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Resolute Energy Corporation (NYSE:REN)

Q1 2014 Earnings Conference Call

May 13, 2014 4:30 pm ET

Executives

Michael N. Stefanoudakis - SVP, General Counsel and Secretary

Nicholas J. Sutton - Chairman and CEO

Theodore Gazulis - EVP and CFO

Analysts

Ronald Mills - Johnson Rice

Jason Wangler - Wunderlich Securities

Richard Tullis - Capital One

Noel Parks - Ladenburg Thalmann

Jeff Grampp - Northland Capital Markets

Ryan Oatman - SunTrust Robinson Humphrey

Patrick Lee - Wells Fargo

Operator

Good afternoon, and welcome to the Resolute Energy Corporation First Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please also note this event is being recorded. I would now like to turn the conference call over to Michael Stefanoudakis, Senior Vice President and General Counsel. Please go ahead.

Michael N. Stefanoudakis

Good afternoon, everyone. My name is Michael Stefanoudakis. I'm the Senior Vice President and General Counsel of Resolute. I'd like to read the forward-looking statement before turning the call over to Nick Sutton, our Chairman and CEO.

This investor conference call includes forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as expect, estimate, project, budget, forecast, anticipate, intend, plan, may, will, could, should, poised, believes, predicts, potential, continue and similar expressions are intended to identify such forward-looking statements.

Forward-looking statements in this conference call include matters that involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance, or achievements to differ materially from results expressed or implied by this investor conference call.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this call. A listing of the material risk factors faced by Resolute appears in our Form 10-K and is updated periodically in the Form 10-Qs and other public filings. At this time, I'd like to turn the call over to Nick Sutton, our Chairman and CEO. Nick?

Nicholas J. Sutton

Thank you, Michael. Good afternoon and welcome to Resolute's first quarter 2014 earnings conference call. I will assume that you had an opportunity to read our press release, out yesterday after the market close. So I will focus my comments on three specific themes, then Ted Gazulis will give you an overview of our financial performance, and after that we will open the call for Q&A.

The three themes that I wish to address are asset quality, visible growth potential and capital. First, let's talk about the encouraging results we're seeing from our horizontal drilling and what those results portend for the quality of our assets in both the Permian and Powder River basins.

Starting in the Permian, with the drilling of the Harrison State well, we completed our initial three-well program in Reeves County. Our first Delaware Basin horizontal well, the LH Meeker C21 1501H, recorded a peak 24-hour production rate of 1,403 BOE per day and a peak 30 day rate of 1,074 BOE per day. This Wolfcamp A test continues to show strong production, averaging over 970 BOE per day over its first 100 days of production. We believe that these strong numbers are indicative of what we might expect to see across our Delaware Basin leasehold.

Our second well, the James 02 1401H, experienced downhole issues during completion and on a sidetracked, so we elected to stop drilling and take steps to complete a 2,000 foot portion of the lateral. The James frac should take place in June. Our third well, the Harrison State C20 1401H, was drilled to TD in the first quarter and is awaiting completion, currently scheduled to take place in a couple of weeks.

As we execute our base capital plan, we will maintain our focus on the Delaware Basin side of the Permian. A near-term catalyst for the program will be the first of four 7,500 foot laterals on our Mustang block. The Renegade 03 02BH will be a Wolfcamp B test and is currently drilling in the vertical section of the wellbore. We anticipate reaching total depth by late May. As these wells are completed, they will help drive oil production higher in the second quarter and for the full year.

Despite the drilling issue with the James well, we are confident of the very strong returns embedded in our Permian assets. The Meeker well, though speaking for itself on a daily basis, the data that we gathered while drilling the James and Harrison wells and the ongoing success of operators in our neighborhood, all point to the return potential of this exciting area. We estimate we have 210 horizontal drilling locations and 135 lower risk recompletion opportunities on our total Permian Basin leasehold that provide Resolute with a visible growth path for many years to come in this oil prone region.

Moving to the Powder River Basin, total production during the first quarter of this year increased 17% over the same quarter last year. The increase in production was largely due to the Castle 3-21TH, our first horizontal Turner well which we turned on to production at the end of last year. Now this is a good segue into talking about this emerging play. The more we learn about the Turner formation, the more we like what we see. Although it is still early days, it may be that the horizontal Turner play has a potential to create another Resolute within Resolute.

