-- Resolute Energy Corp. (Resolute) announced it has agreed to
acquire oil-producing properties in the Permian Basin for $120 million, financed
with debt. Although credit measures weaken slightly as a result of the
acquisition, they remain within our expectations for the rating.
-- The company also plans to issue an additional $150 million of its 8.5%
senior notes due 2020, bringing the total amount outstanding on this issue to
-- We are affirming our 'B' corporate credit rating on Resolute and
affirming our 'B-' issue-level rating on the company's upsized senior
unsecured debt offering,
-- Our stable outlook reflects the company's low-risk proven reserve
base, its adequate liquidity, and the high proportion of oil in its reserves
and production mix.
On Dec. 6, 2012, Standard & Poor's Ratings Services affirmed its 'B' corporate
credit rating on Resolute Energy Corp. The outlook is stable.
At the same time, the company is planning to add $150 million to its $250
million senior unsecured notes offering due 2020, bringing the total amount to
$400 million. We have affirmed our 'B-' issue-level rating on these notes. The
'5' recovery rating on the notes remains unchanged.
Resolute announced it has agreed to acquire oil-producing properties in the
West Texas Permian Basin for $120 million from a private company. The
properties have estimated proven reserves of 4.1 million barrels of oil
equivalent (mmboe), 73% of which are oil, and 1,400 barrels of oil equivalent
(boe) per day of production, which will add about 6% and 15% to Resolute's
proven reserves and production, respectively. The acquisition also expands
Resolute's existing foothold in the oil-rich Permian Basin, bringing its total
acreage position to 15,500 up from 9,000 net acres previously, moderately
improving its geographic diversity. The majority of the new acreage is held by
production (HBP), and thus capital spending requirements are largely
discretionary. The primary asset being acquired is the mature Denton field in
Lea County, N.M., where the company has identified growth opportunities
through well deepenings and infill drilling. The other key asset is the
non-operated Howard County acreage, which is producing from the Wolfberry
play, and has upside potential from horizontal drilling in the Wolfcamp and
Cline shale. Other assets included in the acquisition consist of non-operated
smaller properties, which could be divested.
To finance the acquisition, which we expect to close in mid-December, Resolute
has announced a $150 million add-on to its existing 8.5% senior notes due
2020. It has also layered on new oil hedges for 2013-2015 to lock-in cash
flows. We have also assumed reduced capital expenditures in 2013 on Resolute's
existing assets. Taking these factors into account, we estimate Resolute's
year-end 2013 debt-to-EBITDAX will increase to 3.5x, which is still moderate
for the 'B' rating, from 3.3x at year-end 2012 and just 1.8x at year-end 2011.
The add-on offering is not contingent upon the transaction closing; if for
some reason the acquisition is not consummated, the company would use
incremental debt capital for general corporate purposes.
The ratings Resolute reflect Standard & Poor's Ratings Services' assessment of
the company's "vulnerable" business risk, "aggressive" financial risk and
"adequate" liquidity. The ratings take into consideration the company's small
size and scale, its limited geographic diversity, the high-cost nature of its
asset base, and its position in the highly cyclical, capital-intensive, and
competitive exploration and production industry. The ratings also reflect the
company's meaningful exposure to oil (about 90% of proven reserves and
production), long-lived reserves, adequate liquidity, and moderate debt
Pro forma for the proposed acquisition, we view Resolute's liquidity as
"adequate." Key elements of Resolute's liquidity profile include:
-- Following the add-on notes offering, Resolute will have nothing drawn
on its $330 million revolving credit facility maturing in 2017. However, we
estimate the effective availability on the borrowing base will be about $110
million upon closing of the acquisition, after letters of credit and debt
restrictions related to certain financial covenants.
-- We expect that over the next 12-24 months, the company will remain in
compliance with the facility's financial covenants, which require Resolute to
maintain a debt-to-EBITDAX ratio of less than 4.0x and a current ratio of
greater than 1.0x.
-- We project that the company will outspend FFO by $120 million in 2013,
and will likely fund the deficit through drawdowns of the credit facility and
proceeds from asset sales (including $45 million from sales completed in 2012).
-- Resolute also has 42.5 million in outstanding warrants (with an
exercise price of $13) which, if exercised, could generate about $550 million
in proceeds. The warrants expire in September 2014.
-- The company has no near-term debt maturities.
Pro forma for the add-on offering, we rate the company's senior unsecured
notes 'B-'. The recovery rating on this debt is '5', indicating our
expectation for modest (10% to 30%) recovery for creditors in the event of a
payment default. For the complete recovery analysis, see Standard & Poor's
recovery report on Resolute Energy on RatingsDirect.
The stable outlook reflects Resolute's low-risk proven reserve base, its
adequate liquidity, and the high proportion of oil in its reserves and
production mix. We are unlikely to raise the ratings in the near term, given
the company's relatively small scale and limited geographic diversity. We
could lower the ratings if Resolute's debt-to-EBITDAX ratio were to exceed
5.0x for a sustained period--which would most likely occur as a result of a
large debt-financed acquisition or a major operating problem that curtails
production at the Aneth fields. We note that for debt-to-EBITDAX to reach this
level in 2013, EBITDAX would have to drop by nearly 30% compared with 2012.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Standard & Poor's Raises Its U.S. Natural Gas Price Assumptions; Oil
Price Assumptions Are Unchanged, July 24, 2012
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas
Exploration And Production Industry, Jan. 20, 2012
Temporary telephone contact numbers: Carin Dehne-Kiley (917-496-8208);
Lawrence Wilkinson (212-991-8514)
Resolute Energy Corp.
Corporate Credit Rating B/Stable/--
Resolute Energy Corp.
Senior Unsecured B-
Recovery Rating 5