RESOLUTE ENERGY CORP -REDH REN
November 16, 2009 - 1:44pm EST by
britt12
2009 2010
Price: 10.50 EPS NM NM
Shares Out. (in M): 53 P/E NM NM
Market Cap (in $M): 557 P/FCF NM NM
Net Debt (in $M): 100 EBIT 0 0
TEV ($): 657 TEV/EBIT NM NM

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Description

 

Resolute is amongst the oiliest, (94% of proved reserves), longest-lived (Reserves/Production >20 yrs) and best-capitalized domestic exploration and production (E&P) companies that no one knows of, trading at a significant discount to peers on an EV/proved reserve basis with top decile cash margins and anticipated 16% compounded annual production growth over the next five years while requiring minimal maintenance capex.  The Company began trading publicly on the NYSE seven weeks ago under symbol 'REN' after Hicks Acquisition Corp, a special purpose acquisition vehicle (SPAC), won approval from shareholders to consummate its acquisition of Resolute.  The limited amount of data publicly available to assess the Company's assets and profit potential, coupled with its relatively complex evolutionary path to the public markets has created an opportunity to buy a top-tier, low-risk, low-cost hydrocarbon developer at a discount to its PV-10 value* and an Enterprise Value to Proved Reserve ratio of $7.10/barrel using the 5 year NYMEX strip.  If REN were to be valued in-line with other oil-weighted domestic E&P's on 2008 proved reserves, the stock would fetch north of $17.00/share, implying 65-70% upside from today's levels.

 

Shares Out: 53.1

Net Debt: $100

EV: $657

 

2010E Key Metrics (MM):

PV-10*: $850

Proved Reserves (MMboe)*: 92.5

EV/PV-10: 0.77x

EV/Proved Reserves: $7.10/barrel

 

*assumes 5 year strip pricing

 

Company Background:

Resolute was formed in 2004 under the sponsorship of private equity firm Natural Gas Partners (NGP), an energy focused private equity firm with over $8.0B in AUM and a strong track record of investing in the natural resource arena.  NGP's first objective was to talk Nick Sutton, the former co-founder and CEO of HS Resources, out of retirement and into the chief post at Resolute.  Sutton, an engineer and lawyer by background with over two decades of experience in the oil and gas industry, had previously taken HS Resources public in 1992 at a $155MM firm value ($14.00/share IPO price) and subsequently sold the business to Kerr-McGee in 2001 for $1.8B, or $66.11/share, generating a 354% ROI and a 19.6% IRR.  His strategy at HS Resources was similar to that of Resolute, acquire underinvested properties from majors and enhance production using a variety of primary, secondary, and tertiary recovery techniques.  After getting the band back together, Sutton and NGP began looking for targets, with an emphasis on heavily oil-weighted assets in the U.S.

 

Core Property Overview:

Management's first acquisition came in late-'04, when an executive they knew at Chevron had tipped them off to the Aneth Field, a corporate orphan that had been heavily underinvested under the supervision of Chevron.  The Aneth field is the largest oil field in the Paradox Basin which is located in the southeastern corner of Utah.  The field was discovered in 1956 and had initially been developed using vertical wells, then horizontal (early 1990's by Texaco), and finally through a waterflood-CO2 pilot test in 1998.  Despite the success of the pilot test in increasing both production and reserves over the ensuing years, the program was never expanded field-wide.  Resolute became the owner and operator of the field on 12/1/04, acquiring 43k net acres from Chevron  for $86MM, or $5.06 per proved barrel at the time of acquisition.  After spending $143MM on basic plumbing and infrastructure in order to successfully arrest the fields decline curve, Resolute added to their position within the Greater Aneth Field, acquiring the McElmo Creek & Ratherford Units of the Greater Aneth Field from Exxon Mobil in June '06 for $205MM, or $5.85 per barrel of proved reserve.    

 

The Greater Aneth Field (Aneth, McElmo & Ratherford Units) hosts original oil in place of 1.46 billion barrels of oil.  Approximately 415 million barrels of oil have been produced from the field since inception (28.5% historical recovery efficiency), out of an estimated 560 million barrels of ultimate recovery.  With an average NRI of 59%, Resolute expects to conservatively produce 85 million net barrels of oil from the field (EUR-Historical Production x 59%) using an ultimate recovery efficiency assumption of 33.9%.  The Company's closest public comparable, Denbury Resources, utilizes a similar method of extraction (tertiary recovery via CO2 floods) with current recovery efficiencies in the 40% range.  For Resolute, each incremental 1% recovery results in a 16% increase to proved reserves, providing significant upside and organic reserve growth opportunities.  As of 2Q09, net production within the Company's Greater Aneth properties amounted to 5,145 barrels per day, or approximately 1.9 million barrels per annum.  By spending approximately $9MM per year, the Company will be able to keep current production rates stable.  Over the next five years, Resolute will spend $260MM in growth capex in order to expand existing CO2 floods field-wide with the expectation of doubling production to north of 4 million barrels per year by 2016. 