The industry continues to report results that supplement our Castle well data-point. For example, EOG recently announced the results from two Turner wells as having an average IP of 716 barrels of oil per day. In a recent investor presentation, EOG disclosed they expect horizontal Turner wells to produce estimated EURs that average 860,000 BOE, assuming an 8,200 foot lateral section.

Resolute's Castle well is a 4,400 foot lateral and it tested at a peak 24-hour production rate of 1,134 BOE per day, with 90% of the volume being oil. In its first 160 days, the Castle well produced 95,000 BOE. Liking what we see from the industry and from our own Castle 3-21TH well, on April 29 we spud our second Turner well, the Castle 13-41TH. Our third Turner well, the [Grand 07-14TH] (ph) will be drilled from the same pad as the 13-14 and we expect both wells to be fracked back to back in July.

We have 10 additional permits and various stages of processing that can support a full year of drilling, starting as early as autumn of this year. With up to 48 potential horizontal Turner drilling locations, we are in a position to embark on significant drilling program that offers visible growth potential that complements our core Permian growth asset. Moreover, like the Permian Basin, the Powder River Basin has stacked multi-pay potential that the industry is beginning to develop using horizontal drilling. Examples are the Parkman at a depth of approximately 6,700 feet, and deeper zones that include the Sussex, Shannon, Niobrar, Turner and Muddy formations.

EOG recently reported Parkman well results that rival those of their Turner wells, with estimated EURs of 850,000 BOE per well assuming a 7,300 foot lateral section. We believe our 45,000 net acres in Hilight Field are prospective for the Parkman and other zones present in the basin. Fortunately, our leasehold in Hilight Field is held by production, giving us the ability to develop the resource methodically and apply the best drilling and completion techniques to maximize hydrocarbon recoveries and returns on investments.

Aneth Field, our legacy oil producing asset, continues to deliver strong free cash flow. Despite frigid weather and gas sale interruptions, our net production for the first quarter of 2014 was 6,169 BOE per day, up from 6,037 BOE per day during the same quarter last year. Field personnel are concentrating on enhancing production from existing wells, optimizing field operations and finding opportunities for new production. Because Aneth Field is a giant oil field in the truest sense of the definition, even small improvements can in the aggregate make a big difference and offer very attractive economics. For example, in the Ratherford Unit we have drilled three laterals that show an average 60% rate of return and an average IP-30 of 173 barrels of oil per day. These laterals cost less than $2 million per well.

The second topic I want to emphasize is that not only are we more confident than ever in the quality of our oil assets, we have a lot of room in which to run. Resolute has captured an extensive inventory of horizontal drilling opportunities in the Permian and Powder River basins. We have approximately 250 potential gross locations, which with multiple prospective zones per location means we have more than 650 horizontal drilling targets. At this time, we are running just one rig in the Powder River Basin and one rig in the Permian Basin, so we clearly have room in which to accelerate our pace of development.

And that brings us to our third topic, how to secure capital so that we can accelerate the pace of our drilling programs in the Permian and Powder River basins and transform our significant resource potential into production, reserves and cash flow. As we described in our press release, we are getting closer to defining what a transaction might look like and our Board of Directors has approved the financing structure that would involve monetizing approximately one-half of our economic interest in Greater Aneth Field in a yield oriented tax advantage vehicle.

We are working with our financial advisors to identify the appropriate financing partners for such a structure and we expect that a transaction of this type will provide enough capital to both reduce outstanding debt and accelerate our oil drilling programs. Of course any such transaction is subject to prevailing market conditions, but we are optimistic because of the good strategic fit of Aneth's long-lived lower-risk reserves and production with the attributes of a yield-oriented vehicle.

In summary, we are pleased with our first quarter results. We're on track with our base capital plan, our assessment of our asset quality continues to improve with time as we and the industry move up the learning curve, and we have made important progress toward a potential transaction that will provide us the capital to strengthen our balance sheet and accelerate our growth profile.

Now I'll turn the call over to Ted.

Theodore Gazulis

Thank you, Nick. A detailed analysis of our financial performance along with financial statements is included in our earnings release and of course our 10-Q was filed yesterday. In addition, further information will be available in the statistical supplement that will be posted on our Web-site tomorrow morning. As a result, my comments this afternoon will focus on a few big picture items, and then of course we'll follow with Q&A.

