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Resolute Energy (REN) - Is Management Pumping The Stock?

Summary

Resolute has come back from brink of bankruptcy - thanks to stellar results from the wells in Permian.

Are these well results too good to be true?

Is management pumping the stock with disclosing the information selectively?

Background

Resolute has 20,000 gross (16,300 net) in Delaware basin, the acreage is before latest acquisition that was announced in January and will be closed in May. The area is divided into Mustang and Appaloosa as shown below.

From the picture, one can make the approximation as following:

  • Appaloosa is around 11 square miles - 7000 acres
  • Mustang is around 20 square miles - 13,000 acres
  • Mustang has around 5 square miles - 3,200 acres that are not operated by Resolute

In October, Resolute bought 3,293 acre in Mustang area to increase their holding, hence I am assuming they have close to 100% of ownership of the acreage where they have control. Also I am assuming that they have 40% of control of Mustang acreage they are not operating. My approximation of their net acreage is following:

 

Gross

% control

Net

Mustang

     

Resolute Operated

9,800

96%

9,408

Resolute Not Operated

3,200

40%

1,280

Appaloosa

     

Resolute Operated

7,000

80%

5,612

Total

20,000

 

16,300

Why Permian overall output in 2016 is so low - especially with these monster wells?

Resolute brought 14 wells online in last 14 months, following 12 wells in calendar year 2016.

Location

Well Name

Month it was brought online

Production Peak Data

24 Hr

30 Days

60 days

90 days

120 days

150 days

Mustang

Jolly

Mar-16

1,820

1,552

1514

1501

1478

1426

Mustang

Flying Dog

Apr-16

1,573

1,475

1,469

1,443

1,378

1,315

Appaloosa

North Goat

May-16

2,471

2,215

2,054

1,992

1,955

1,986

Appaloosa

North Mitre

Jun-16

3,330

3,131

3,066

3,008

2,942

2,895

Appaloosa

South Elephant

Jul-16

3,329

3,017

2,869

2,686

2,543

2,473

Appaloosa

North Elephant

Aug-16

2,768

2,224

2,074

1,989

1,883

1,760

Mustang

Thunder Canyon

Aug-16

2,272

1,607

1,581

1,495

1,375

 

Appaloosa

South Goat

Sep-16

3,336

3,121

3,022

3,039

2,960

 

Appaloosa

South Mitre

Sep-16

3,038

2,698

2,512

2,369

   

Mustang

Bouchre

Dec-16

2,651

2292

2107

     

Mustang

Unita

Dec-16

2,451

2128

2061

     

Appaloosa

Harrision State

Nov-16

2,906

2431

2099

     

Well results are impressive, it is probably the most important reason why stock went up from low single digit to 40s - even with dilution.

While these results are impressive, the overall Permian production has gone up from 4,883 BoE from Dec 2015 to 14,750 BoE in Dec 2016. This actually does not make sense.

Most of the wells that came online in 2016, have daily BoE rate more than 1,500. 3 wells (Bouchre, Unita and Harrision) were brought online in Nov-16 and Dec-16 and they have IP30 BoE of more than 2100. In addition to this, there were atleast two wells that are brought online in the non-operating acreage (please see picture above).

If the well results were so good, then why Resolute exited 2016 with 14,750 BoE for Permian. It should be more like 20,000 BoE. I am not able to reconcile this. Is management mis-representing the well results?

Is Capital Expenditure going up?

According to the press release on March 13th, their capex for FY 2016 was $132.9M. The typical capex for Aneth is ~$14M, which means they spent ~$120M for 12 gross wells. According to their presentations, the typical AFE is from $7-9M. If that so, their capex should be less than $100M. It may be possible that capital expenditure may be going up, but it was not highlighted by management either in the calls or investor presentations.

What's current inventory?

According to slide below, Resolute has access to develop 966 wells, which is impressive.

I started digging little bit more. It looks like only 42 wells are developed, other 924 wells are bit up in the air. In the presentation of Aug 2017, they have mentioned that only 2/3 of acreage is capable of having long laterals (10,000 ft and 7,500 ft).

Currently they are developing only 7,500 and 10,000 laterals.

From the picture above in the 1st page, it looks Appaloosa has 4 zones (with dimension of 2 mile x 1 mile) to support 10,000 laterals. With current proven concept of 160 acre spacing, it should support 16 well (4 wells per zone). Resolute has not done any testing with 80 acre spacing in Appaloosa. Resolute has currently has 6 wells in Appaloosa.

Mustang has 6.5 zones (with dimension of 1.5 mile x 1 mile) to support 7,500 laterals. With current proven concept of 160 acre spacing, it should support 26 wells (4 wells per zone). Resolute has tested 1 80 acre spacing (with Uinta/Boucher) and 1 well in Lower WCA (with Renegade pair). They claim that there is hardly any dip in well results with these down-spacing tests. I would be hard pressed to accept these results as I would think it requires atleast 3 back-to-back successive wells in the same area to prove whether there is any impact. Infact ideally they should bring 5/6 wells in same area to quantify the impact.

So currently there are 42 wells that are proven, rest of the wells are not.

What's PV10 of long (10,000 ft) and mid-length (7,500 ft) laterals?

According the March 2017 presentation page 12, PV10 of long lateral is $21M and PV10 of mid-length lateral is $10M using strip pricing. According to January 2017 presentation, PV10 of long lateral is $19.9M and PV10 of mid-length lateral is $9.2M using the same strip pricing. I think both of these numbers are wrong and the PV10 is much lower. According my calculation assuming $50 price for barrel of oil and $3 per MMBtu of gas, PV10s are $15M and $6.4M respectively.

Is management only pushing the good news, suppressing old news?

In the presentation published in Mar 2017, they claimed their wells performing better than curve type.

Again, I started digging bit more and found that following four wells are performing either below curve type or matching it.

Location

Well Name

Month it was brought online

Production Peak Data

24 Hr

30 Days

60 days

90 days

120 days

150 days

Mustang

Jolly

Mar-16

1,820

1,552

1514

1501

1478

1426

Mustang

Flying Dog

Apr-16

1,573

1,475

1,469

1,443

1,378

1,315

Appaloosa

Harrision State

Nov-16

2,906

2431

2099

     

Mustang

Thunder Canyon

Aug-16

2,272

1,607

1,581

1,495

1,375

 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.