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Tuesday, September 08, 2015 9:32:09 PM
REN: Text book how to survive a crash in oil prices.
Good afternoon, everyone. My name is Michael Stefanoudakis, I'm the Senior Vice President and General Counsel of Resolute. I'd like to read the forward-looking statement before turning the call over to Nick Sutton, our Chairman and CEO.
This investor conference call includes forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as expect, estimate, project, budget, forecast, anticipate, intend, plan, may, will, could, should, poised, believes, predicts, potential, continue, and similar expressions are intended to identify such forward-looking statements. Forward-looking statements in this conference call include matters that involve known and unknown risks, uncertainties, and other factors that may cause actual results, levels of activity, performance, or achievements to differ materially from results expressed or implied on this call.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this call. A listing of the material risk factors faced by Resolute appears in our Form 10-K and is updated periodically in the Form 10-Qs and other public filings.
At this time I'd like to turn the call over to Nick Sutton, our Chairman and CEO.
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Nick Sutton, Resolute Energy Corporation - CEO [3]
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Thank you, Michael.
Good afternoon and welcome to Resolute's second-quarter 2015 earnings conference call. I will assume that you have had an opportunity to read our press release and our filing on Form 10-Q, both of which went out last night. So I will focus my comments on the primary drivers of our performance during the past quarter. After that, Ted Gazulis will give you an overview of our financial results, and then we will open the call for Q&A.
At the beginning of the year, we established a strategic plan to keep capital spending within cash flow, to enhance operational efficiencies in order to maintain our cash margins, and to pay down debt even while maintaining production. In our last earnings call, we articulated our formula for achieving that plan to maintain production volumes, lower our controllable costs, increase liquidity, and reduce capital spending.
Our results for the second quarter and the first half of 2015 demonstrate that this formula is working, as we are on track to meet or exceed our public guidance on every metric except for a modest variance on production taxes, something over which we have no control. Let's walk through the highlights, starting with production.
Average daily production in the second quarter increased to a record rate of 13,528 Boe per day; that's up 10% from the same quarter last year. That is a notable accomplishment considering that we've ceased our operated drilling activity. And by the way, the production increase is inclusive of losing approximately 610 net Boe per day from the sale of our assets in the Midland Basin, production that was in our original guidance that we provided to you earlier this year. These higher production volumes helped offset lower commodity prices.
The primary driver of the positive production variants was our Permian Basin assets, which produced 5,566 Boe per day. That's up 3% from the previous sequential quarter and it's 28% higher than the same quarter last year. The increase was a result of having a full quarter production from three horizontal wells completed in the first quarter of 2015, and our Mustang project area in the Delaware Basin, complemented by reduced downtime at our Gardendale area in the Midland Basin and other properties in New Mexico. These factors all helped deliver above-planned production in the second quarter.
Production in Wyoming averaged 1,655 Boe per day, 3% lower than the same quarter last year and 4% lower than the first quarter of 2015. The decrease was a result of natural production declines, several well workovers, and a temporary shut-in by the gas processor to accommodate planned maintenance.
Aneth Field continues to prove the value of having a mature, low-decline asset in our portfolio, as it provides a steady source of production and cash flow. Aneth Field delivered production at an average rate of 6,370 Boe per day in the second quarter, essentially flat as compared to the same quarter last year and the first quarter of 2015. In the first half of 2015, Aneth Field produced 6,350 Boe per day, an increase of 2% over the same period last year.
The production improvement primarily is a result of increasing response to our ongoing tertiary recovery project in Aneth Field. I'm very pleased with our production performance through the first half of the year and I am impressed by the ability of our team to post production increase that more than offset the production that we lost as a result of the sale of non-core assets.
Now let's turn to cost control. We have hammered down controllable cost by rigorously focusing on efficiencies and proactively working with our service providers. We reduced lease operating expense, that's excluding non-cash share based compensation, in the second quarter by 40% to $15.64 per Boe as compared to the same quarter last year.
We also have cut overhead. Cash-based general and administrative expense in the second quarter amounted to $3.87 per Boe, 31% lower than the prior-year period. Importantly, we believe that these cost savings are sustainable. For example, our field staff has brought more tasks in-house, eliminating less competitive vendors.
But it also bears mentioning that the longer our operations team has worked with our assets, especially those we acquired in the Permian Basin, the more efficiently they produce, performing good well surveillance, solid engineering, and regular maintenance has kept wells on production, thereby avoiding costly downtime. Our team has proven itself as a strong operator and all of these factors combine to create long-term sustainable reductions in cost. Higher production volumes combined with significantly lower costs at both the field and the corporate levels have worked together to preserve our margins.