Those of you who follow Resolute for any length of time will recall that in some previous years our first quarter results have experienced the production impact of severe winter weather or other unforeseen circumstances. However, as Nick noted, we got off to a good operational start in the first quarter of 2014 as production in each of our current operating areas increased from the prior year quarter.

Production in the first quarter was 1.134 million equivalent barrels. That was just about 12,600 BOE per day and 8% higher than the same quarter last year. Rising production and higher commodity prices helped push first quarter 2014 revenue 15% higher than that posted in the first quarter of 2013.

The first quarter of 2014 lease operating expense was $25.27 per BOE, which was 5% higher than the $24.08 a BOE posted in the year ago quarter. On a sequential basis, LOE in the first quarter was 8% higher than that realized in the fourth quarter of 2013. Greater operational activity in the Permian Basin, where our well count continues to grow, was the primary driver of LOE. Over time we expect our per-unit cost to move lower as our well count grows and we establish more production.

In the first quarter, we generated $41.1 million of adjusted EBITDA, a non-GAAP measure, or $36.27 per BOE, which represented a 35% increase over the same quarter last year. Significant components of increased adjusted EBITDA included increased commodity pricing and higher production from the Permian Basin, including wells acquired in March of 2013 and results from our oil focused drilling activity.

Reviewing our capital program, we invested approximately $36 million during the first quarter, net of divestitures of $4.8 million. We have now completed the sale of all of our Bakken Properties. The majority of our capital budget was allocated to our drilling project in the Permian Basin and our ongoing tertiary recovery projects in Aneth Field. We are on track with our base capital program as we previously announced. After we complete the financing transaction that Nick described earlier however, we expect to increase our capital budget and to accelerate our oil drilling activities.

Finally, turning to liquidity, at March 31, 2014 we had outstanding debt of $320 million drawn on our revolving credit facility and $400 million of senior notes. In March, our bank group increased the borrowing base on our revolving credit facility to $425 million, up from $415 million, as a part of the redetermination process we added to our hedge position for 2015 with the combination of swaps and collars.

Overall there, we are pleased with our first quarter results and we thank you all for your interest in Resolute. With that, Nick, I'll turn it back to you.

Nicholas J. Sutton

Thank you, Ted. As you can tell, our team did a great job in the first quarter, which goes a long way to achieving our full-year guidance. Our capital spending is consistent with our base capital plan which is designed to maintain investment and cash flow. Given our strong adjusted EBITDA results, we're in good shape and have built plans to reduce our current capital budget.

We have never been more excited about the quality of our oil assets of the Permian and Powder River basins. The more we learn, the more we like them. With a deep multiyear inventory of drilling locations, the only thing holding us back from accelerating production growth is capital. In that regard, we have made substantial progress moving down the road to a financing transaction to raise the capital we can use to accelerate our drilling programs and to reduce outstanding debt. Once this transaction is complete, we will revisit our capital budget and put in place a plan for achieving double-digit growth.

Thank you all for listening, and I'll turn the call back to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Ron Mills with Johnson Rice. Please go ahead.

Ronald Mills - Johnson Rice

Question on, you talked about assuming the success on the financing side, then adding likely a second rig in the Permian later this year and another rig in the – or at least spring the rig back into the PRB during the autumn timeframe, am I reading too much into it or from a timing standpoint would that suggest you're probably talking about somewhere in the plus or minus six to eight-month period to be able to – I guess less than eight – four to six-month period in order to get something done on the financing side to meet that kind of schedule from a rig addition standpoint?

Nicholas J. Sutton

That's very good question, Ron. Your assessment of where we will go with rigs after our financing transaction is spot on. And as to timing, I am hopeful, put it that way, I'm hopeful that we will be able to accomplish this much sooner than six to eight months. We have been working on this and we talked with you last quarter and I think pretty far down the road on some parallel tracks, and in fact the market will dictate which of those tracks we finally select. But as I think I've expressed to you and to others, as we approached this situation, these opportunities for financing transactions, my primary view was that it had to be workable and it had to be fixative. I'm not sure fixative is a real word but it's one I use.

By workable, meaning that we as a company are not looking to engage in a very long, very complicated transaction or set of transactions, we think that there are some reasonably clean ways that we can accomplish our objectives and that should not take six to eight months to bring to completion. And as I say, we are working parallel tracks and if any one track appears to be taking longer than we anticipate, we will be in a position to switch horses in mid-race. And so again, so long answer to a short summary, I don't think it's going to be six to eight months.

