Resolute Energy Corp. (NYSE: REN) has entered into a series of related agreements with an undisclosed Permian Basin midstream company pursuant to which Resolute and an existing minority interest holder will sell the gas gathering and water handling systems currently operated by Resolute in its Appaloosa and Mustang project areas in Reeves County, Texas, for aggregate gross consideration of up to $110 million.
This consideration is comprised of two components: 1) a $50 million payment for the assets currently in place and 2) up to $60 million in earn-out payments tied to field drilling activity through 2020 that will deliver gas and produced water into the system. Resolute will receive $32.85 million of the initial payment, while the company’s partner in the Mustang area will receive the balance of $17.15 million.
The proceeds of the sale initially will be used to reduce debt and to fund development activity in the company’s properties in the Delaware Basin in west Texas. The transaction is expected to close on or about August 1, 2016, and is subject to customary closing conditions. The purchaser has placed a purchase deposit of $3 million into an escrow account.
The earn-out payments will be based on the completed lateral lengths of wells and the year in which a well is spud. Payments are available through 2020, with a ceiling of $60 million (gross). Earn-out payments for Appaloosa area wells will be paid 100% to Resolute and payments for Mustang area wells will be allocated 60% to Resolute and 40% to Resolute’s partner. In addition to the initial payment described above, at closing Resolute will receive approximately $2.3 million in earn out payments for wells previously completed as part of its 2016 drilling program.
Following closing of the transaction, the purchaser will operate and expand the gathering systems in a manner to accommodate all current and future volumes of gas and water produced by Resolute and its partner in the Appaloosa and Mustang areas. Resolute and its partner have agreed to dedicate and deliver all gas and water produced from their acreage within the Appaloosa and Mustang areas to the purchaser for gathering, compression and disposal services for a term of fifteen years. The parties anticipate that the purchaser will also provide gas processing services to Resolute and its partner in the future.
Wunderlich Securities analysts upgraded the company to a Buy rating, noting Resolute Energy “has done a nice job of selling assets and paying down debt but still has a significant leverage position. As such, we would like to see REN attempt to reduce its debt to further improve the balance sheet. With its higher priced hedges rolling off this year, we do see a drop in average prices, but we also think it will continue to grow nicely; there are improvements operationally that helps REN financially and could help improve the $105 million in liquidity.”
Petrie Partners LLC acted as financial advisor to Resolute on the midstream transaction.