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  • 1. Resolute Natural Resources January 18, 2007 Houston, Texas
  • 2. Resolute Natural Resources Company Overview
  • 3. Company Overview: Formation
    • An acquisition, exploitation and exploration company formed by Resolute’s management team and Natural Gas Partners VII, L.P. (“NGP”) in January, 2004.
    • The management team consists of the key individuals who led HS Resources, Inc., including Nick Sutton who was the CEO and a co-founder of HS Resources.
    • NGP is part of NGP Energy Capital Management, the premier investment franchise in the energy sector with $3.65 billion of investment capital under management.
  • 4. Company Overview: Resolute Strategy
    • Focus on domestic onshore basins where we have the opportunity to extract incremental production from mature fields.
    • Exploit the management team’s proven track record in managing operationally intensive projects.
    • Establish significant regional positions to capture the economies of scale that accrue to the dominant producer.
    • Create value by applying leading-edge technologies.
  • 5. Company Overview: Primary Areas of Activity
    • Development & Exploitation:
      • Operator of three federal units which comprise the Greater Aneth Field in the Paradox Basin of Southeastern Utah.
      • Assets acquired from Chevron and ExxonMobil.
      • Net proved reserves of 67 million barrels, 98% light sweet crude oil.
      • Net production of approximately 5,500 barrels per day.
    • Exploration:
      • In excess of 108,000 acres in two emerging resource plays.
      • 47,000 acres targeting Floyd Shale in the Black Warrior Basin in Alabama.
      • 61,000 acres targeting a shale formation in the Northern Rockies.
    • Gas Trading & Marketing:
      • Own 40% of Odyssey Energy Services.
      • Odyssey purchases and sells physical natural gas in the western and southwestern United States.
      • Resolute’s partner in Odyssey is Wachovia.
  • 6. Resolute Natural Resources Greater Aneth Field
  • 7. Greater Aneth Field: Acquisitions
    • Acquired in two separate transactions
      • Chevron assets acquired in November, 2004.
      • ExxonMobil assets acquired in April, 2006.
    • Resolute partnered with the Navajo Nation Oil and Gas Company
      • NNOG is an energy company wholly-owned by the Navajo Nation.
      • Greater Aneth Field is primarily located on Navajo tribal land.
      • NNOG purchased a non-operated interest in the assets.
    • Reserves and production (at acquisition)
      • Chevron: net proved reserves of 17.2 MMBoe and average net daily production of approximately 1,900 Boe per day.
      • ExxonMobil: net proved reserves of 34.5 MMBoe and average net daily production of approximately 3,200 Boe per day.
  • 8. Greater Aneth Field: History
    • Located in the Paradox Basin of southeastern Utah.
    • Discovered in 1956 and developed by Texaco, Mobil and Conoco.
    • Original oil in place estimated at 1.44 billion barrels with 405 million barrels produced to date (28.1% recovery).
    • Production is 98% oil; primarily from the Desert Creek at 5,600 ft.
    • Production peaked at 100,000 barrels per day in 1958 and is now approximately 10,000 barrels per day .
  • 9. Greater Aneth Field: Attractive Attributes
    • Large resource base:
      • Remaining gross proved reserves of 124 million barrels brings total recovery to 36.7%.
      • Each incremental 1% increase in recovery efficiency equates to an incremental 8 million barrels net to Resolute.
      • Long term option on technology and oil prices.
    • Under-exploited asset:
      • Resolute’s Greater Aneth properties have been controlled by major oil companies since discovery.
      • Resolute is the first independent to control operations in the field.
      • The major oil companies had severely curtailed investment of human and financial capital in the field.
    • Property plays to Resolute’s strengths :
      • Mature, technology starved, operationally intensive asset plays to skills developed by Resolute personnel in long operating history in other mature areas such as the D-J Basin.
  • 10.
    • Operational enhancements:
      • Conforming producing and injecting zones.
      • Returning shut-in or temporarily abandoned wells to production or injection.
      • Injector well cleanouts to increase injection capacity.