Ronald Mills - Johnson Rice

Okay. And then on the Parkman versus the Turner, we know how really economics from your standpoint on the Parkman but the EOG results suggest something plus or minus 2x what you talked about in your Analyst Day last year and then subsequent presentations. Can you talk about any similarities, differences about where EOG is located from an acres position where you are and the applicability as EOG and yourself and others ramp activity up in that play?

Nicholas J. Sutton

EOG is about 14 miles south, a little bit west of our activity in Hilight Field, and so it's not very far away. Now there is some regional variation in the quality of the rocks. And so, I look at EOG's announcements as indicative of potential, not necessarily something that we should expect to replicate. Also EOG's position is such that they are drilling longer laterals, and our first Turner well as an example was about 4,400 foot lateral. Some of the EOG EURs are predicated on 7,000 to 8,000 foot laterals. So that will come into play.

But as I say, I look at EOG as being indicative of potential and not necessarily determinative of our acreage, but I would say our first Turner well is – for a 4,400 foot lateral, is a very strong well, as I mentioned its production to-date, and it's holding in very, very steadily. So I am extremely enthusiastic about the Turner and we have a team working with the Parkman and other zones as they rest in the Hilight Field and I hope we will have more to talk about on those fronts in future quarters.

Ronald Mills - Johnson Rice

Then one last one before I turn over, in the Permian where you had the James well drilled, I think there was another operator that had some difficulties drilling. What are some of the issues on the drilling side in your Appaloosa area and is that part of the reason to take that rig and drill the next four wells in Mustang or just any more color on that?

Nicholas J. Sutton

You're absolutely right, the James well is in what we refer to as our Appaloosa project area, and that is further east than the Mustang, not terribly far away, but one of the things that our technical people look at is, they've done a regional pressure mapping and there's no doubt that as we move to the east, we are in an increased pressure area. That creates certain issues with drilling and certain opportunities as well. I mean in some respects you get a tiger by the tail. Those high pressures would indicate the potential for very significant production. But they do create some drilling issues and those kinds of issues get resolved with time and experience. So we are very optimistic about our Appaloosa area.

The reason we're moving more over to the Mustang area is, it's an area where we can drill longer laterals as our first well down there that, I mentioned is our Renegade well, that's going to be about a 7,500 foot lateral. And so, we are able to do longer laterals. We're able to get some efficiencies because we have a very strong acreage block there and so we don't have a lot of demobilization/demobilization costs and things of that nature. We also have infrastructure build there, so we have gas gathering, we've got compression, we've got saltwater disposal. And then also the Mustang drilling that we've got on the books right now will help hold acreage.

So those are the primary factors that are causing us to go to Mustang right now, but I will tell you the change experienced is one of those good news-bad news things. The good news is, you got the tiger by the tail, the bad news is sometimes the tail gets away from you in ways that you wouldn't anticipate.

Operator

The next question comes from Jason Wangler with Wunderlich Securities. Please go ahead.

Jason Wangler - Wunderlich Securities

Up in the Powder River, those permits that you kind of have in process, are those all focused as of now at least in the Turner? And I guess I'm just asking that is, are you still going to kind of watch other formations while you kind of focus on that one given the results?

Nicholas J. Sutton

We will be certainly focused on these other formations as we go forward, but the 10 permits that we talked about are really aimed at the Turner.

Jason Wangler - Wunderlich Securities

Okay, and then just kind of back down on the Permian, two if I could. Are all four of the longer laterals focused on the Wolfcamp B or will there be different formations targeted there?

Nicholas J. Sutton

Those four will all be Wolfcamp B.

Operator

The next question comes from Richard Tullis with Capital One. Please go ahead.

Richard Tullis - Capital One

Nick, looking at Aneth and the potential monetization there, what was the 1Q EBITDA at a 100% level for Aneth?

Nicholas J. Sutton

I don't think we've ever broken our production out and the data out by operating area. So that's just not something that I'm prepared to mention on the call.

Richard Tullis - Capital One

Have you guys kind of kicked around any ranges of what you think this asset could bring in?