 

Resolute is primarily a tertiary recovery player.  For those of you who may be unfamiliar, tertiary recovery is the third stage of oil extraction, and typically occurs after primary and secondary (waterflooding) recovery techniques have run their course and the efficiency of extraction via these methods has diminished.  Tertiary recovery involves injecting liquefied CO2 into the wellbore in order to increase the viscosity of oil so it can be swept into productive zones and be produced easier.  Tertiary recovery facilitates the recovery of an additional 15-25% of the original oil in place.  It is a proven, low-risk technology that has been in existence for almost 40 years and currently accounts for about 250k barrels per day of oil production in the U.S.  Resolute's development and production strategy is heavily dependent upon CO2, which accounts for 2/3rds of their maintenance capex.  Resolute has long-term contracts in place for the supply of their CO2 with Exxon Mobil and Kinder Morgan. 

 

Tertiary recovery plays are front-end loaded, with the majority of the capital spend incurred up-front.  Production typically takes 12 to 18 months to respond at full flow rates once on-line.  Resolute has already spent $68.5MM in a three phase tertiary injection program that is beginning to show response but has yet to come on line within the northwestern part of the Aneth field.  Investor's will get a free ride on this additional production when it comes on-line in late-2010.  Production is expected to slightly decline in '09, then stabilize in '10, with significant growth expected by '11 and beyond.  Crude produced from Aneth commands lower differentials (higher prices) than most fields given its light, sweet nature.  The Company's differential to NYMEX is locked in at $6.25/barrel with Western Refining.  First half 2009 operating expenses (including well-head tax) was $23.03/boe, and SG&A was $1.41/boe.  Operating expense is relatively stable with the exception of tax, which fluctuates with the price of oil.  For 2010, management expects operating expenses of $22.67/barrel and SG&A to rise to $2.50/boe (due to additional public company costs).

 

Other Assets:

In addition to their core Aneth fields, Resolute owns conventional producing oil and gas properties in Wymoing's Hilight Field, with 1H09 net production of 2,141 barrels per day.  Resolute plans to conduct refracs and return-to-production projects within the field, including CO2 floods on portions of their acreage.  Other exploratory projects include the Big Horn Basin properties in northwest Wyoming (71k net acres of prospective unconventional oil resource) and the Black Warrior Basin properties in northwest Alabama (41k net acres of unconventional gas).  These are longer term prospects for the Company that have yet to be fully explored.  We ascribe no value to the Company's exploratory projects at this time.

 

Valuation:

Resolute was forced to write off almost 50 million barrels of oil at year-end 2008 due to the heavily depressed oil price that existed on 12/31/08 and GAAP's unrealistic methodology of accounting for proved reserves, which has since been amended.  The 2008 proved reserve balance of 49.3 million barrels using $44.60 oil is poised to rise as much as 50% this year given the substantial rise in NYMEX prices and Resolute's heavily oil weighted portfolio.  If we were to value their proved reserves on a more realistic basis by incorporating the 5 year NYMEX strip price of oil, then holding oil prices constant at $70.00 beyond year five, Resolute's proved reserves and PV-10 value would equate to 92.5MM boe and $850MM, respectively.  Management has confirmed these figures.  This ascribes no value to any additional organic reserve growth throughout their properties, which we project to increase significantly in years to come through a combination of infill drilling and expansionary tertiary floods that are either currently being implemented or will be within the next three years.  Using our 2010 estimated PV-10 value of $850MM and deducting the Company's $100MM of net debt, we ascribe a conservative value of $750MM, or $14.12/share for the Company's proved reserves.  If oil prices rise or the Company is successful in delineating new reserves through additional tertiary floods, exploratory drilling, or increased recovery efficiencies, Resolute will offer significant upside to our current fair value estimates.  Given the scarcity of small-cap oil-weighted domestic E&P's, as far as I can tell the Company's best public comparables with oil-weighted portfolio's include DNR, EAC (recently acquired by DNR), CXO, WLL and ARD.  Using 2008 proved reserves, the peer group's EV/proved reserve mean and median are $22.66 and $21.11, respectively, versus REN at $13.50.  If we were to ascribe the same multiple to REN's 2008 Proved Reserves, REN would be valued at north of $17.00/share, implying upside potential of 65-70%.  This figure includes the expected dilution and associated exercise proceeds of the Company's publicly traded warrants. 

 

 

Risks:

  • Oil price collapse, which should be somewhat muted by existing hedges
  • Public warrants outstanding of 27.6MM struck at $13.00/share with forced conversion at $18.00, which would dilute existing equity but raise $360MM of cash to the company.
  • Unsuccessful implementation of CO2, which we find unlikely due to the long history of tertiary floods in the field and the hundreds of data points we evaluated on production response and estimated ultimate recovery per well.

 

 

Catalysts:

  • Earnings release and conference call on 11/23, their first as a public company and mgmt's first opportunity to address and introduce Resolute to the investment community.
  • Market discovery and valuation gap compression to peer group multiples
  • Several upcoming presentations at energy conferences, including Brean Murray & Capital One Southcoast
  • Additional analyst coverage and potential inclusion into energy focused ETF's

Catalyst

  • Earnings release and conference call on 11/23, their first as a public company and mgmt's first opportunity to address and introduce Resolute to the investment community.
  • Market discovery and valuation gap compression to peer group multiples
  • Several upcoming presentations at energy conferences, including Brean Murray & Capital One Southcoast
  • Additional analyst coverage and potential inclusion into energy focused ETF's
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