Resolute Energy (REN) -- This E&P company recently went public via a SPAC merger and has a great Enhanced Oil Recovery (EOR) project going in the Paradox Basin in southeast Utah. They inject CO2 into the oil reservoirs and the gas pushes the oil to the surface.
I consider Resolute stock and warrants (especially the latter) to be one of the better buys out there for someone who is bullish about oil prices from a long-term perspective, but is not so sure how they might go over the next year or so. Resolute also have a gas project in Wyoming but since oil makes up 94% of their reserves and accounts for about 85% of their revenue, I'm focusing solely on their oil stuff in this piece.
RayJames "Strong Buy"; Reserves Volatility
RayJames has them at "Strong Buy" with a $15 PT, see both their initiation report and the update they put out today at finance.groups.yahoo.com (you need to join the group to be able to download files; its free, fast & easy to do so). The key point why RJ thinks "that Resolute is one of the most attractively valued companies in our universe" (see pg. 1 of today's update) is that Resolute's proved reserves are set to jump by 40-50% in their upcoming reserve report due to higher oil prices.
Resolute's reserves change so drastically based on the oil prices because, as with any EOR operation, it costs a lot to get the oil out of the ground, and at lower oil prices the point at which the project is projected to become uneconomic gets shortened significantly. But if you believe, as I do, that once we get through next year we are unlikely to see oil prices under $60 (at least until the next worldwide recession), then you will see how undervalued this company is under this assumption.
Resolute had 49 mmboe of reserves at last year-end, using the year-end oil price of $45. This year as you know they will be using the average oil price for the last 12 months, which through November was $56 (see netherlandsewell.com ) and will probably end up to be around $58 for the year. John Freeman of RJ believes that under this price assumption, Resolute will get a 40-50% bump in reserves this year, and when he asked this to management in their 3Q CC they concurred.
So let's use RJ's projection that they will have 74 mmboe of reserves as of '09 year-end. The company has 50 mm shs out, plus $100 M of debt and $20 M of working capital deficit, so with the stock price at $10.80 that means their total EV is $660 M, which would peg their EV per barrel of reserves at a measly $9. If someone knows of an E&P company trading at a lower EV/reserves amount would you please provide the ticker? Oh, and by the way, this is not the result of a company being way over-levered with one foot in bankruptcy court.
Au contrair, Resolute has "one of the cleanest balance sheets in the industry" (RJ update 11-24, pg. 1). Their $100 M of debt represents only 15% of their total EV, and their EBITDA/Interest ratio is a stellar 19:1. Unless they make an acquisition, this debt should go down by $20 M over the next year since they have forecast $63 M in cap ex yet RJ is calling for them to generate $83 M in cash flow for next year(assuming $80 oil price).
Proven Management Team
I'll just let RJ tell the story here (from initiation report, pg. 5):
One of Resolute’s most powerful assets is its experienced management team.
Its senior team has an average work experience of over 25 years and in all
aspects of the oil and gas industry: acquiring, exploring, exploiting, developing,
and operating oil and gas properties – especially in operationally
intensive oil and gas fields similar to Resolute’s mature properties.
The group, led by Nick Sutton, has a long history of working together and
helped build the previous company, HS Resources, from a $155 million public
company that IPO’d in 1991 to a $1.8 billion company that was sold to Kerr-
McGee in 2001. During the near-decade span, the team completed 16
acquisitions and 4 financings as a public entity, and, most importantly, helped
generate a 354% ROI and nearly 20% IRR for investors. HS Resources’
strategy focused on acquiring legacy properties from majors and then using
core competencies and proven techniques to enhance reserves, production,
and cash flow – the same strategy as Resolute Energy. Clearly it’s best to
stick with what you know.
3Q Numbers; Hedging
Resolute just put out their 3Q numbers and the PR is very confusing (even to this CPA) due to the fact that the merger transaction with the SPAC had to be treated, for GAAP purposes, as if the SPAC acquired Resolute vs. the other way around. In the PR, management tried gallantly to show what their "real" numbers were in addition to the required GAAP disclosures; this lead to a lot of numbers, tables, reconciliations, etc., which more than likely left a lot of readers in the dust. However, the key to me is that RJ's model was corroborated with respect to the most important "bottom line" figure. Resolute's 3Q "adjusted" EBITDA of $17.7 M came in just slightly lower than RJ's projection of $19 M.
A Resolute shareholder who is holding the shares for the long term doesn't give a rat's ass what happens to oil prices for the next year. Or more precisely, he doesn't give 63% of a rat's ass, since Resolute has 63% of next year's production hedged at $67. With $20 M of free cash flow being projected based on $80 oil prices, but with 63% of the cash flow already locked in, you can see that the chances of them having to draw on their line to meet their cap ex budget are just about nil.
Getting the Story Out
This story is just barely starting to get told. They did a big road show in connection with their merger with the SPAC, and in connection therewith they lined up some of the more prominent investment banking firms. There is a list of them in the S-4, which reads like a "who's who" of energy investment banking firms, viz., Ray James, Friedman Billings, CapitalOne Southcoast, Deutche Bank, UBS Securities, and BMO Capital Markets. So far RJ, Capital One, and Ladenburg Thalman have thrown their hat in the Resolute ring and initiated analyst coverage of the company. Friedman has invited Resolute to present at their conference next Tuesday; I would not be immensely surprised if Friedman initiates coverage on them soon, maybe as early as Monday. They are also presenting at the CapitalOne conference the week after next.
With the weak natty prices, everyone is clamoring for more exposure to oil-weighted E&P companies. Resolute has one of the highest oil weightings of any E&P I am aware of among the domestic producers (putting the Bakken small-caps such as KOG and NOG aside for the moment). I have seen the Resolute powerpoint presentation on their website and I believe this story will sell very well at these investment conferences. In any event we will start to find out on Tuesday (their presentation will be webcast). |