Nicholas J. Sutton

We kicked around a lot of ranges here, Richard, and ultimately certainly we go through some of the same evaluations that you go through and that other parties go through and it's combination of NPV and cash flow, and so all of those lead to a range of potential outcomes. In the end it's going to take a market test and the market is going to tell us what it thinks the value of that is and that's what we'll deal with when we get there. And I would anticipate that we're closer to getting some at least preliminary market tests, so a couple of different approaches here in very short order.

Richard Tullis - Capital One

How much of the potential proceeds you think would go toward the balance sheet, how much toward increased drilling at that point, say over the next year from the point of the transaction?

Nicholas J. Sutton

Let's look at it this way, Richard, if we could. First of all it will depend on the proceeds and I would look at it as all going to repaying debt as we ramp up the drilling program. In other words, we're replenishing our capital availability and it's not as if on day one, we'll say, this is going to go to the drilling program and this is going to go to repay debt. It will all go to recharge our revolver and we can draw on that as fast as we are operationally prepared to move. We have laid out internally a very detailed approach to accelerating activity. It would like to warn to, maybe that's not the right word, but we are not going to just go out and stand up a half a dozen rigs. We will do this in a very methodical and rational way and I think you will see us add rig after rig after rig over upcoming quarters and years.

So the first step will be to accelerate our 2014 activities. That will be somewhat dependent on the timing, and if for example we close late August or early September, that will give us roughly four months to start accelerating the programs in the Powder and in the Permian. Then we'll take a look at our 2015 plan in light of then prevailing circumstances, including product prices, and we certainly will have plenty of capital available to us. We will take all those things, push them together and we will come out with a 2015 plan, but I would expect to be significantly more active than we have been able to do thus far in 2014.

Richard Tullis - Capital One

Maybe this question is for Ted, any revolver impact from say monetizing half of Aneth?

Theodore Gazulis

Certainly there will be a revolver impact. You can't do a transaction that works on half of Aneth without half of Aneth's worth of the revolver impact. However, as we look forward, as we've done our modeling, we don't anticipate that there will be after having – certainly after having repaid a meaningful amount of debt, we don't anticipate that the revolver impact will have any deleterious effect on our ability to do the drilling that Nick is talking about.

Nicholas J. Sutton

Not to mention the fact that as we accelerate the drilling, we will be in a position to add properties and reserves to the borrowing base, and so we think we can replenish our borrowing capacity rather quickly given the results and the quality of the results that we're seeing in these two growth areas.

Richard Tullis - Capital One

Okay, and I'm not sure if you're considering MLP, but just if you can comment there on where the IRS stands right now in reviewing proposals for MLPs?

Nicholas J. Sutton

Well, I think that the only thing what you may be referring to is the position taken by the IRS that they are no longer going to issue opinions on various types of MLPs and that, at least it's my understanding, is related to the stretching of MLP assets from the original sort of oil and gas properties and pipelines and things of that nature to drilling rigs and tankers and barges and a lot of other things that may or may not go out of the scope of the original laws, rules, regulations. Because we are an upstream player in the space, it's well established that MLPs are appropriate, and so we don't see any SEC or IRS detriment to doing some kind of a yield oriented vehicle such as an MLP, which is not to say that is exactly what we're going to do or may wind up doing.

Richard Tullis - Capital One

Sure, sure. And just last for me, Nick, what were the downhole issues for that second Delaware Basin horizontal?

Nicholas J. Sutton

We had a lot of pressure, as I indicated earlier, that started really in some shallower formations where we were taking gaskets, we got through those okay, we got out into the horizontal section, faced a lot of pressure, had to mud-up significantly in order to counteract those pressures, keep the well in balance, and as a result we had some hole quality issues.

We were able to get a liner set in there and yet in that process, the integrity of that liner got compromised in a way that we just decided it was not worth fighting with any further and we elected to sidetrack. And we got out several thousand feet and ran into similar issues and it's up like one jut says, this coal is getting a little tired, a little thrift right there, little worn, let's take what we can get and move on to other drilling and newer wells.

Now as I say, the tiger by the tail and we'll see what we ultimately wind up with there, but the good news is we had gaskets in the shallower formations and we had a lot of pressure in our lateral, and we'll see what that means for not only James well but for future drilling in that area.

Operator

The next question comes from Noel Parks with Ladenburg Thalmann. Please go ahead.

