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