Adjusted EBITDA, a non-GAAP measure, was $35.5 million in the second quarter, essentially flat with the same quarter last year despite commodity prices that were approximately half of what they were last year. Adjusted EBITDA during the first half of this year was $70.3 million or $28.76 per Boe, only 8% lower than the same period last year, again, despite dramatically reduced commodity pricing. Clearly our team's engine is firing on all cylinders.
The first-quarter sale of the Howard and Martin County, Texas assets improved our balance sheet and strengthened our liquidity position without negatively affecting overall cash flow. Net proceeds from the sale of those properties were used to reduce bank debt. Total debt at June 30 was $31 million lower than at March 31 of this year. The borrowing base on our revolving credit facility currently is $260 million, and with $160 million of borrowings, we have approximately $100 million of availability, which is more than adequate to fund our 2015 plan.
Turning to capital spending, we invested $7.6 million in the second quarter, bringing total capital spending in the first half of this year to $30.3 million, which excludes the previously mentioned asset sales. Most of the capital spending incurred through the first half of 2015 occurred in the first quarter as we completed three Permian Basin wells. The majority of spending for the rest of 2015 will be for CO2 purchases at Aneth Field to support the production rate at this foundation asset, and we expect our 2015 CapEx spending to be in line with our 2015 public guidance.
As I mentioned in our last call with you, this is not our first cycle. We have experienced prior cycles and we have quickly put our experience to work to preserve value by taking decisive actions. I continue to be impressed with the performance delivered by our operating teams since it's down cycle began, and thanks to them we have met or exceeded our key metrics for the first half of this year.
Finally, I'll make brief mention of the ongoing process of selling our Hilight Field assets. As we mentioned in yesterday's press release, we have received bids in we are working diligently through the process. Additionally, we have had fruitful discussions with potential joint venture partners to fund drilling on our Permian Basin assets and we look forward to providing more details to you as soon as is appropriate.
Now I'm going to turn it over to Ted Gazulis.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [4]
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Thank you, Nick.
I'd like to start with a look at where we stand relative to the guidance we issued earlier this year. With regard to production, Nick mentioned earlier that we produced at an average rate of more than 13,500 Boe per day through the first half of the year. That's above the top end of full-year guidance which is 12,000 to 13,000 Boe per day.
It's important note that even though we sold our properties in Howard and Martin Counties, Texas, we have not adjusted our guidance downward. Equally, though, because we're not drilling any wells in the second half of 2015, we anticipate that production has peaked for the year and expect that natural production declines will cause volumes to be modestly lower over the next two quarters. But again, we feel confident of achieving full-year production guidance.
We've had great success in reducing costs in light of the depressed commodity price environment. Total lease operating expense in the first half of 2015 was $39.8 million, which was 31% lower than the first half of last year. And sequentially our LOE was 5% lower in the second quarter than it was in the first.
Through the first half of 2015 we reduced LOE per Boe excluding share-based compensation by 37%, $16.11 per Boe, down from $25.56 per Boe in the first half of 2014. At the current run rate, full-year LOE would come in well below our guidance range of $88 million to $98 million.
General and administrative expense in the second quarter was $7.5 million, which included $2.7 million of non-cash expense and was 28% below the same period last year. For the first half of 2015, total G&A expense was $14.8 million, inclusive of non-cash compensation expense of $5.6 million, and was 22% below the same period last year. At the current run rate, full-year cash G&A expense would come in at or below our guidance range of $25 million to $29 million.
In addition to exercising strong financial discipline, our hedge book helped to mitigate the effect of commodity price declines. Excluding commodity hedges, revenue was $48.4 million in the second quarter of 2015, down 45% from the same quarter last year to $39.31 per Boe from $78.96 per Boe in the prior-year period. However, after incorporating the effect of favorable commodity price hedges, revenue was down only 18% from the prior-year period to $53.93 per Boe.
For the first six months of 2015, revenue excluding commodity hedges was $89.5 million, or $36.60 per Boe, down 50% from the same period last year. When incorporating the impact of derivatives, though, hedge adjusted revenue was down only 21%.
We believe that hedging is an important part of managing a commodity-based business. For the remainder of 2015, we have 6,600 barrels per day hedged at an average floor price of more than $85 per barrel, and in 2016 we have hedges covering 6,500 barrels per day at an average floor price of more than $80 a barrel. We've also started layering in new hedges to carry us into 2017.
Despite a 50% decline in realized revenue per Boe before commodity hedges, in the second quarter we generated $35.5 million of adjusted EBITDA, a non-GAAP measure, which was flat with the same quarter last year. In the first half of 2015 we generated adjusted EBITDA of $70.3 million, or $28.76 per Boe, which was only 8% lower than the same period last year and a significantly smaller decline than the 54% drop in revenue per Boe before commodity hedges. We think it's a strong statement that we've maintained our adjusted EBITDA in the face of sharply downward commodity prices.