Noel Parks - Ladenburg Thalmann

A couple of things. As you look at a transaction with Aneth, I was wondering, are there any considerations as far as your CO2 supply agreements where any change of ownership or pressed change of ownership would have any effect on those?

Nicholas J. Sutton

No, those contracts are just fine for anything that we're presently contemplating.

Noel Parks - Ladenburg Thalmann

Great. And we have seen a few deals with industrial MLPs in the last couple of quarters or so, the buying into tertiary rate projects, and I'm assuming those might be one you're thinking, for those types of transactions, do you think those would have the rough comparables for Aneth or do you think Aneth sort of needs to stand alone when you're looking at valuation?

Nicholas J. Sutton

I think we look at valuation from a number of different standpoints, and if we were to limit ourselves just through an MLP lens, I don't think we would limit it to MLPs that have a CO2 component in that. The upstream MLPs are – I'm not going to say they are fungible, but ultimately the metrics are pretty consistent. And so, as I said, I don't think a CO2 component in an upstream MLP is any better comp than any other upstream MLP out there. Each one is stands on its own and has certain attributes that may impact valuations. So as I say, you can look at the entire upstream space and draw some conclusions, but we are – as I said, we take a broader look at what – as we look at valuations, the cash flow MLP type approach being just one.

Noel Parks - Ladenburg Thalmann

And just one more thing, I want a little more pencil on, in the Gardendale you mentioned that you're doing recompletions of some verticals out there in the Spraberry. Can you just give an idea of what your expectations are for those, the costs, returns, your production uplift?

Nicholas J. Sutton

I think it's a little bit early to really get into what the production uplift is going to be in that these are all relatively recent activities. The cost is roughly $600,000 to $700,000, maybe $500,000 to $700,000 per recompletion. I think the results have been encouraging, but as I say, it's real early and you need a little bit of time to see the extent to which the uptick in production becomes apparent, in that you've got multiple completions being comingled, and while you're going through the recompletion, that affects the other zones that have been in production, and so it has stood the wells after re-stabilize before we can have a pretty good engineering view of exactly what we think that they have produced.

Noel Parks - Ladenburg Thalmann

Sure, and roughly about how much time do you need to get a sense of stabilized volumes would you say?

Nicholas J. Sutton

I'm looking at the head of our reservoir engineering and I think what he's going to tell me is that it varies well to well, and to lay a number out there, whether it's six months or a year, it's some wells might be six months, some wells might be a year. It won't be a matter of weeks and months.

Noel Parks - Ladenburg Thalmann

Okay, that's what I was looking for. That's it for me. Thanks.

Operator

The next question comes from Jeff Grampp of Northland Capital Markets. Please go ahead.

Jeff Grampp - Northland Capital Markets

just wanted to go back to the Mustang project and the next batch of these horizontals that you guys got going, I know they are all going to be the Wolfcamp B bench, but have you guys given any thought in terms of altering any completion practices in terms of denser frac stages or increased amount of prop that a lot of the other operators have been talking about out there lately?

Nicholas J. Sutton

The completion program is subject to constant discussion here at Resolute. We also reach out to some of our colleagues in the industry to compare some results, and certainly there is a movement toward more volume and more density, and that is not lost on us.

Jeff Grampp - Northland Capital Markets

Okay. And then over back on the James well again, I know that these pressure issues seem to be giving some folks problems, I mean have you guys or other operators kind of talked about what the potential solutions are, do you think that is something that you guys kind of have a decent amount of comfort level with when you decide to get in there or is there still some work to be done on that front?

Nicholas J. Sutton

I'd like to tell you that we will have a comfort level before we get in there, and some of the things that we are evaluating relate to for example the mud program and just how that all fits in. There are some other ways that we can steer the wells we think a little bit better despite that pressure, and I mean frankly we learned quite a bit just on the James well that we think that we will be able to apply in future wells. But right now our schedule is to focus on the four wells in Mustang for the reasons that I mentioned but we've got a good acreage position over Appaloosa, and as I mentioned earlier, I personally am really excited about the potential in Appaloosa but I can assure you we will have adjusted our approach to drilling those wells as we move forward in Appaloosa.

Jeff Grampp - Northland Capital Markets

Okay, great. And then shifting over to Hilight, I know that you guys had mentioned that these next batch of permits are all before the Turner, are any of those going to be longer laterals or are you guys just kind of sticking with that 4,500 plus or minus kind of lateral length for those?

