Sutton also said much of Resolute’s leasehold is held through production, meaning the company does not need to drill wells in the current price environment. “100% of our Powder River Basin and our Aneth Field acreage is held by production,” Sutton said. “In the Permian Basin, approximately 62% of our leasehold is held by production, and what is not can be extended with lease modifications.”
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Johnson Rice & Co. - Notes from the Road
Key Takeaway:
We recently traveled with Resolute’s senior management and came away with a greater appreciation for the progress that has been made to repair the balance sheet and consolidate its asset base, while leveraging its long-lived assets to grow both production and reserves in the Permian. Cost cutting efforts company-wide have resulted in a ~21% reduction in LOE QoQ, a majority of which are expected to be sustainable, which will not only reduce quarterly operating costs but also provide for enhanced well level economics and support for its borrowing base. Liquidity was greatly enhanced through the sale of its non-core Permian assets ($42 million) and issuance of a total $200 million in second lien debt (additional $50 million announced last night). In addition, additional non-core asset sales, including Denton and Hilight, remain possible later this year. The finalization of a joint venture in the Permian, likely a financial well-by-well structure, is progressing with a resumption in drilling possible by 4Q if a deal can be inked. With a significant hedge book in place ~6,500 boe/d (~50%) hedged for both 2015 and 2016 above $80/bbl, 92% of its properties HBP and free cash flow expected during the remainder of 2015, Resolute is in an enviable position which should continue to improve throughout 2015.
Key Points:
Long-lived fields protect production/cash flows – While a majority of its focus has been in the Permian Basin, roughly 75% of Resolute’s assets/production (~8,825 boe/d) lie in long-lived areas (Aneth, Hilight, Denton) that have a base decline rate of 5-8%.These low decline assets are able to be kept relatively flat with minimal capex (~$20 million) providing significant free cash flow, which has been used to fund drilling in the Permian during 2014 and will allow for debt repayment during 2H:15. In addition, recent optimization efforts in all three of its long-lived areas have both increased production and significantly lowered LOE to $16.75/boe in 1Q (from $24.26 in 2014).
Majority of LOE reductions permanent – Significant cost reductions achieved through the reduced use of third-party contractors, completion of several well optimization projects that have been on-going since the acquisition of the Permian acreage in 2012/2013, reduction of standby equipment to fix well problems quickly (not needed in the current environment) and deferral of certain well recompletions. While some of these costs will likely rebound some once commodity prices rebound from current levels and activity increases (reworking of old wells, use of contractors), the majority of the savings should remain in place regardless of commodity price or activity levels.
Well costs reduced 20% – Drilling efficiencies and service cost reductions on recent wells lowered its well costs in the Delaware Basin to ~$9 million (from ~$11.5 million) for a 7,500' lateral. These cost savings were achieved despite receiving only partial reduction of rig costs to current spot rates (due to contracts in place) and pumping much larger completions (~1,500 pounds of proppant per foot vs 800 previously). In the current environment, management believes that well costs could trend below $9 million if additional drilling efficiencies are realized.
