Oil Patch Quick Pitch: Resolute Energy

Oil and baseball. Even Texans seem stymied when it comes to making money in these disparate fields. President Bush (43, not 41) dabbled in each, and found much more success in his ownership of the Texas Rangers. Dallas-based investor Tom Hicks rode that same team into a prepackaged bankruptcy earlier this year. Hicks must be hoping that his new oil venture, Resolute Energy (NYSE: REN), fares better.

Resolute was actually founded back in 2004, but it just came public last September via a special-purpose acquisition company (SPAC) controlled by Hicks. The shares are largely unchanged over the past year.

Here are some key facts about the company, which is heavily oil-weighted (77% by reserves) and focused on onshore development in the Rockies region:

Data from Capital IQ, a division of Standard & Poor's, and from company presentations.
Boe = barrels of oil equivalent.

Based on second-quarter average production, Resolute is valued at just less than $100,000 per flowing barrel. That's rich, though nowhere near as much as SandRidge Energy (NYSE: SD) paid for Arena Resources earlier this year. On the basis of reserves, the firm trades at a cheaper $11.25 per barrel. These metrics are superficial at best, but they help us get our bearings.

Resolute's core property is the Aneth field in Utah. This is a large, decades-old field making use of tertiary oil recovery, a process that injects carbon dioxide into the reservoir to wring out left-behind oil. One unit within the field has been running a "CO2 flood" since 1985. Other CO2 floods are just getting under way, and development will continue through 2013.

The company perhaps best known for this type of operation is Denbury Resources (NYSE: DNR), and the technique offers a compelling way to deliver fairly predictable growth in oil production over many years. In Resolute's case, the company is projecting 15% compound annual growth at Aneth through 2014. Capital investment is projected to run at $52 million per year.

Aneth kicks in nearly three-quarters of Resolute's production today, but there are other plays in the firm's pocket that may contribute significantly in the years ahead. Resolute is targeting several oily shale plays, including the Mowry and Niobrara in Wyoming, and the Bakken in North Dakota. EOG Resources (NYSE: EOG) has drilled a Mowry well in Resolute's backyard, and the firm will drill a Mowry test well later this year. In the Bakken, Resolute has farmed into acreage operated by GeoResources (Nasdaq: GEOI) and Marathon Oil (NYSE: MRO), and will participate in up to five wells by the end of the year.

Let's use some conservative numbers to figure out what all this might be worth. At Aneth, the present value of proved reserves, using $61 oil and $3.87 gas, is reported at $433 million. Wyoming reserves weigh in at $46 million. Resolute has around 45,000 net acres here. Assuming that 20% of the acreage is prospective for the Mowry or Niobrara, Resolute would have 28 well locations at 320-acre spacing. At 300,000 barrels recoverable per well (I'm using estimates by competitor Continental Resources (NYSE: CLR) here), that would be 8.4 million barrels of oil, worth around $77 million, based on PV-10 pricing.

In the Bakken, I figure Resolute now has around 20 net locations, on a risked basis. Wells that hit the sweet spot here can be worth more than $10 million apiece, even at $60 oil, while other wells can be worth less than $2 million. Splitting the difference gives Resolute a value of $120 million for its Bakken acreage.

In total, we've now got a value of $676 million. That doesn't quite get us to the current enterprise value assigned by the market, but we did use a 20% discount to today's oil prices. Resolute isn't a clear home run at the current price of $11 per share. But its value could represent a double or a triple (in baseball terms, anyway), especially if you believe that $70-plus oil is not just the order of the day, but also likely to be sustained or exceeded in the years to come.