Nicholas J. Sutton

We are looking at some longer laterals as we move forward.

Jeff Grampp - Northland Capital Markets

Okay, great. And then last one for me, I know you guys don't like to give quarterly guidance but is there any kind of incremental color you guys can give for 2Q? I mean based on the completion schedule in the Delaware a little backend loaded, should we be expecting maybe flattish type of production for 2Q before ramping into 3Q, is that kind of a good way to think about it?

Nicholas J. Sutton

I think that's probably as reasonable as anything. I mean we indicated earlier, we said earlier that we're very comfortable with the guidance that we've put out as to our base case and we all are aware of the fact that on a year-over-year basis that's high single-digits in terms of growth, but we are confident that later in the year we will be ramping up our activities in a way that we should realize some of the benefits of that in Q3 and Q4.

Operator

The next question comes from Ryan Oatman with SunTrust. Please go ahead.

Ryan Oatman - SunTrust Robinson Humphrey

There are some moving parts here with the power outages in Aneth and the sidetracked wall in the Delaware Basin, kind of getting at the last question, any chance you guys can provide the current production figure for us?

Nicholas J. Sutton

No, that's not something that we do.

Ryan Oatman - SunTrust Robinson Humphrey

That's fine. And then I guess looking a little bit more strategically, you talked about increasing activity upon receiving proceeds from Aneth, can you talk about what that program would look like in terms of rig activity in both the Permian and the PRB, kind of where you'd see CapEx going, a little bit more color in detail I guess on what we should expect here should the sale is successful?

Nicholas J. Sutton

Assuming that we are successful, which we believe we will be, we should be in a position to stand up another rig in the Permian and to continue with our program without [inaudible].

Operator

Pardon me, gentlemen, this is the operator. I don't mean to interrupt but we're getting some glitchy sound. We're having trouble hearing you. It just started. We're having some trouble hearing you. I don't know if anything moved or switched but it's glitchy, and so we didn't hear the response to that question. Apologies. Please hold the line, one moment. Thank you all for your patience. One moment, we're just going to reconnect the main speaker line.

Ryan Oatman - SunTrust Robinson Humphrey

Okay, that's helpful. In the PRB, did I take it to understand correctly on the permits, kind of 10 wells a year is kind of a reasonable annual program given the permitting out there and what you can do with the rigs?

Nicholas J. Sutton

I think that's a reasonable starting point. Ryan. We think we can drill that many year with the continuous drilling program, and whether we are in a position to accelerate from there as we move out in time remains to be seen, but when we referred to the 10 permits that are in process, that is a view that that's sort of an annual rate and we want to be out a year ahead of ourselves in terms of permitting in the PRB.

Ryan Oatman - SunTrust Robinson Humphrey

Okay, very good. And then the final one for me, I'm looking at Slide 19 in the presentation, Reeves County horizontal activity, you guys did a good job showing the environment in which you're operating out there and also kind of color-coding the different horizons operators and yourselves have tested, any thoughts on those other horizons and perhaps testing some of the incremental horizons out there in addition to what you've done out west so far?

Nicholas J. Sutton

Our Meeker well was a Wolfcamp A test and the wells that Renegade is currently drilling is going to be a B test, and the other three of the four wells that are on the current schedule are going to be B test. Certainly we are doing our own internal technical work on other potential horizons out there. We think that that area is going to support multiple horizons. But right now our focus is on the A and the B. And as I think you know we prefer, given our size, to be a fast follower as opposed to a prime mover and we'll let some of the big companies take the high-risk dollars on proving up some of the other potential zones.

Operator

The next question comes from James Spicer with Wells Fargo. Please go ahead.

Patrick Lee - Wells Fargo

This is Patrick Lee calling on behalf of James Spicer. I want to beat a dead horse but going back to the Aneth transaction, potential transaction, I'm just wondering have you – I'm sure you must have looked at the WPX legacy deal and is something like that something that you would be interested in doing as opposed to an MLP?

Nicholas J. Sutton

I'm not sure that I can pull the WPX legacy deal right out in front of me right now in a way that I could comment on that. Certainly we review all those deals. I think let's leave it that we are evaluating with our financial advisors a number of deals. So that is why we have resisted the word 'MLP' because there are several different kinds of approaches and we just have to wait and see, as I say, which alternative gives us the best economics.