      • Right-sizing pumps to decrease back pressure on reservoir.
    • Horizontal infill drilling:
      • 40 acre infill locations utilizing horizontal laterals from existing well bores.
      • More than 80 identified locations, net proved reserves of 6.2 million barrels.
      • Target rates of return exceed 50%.
    • Aneth CO 2 flood:
      • Implement a CO 2 flood project for the Aneth Unit.
      • Expected to add gross proved reserves of 13 MMBoe.
      • Target rate of return in excess of 40%.
    Greater Aneth Field: Adding Value at Aneth
  • 11. Resolute Natural Resources Managing Leverage in a Volatile Commodity Price Environment
  • 12. Managing Leverage:
    • As with most aspects of management, there are competing schools of thought when it comes to the proper amount of leverage in an energy company.
  • 13. Managing Leverage: A conservative view of financial management “ Neither a borrower nor a lender be, do not forget, stay out of debt …” Polonius (aka the Skipper)
  • 14. Managing Leverage: A more contemporary view of financial management “ [Leverage] is good, [leverage] is right, [leverage] works..” Gordon Gecko – legendary energy banker
  • 15. Managing Leverage: Recent Experience
  • 16. Managing Leverage: Keys to Managing Leverage
    • Leverage can be differentiating factor in competitive acquisition market.
    • Decisions on appropriate leverage should be holistic:
      • Make sure assets are “leverage-friendly”
      • Diversify your funding sources
      • Manage commodity price risk using the right mix of tools
    • Getting it wrong can lead to an early exit in a volatile market.
    Other Price Risk Management Capitalization Leverage Friendly Assets
  • 17. Managing Leverage: What are “leverage-friendly” assets?
    • Long life, stable decline profile:
      • Sweet spot – not too short or too long
      • Sufficient history to make capital providers comfortable
    • Bias toward PDP reserves:
      • PDP reserves produce cash flow
      • Balance upside vs. ability to leverage
    • “ Hedgeable” commodity:
      • Certain commodities introduce hedging complications
      • Predictable, manageable or hedgeable basis differentials
    • Favorable cost structure:
      • Cash flow from production sufficient to fund development costs and also reduce leverage
  • 18. Managing Leverage: Capitalization
    • Diversify your funding sources:
      • Sources of debt capital for energy companies has expanded dramatically.
      • Markets are very aggressive – “Yield cures a lot of sins”.
    • Senior bank debt:
      • Cheaper and more flexible – also most conservative.
      • Traditional bank borrowing base is a form of price risk exposure.
    • Second lien loans:
      • Greater tolerance for leverage than bank market.
      • Focus on strip prices as opposed to internal price deck.
      • No re-determinations or amortization.
      • Higher cost of capital – more difficult to amend.
    • Other sources:
      • Private placements
      • High yield bond market
      • Private mezzanine providers
  • 19. Managing Leverage: Price Risk Management
    • We don’t subscribe to theory that investors desire price risk exposure
      • Investors seek a superior return on capital relative to the risk
      • Return is driven by increasing per share production and reserves
      • Tail and undeveloped reserves will always provide some element of price exposure
    • The “right” level of price risk mitigation depends on the assets and the capital structure
    • Match the right price risk management tool to the need
    • Hedging is not a one time event
      • Monitor your hedge position relative to assets and market conditions
      • Be careful to avoid “day trader” syndrome
  • 20. Managing Leverage: The Resolute Experience
    • The Aneth assets fit the leverage-friendly profile
      • Predominantly PDP assets when acquired
      • Long operating history with stable, predictable decline
      • Production is light sweet crude oil sold at a contractual differential to NYMEX
    • Assets were acquired using roughly 15% equity and 85% debt
      • Traditional bank revolver
      • $125 million second lien facility placed with institutional investors
    • 75% - 90% of PDP production is hedged through 2010
      • Downside protection ranges from low $60’s/barrel in 2007 to $70/barrel in 2009 and 2010.
      • Utilizing a mix of swaps, puts, and put spreads
    • Significant price risk mitigation purchased prior to closing on each transaction