Resolute Tests Value Of Midland Assets To Whittle Debt

Burdened by debt, Denver’s Resolute Energy Corp. (REN) is considering the sale of some of its Permian Basin assets—if the price is right.

On Sept. 29, Resolute launched a limited marketing process for a Midland Basin asset in West Texas. The company could gain anywhere between $158- to $237 million from the sale, said Andrew Smith, vice president and senior energy analyst with Global Hunter Securities LLC, in a report.

As with many E&Ps, Resolute is in search of debt relief. In September, the company sacrificed its Powder River Basin assets in a pending $55 million sale. Resolute is using proceeds from asset sales to pay down debt and increase liquidity.

As of June 30, the company had $759 million in debt, including $160 million in revolving credit, $200 million in term notes and $400 million in senior notes. The sale has the potential to reduce Resolute’s net debt/EBITDA by about 1x to 5x, Smith said.

"We view this potential outcome as a positive in the near term, but note that based on our current commodity price estimates, we expect REN's leverage to worsen in 2017 as its attractive oil hedges expire," he said.

Resolute is far from the only company with a debt headache. Prior to the downturn, nearly 130 companies were already facing a shortfall in cash flow in the summer of 2014. Spending overtook cash flow from operations by nearly $110 billion. That prompted E&Ps to borrow $106 billion and sell $73 billion in assets, according to the U.S. Energy Information Administration (EIA).

A September analysis of 44 companies shows that from July 2014 to June, about 83% of companies are using operating cash to pay debt. As borrowing bases are redetermined in October, some companies may face challenges in raising enough cash to maintain capex and meet liabilities, EIA said.

For the time being, Resolute is dangling the assets to see what price they could fetch.

The company said it “will assess market feedback and potential valuation, among other factors, in determining whether or not to pursue a sale of some or all of its interest in the property.”

Resolute previously discussed retaining the acreage and including it in a joint venture package along with its Delaware Basin assets, Smith said.

The Goods

Resolute’s Midland Basin assets cover 4,700 gross (4,600 net) acres in the Gardendale area in Midland and Ector counties, Texas. The company holds about 98% working interest in the property, which is HBP by vertical wells.

The acreage includes resource potential in the Middle and Lower Spraberry and Wolfcamp B formations. Resolute has successfully drilled three horizontal Wolfcamp B wells on the Gardendale property.

Resolute’s Midland wells averaged 30-day initial production rates of 536 barrels of oil equivalent per day (boe/d), with 81% oil. Production during the second quarter was 1,649 boe/d.

Additional potential exists on the property in the Wolfcamp A, C and D (Cline), Atoka and Clearfork formations.

Petrie Partners LLC and BMO Capital Markets are financial advisers for the transaction.

Uphill Battle

In early 2015, Resolute was on the ropes as commodity prices plummeted. In February, the company received notification that its listing on the New York Stock Exchange (NYSE) was in peril.

The NYSE requires that the average closing price of a listed company’s common stock be above $1 per share over a consecutive 30 trading-day period. As of Jan. 29, 2015, the 30 trading-day average closing price of the company’s common stock was $0.97 per share.

The company quickly got to work. By May it had closed the sale of noncore assets in the Midland Basin in West Texas for about $42 million. The assets consisted of operated and nonoperated properties primarily located in Howard County, Texas.

In September, it announced plans to sell a Powder River Basin field in Wyoming for $55 million. The deal, with an undisclosed third-party buyer, is expected to close Oct. 6.

As with the potential sale of the Gardendale property, proceeds from these divestitures will be used to repay debt and increase liquidity.

When the Powder River Basin sale closes Resolute will have sold almost $100 million of properties, according to a Sept. 29 company presentation.

In May, the company used a $50 million second lien term loan to reduce its bank debt.

Resolute said it’s in discussions with its lenders about its fall borrowing base redetermination. The company expects to announce its new borrowing base and whether it will be allowed to use proceeds from the sale to repay borrowings under its revolver by early October.

Resolute’s producing properties are located in Utah's Paradox Basin, the Permian Basin and the Powder River Basin. It also owns exploration properties in Texas’ Permian Basin and Wyoming’s Big Horn and Powder River basins.

Contact the author, Emily Moser, at emoser@hartenergy.com.