Patrick Lee - Wells Fargo

Okay. I'm wondering, are you set on monetizing, as I noticed, about 50% or are you willing to monetize less or are you set on that 50%, and I guess would you want to do that to get the funds mostly upfront or would you be willing to structure it out over a longer timeframe?

Nicholas J. Sutton

Certainly we're open to anything, but as I said earlier in the call, I believe that the transaction should be fixative is the word I use, and what I really mean by that is that we don't want to be in a situation where we find ourselves doing part of the deal and then part of the deal and then part of the deal, and so you're never really clear of the balance sheet considerations and we think we would like to get our balance sheet cleared up so that we can get up and running on a multiyear basis.

We also feel there are going to be opportunities in the Permian that we will be able to take advantage of by having a stronger balance sheet. And so, our initial inclination is not to have something that is sort of drip-drip-drip-drip and coming in that way.

In terms of more than 50%, we have other considerations such as our bond indentures that come into play. And so we have been very careful about how we are going about sizing the potential of this deal, and again though, the market will tell us what it feels is appropriate.

Patrick Lee - Wells Fargo

Okay. With respect to the bond indentures, could you advise us what the current RP basket is at this point?

Nicholas J. Sutton

You cut out there, Patrick. Advise us as to what?

Patrick Lee - Wells Fargo

What the RP basket is standing at right now, the restricted payments basket, if Ted could answer that?

Theodore Gazulis

Roughly $100 million.

Patrick Lee - Wells Fargo

I guess then I'm wondering if what kind of constraints are there potentially with respect to selling off these assets or giving out these assets if you're looking at an RP basket of $100 million and these assume the Aneth assets are more than that amount?

Nicholas J. Sutton

You get into whether it's saleable or some [indiscernible] assets which triggers things, and this gets way deepen in the ways that I don't think we need to get into today.

Operator

The next question is a follow-up from Ron Mills with Johnson Rice. Please go ahead.

Ronald Mills - Johnson Rice

On the PRB, Nick, I think in the past you've talked about plus or minus a quarter of your PRB acreage being prospective for the Turner. Is the Parkman also really relevant only where the Turner is, do you think Parkman may have opportunity set across a greater portion of your acreage position, or how do those two formations overlap each other?

Nicholas J. Sutton

That's getting into the geology in sort of a deep detail, and I think that as we learn more about the Parkman, we'll have more to say about that. Our focus right now is on the Turner and we think that on our acreage in Hilight Field right now we have at least 48 locations, and as we drill more wells, that number could go up or it could go down, it could contract. But as to how the Turner and the Parkman stack up with each other, that's just a lot of mapping that is going on along with the mapping of the Shannon, the Sussex and the other formations there.

Ronald Mills - Johnson Rice

Okay. And then, just to make sure, when you talk about getting back to double-digit growth given a timing of standing up a second rig and getting the rig back up in the PRB, you're talking more about a 2015 timeframe, correct?

Nicholas J. Sutton

Yes. We certainly may be in a position, Ron, to accelerate our – because if our timing works out the way we would anticipate and hope, we will be able to stand up the additional rig in the Permian and continue with the Powder River Basin drilling. That has a potential of taking some high single digits into double digits, but certainly it will be lower moderate single-digits rather than knock the lights out in 2014 kind of a growth picture.

Ronald Mills - Johnson Rice

Understood. And then maybe just as a reminder, we had talked about also in addition to Aneth other things that were out there and a couple of which were your shallower production in the Muddy and the production in the Denton area of the Permian, can you remind me of what those production levels were? I think the Denton was somewhere in the 752,000 barrel a day range, but I don't remember if you have talked about the Muddy.

Nicholas J. Sutton

You're correct as to Denton, and Muddy production right now is a couple of million cubic feet of gas a day.

Operator

This does conclude the question-and-answer session. I would like to turn the conference back over to CEO, Nick Sutton, for any closing remarks.

Nicholas J. Sutton

I think my only closing remark would be on thanking you for being on the call today, is to apologize once again for whatever our local service provider did to us in terms of our communication. I hope that on myself, while I'm here, I was clear enough for you to be able to hear me. Again, thank you so much, and as always, we're here to answer any calls that you might have.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Source: Resolute Energy's (REN) CEO Nicholas Sutton on Q1 2014 Results - Earnings Call Transcript
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