Looking at capital, we invested $7.6 million in the second quarter, bringing a total first half CapEx to $30.3 million. As you're probably aware, our 2015 capital program was front-end loaded and we remain on track to spend within our guidance in the range of $45 million to $50 million. At June 30, 2015, we had a total of $160 million drawn on our revolving credit facility, $199.1 million of second lien term loan outstanding, and $400 million of outstanding senior notes. After adjustment for the Howard and Martin County asset sale, our revolving credit facility has a borrowing base of $260 million, providing us with current availability of $100 million.
As we look to our fall borrowing base redetermination, we recognize that prevailing commodity prices are significantly lower than they were last year. But we also note that drilling, completion, LOE, and G&A costs are all down across the board. Clearly the PV-10 of our reserves will be negatively affected by lower commodity price assumptions, however, we anticipate that this impact will be mitigated somewhat by the recognition of our meaningful lower cost structure.
Given that market forces are dynamic and there are many variables at work, I'm not in a position to speculate the level at which our borrowing base will be redetermined. Under any circumstances, though, we'll work with our lenders to ensure that the Company has sufficient liquidity to run the business.
We are in the fortunate position of not having to face any impending debt maturities, as our revolving credit line and senior notes mature in 2018 and 2020 respectively, and our senior loan -- second lien term loan matures no later than six months after the maturity of the revolving credit line. We are in compliance with our debt covenants, and forecast sufficient liquidity and cash flow from operations to fund our 2015 capital budget and to reduce debt.
In sum, then, strong field operations, rigorous cost control, and favorable commodity hedges have helped Resolute to mitigate the effects of the recent commodity price declines and have positioned the Company to work through this product price cycle.
We thank you for your interest in Resolute. With that I'll turn it back to Nick.
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Nick Sutton, Resolute Energy Corporation - CEO [5]
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Thank you, Ted.
I said it in our first-quarter earnings call and I will say that again: I commend our team for the great job they have done to preserve value since this down cycle started last year. The attention to detail, the drive to achieve, the focus exhibited by our people in our field offices and at the corporate level, have enabled us to be in a strong position going forward. In my view, the cost reductions are sustainable, and we should have continued benefits for cash flow, returns on capital projects, and preservation of reserves.
The value of our favorable commodity hedges that Ted outlined is apparent with approximately 74% of 2015 forecast daily oil volumes hedged at a weighted average floor price in excess of $86 per barrel at 6,500 barrels per day in 2016, hedged at a weighted average price at over $80 per barrel. Our derivatives program has helped cushion our margins from the worst of commodity price declines and will continue to shore up our margins going forward. Fortunately, the majority of our acreage footprint is held by production, meaning that we do not need to drill wells in this current commodity pricing environment just to hold leases.
100% of our Aneth Field acreage is held by production. 100% of the acreage in our Gardendale project area in the Midland Basin is held by production. 100% of our Powder River Basin acreage is held by production. 100% of our acreage in New Mexico is held by production. While some of our Reeves County acreage is not yet held by production, that which is not is a amenable to lease modifications, a process with which we have had considerable success.
Our legacy asset, Aneth Field, is a strong and steady source of production and cash generation. In fact the majority of our Company-wide production is sourced from assets having shallow declines covered by favorable hedges, and as a result, we have been able to generate positive free cash flow in the quarter and we expect that to continue through the rest of the year. Our formula of production maintenance, cost control, capital discipline, and liquidity enhancement is working and our team will continue to execute on plan to help us endure this down cycle and emerge from it a more competitive Company.
I thank you all for listening and I'll now turn the call back to the operator for Q&A. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Neal Dingmann, SunTrust.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [2]
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Good afternoon. Nick, just a quick question, you mentioned just lastly here on this re-used lease modification, is that the cost, which is pretty minimal there, or is that something that you would consider with those, maybe trading that and increasing what you have in the Midland Basin, maybe if you could just talk about that a little bit.
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Nick Sutton, Resolute Energy Corporation - CEO [3]
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I'm not sure I quite got the full import of your question.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [4]
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Two things, Nick. One, the costwise to basically modify, you mentioned most everything else is 100% HPP, to modify or to hold those leases, are we talking just very minimal? A couple million dollars or less? And number one, if it is very small, obviously, that's not a big deal. If it were more than that my thought was, does it make sense to try to trade some of that acreage for something that would block in some of your other existing acreage?
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Nick Sutton, Resolute Energy Corporation - CEO [5]
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The modifications are, in the big picture, not that expensive. We've had considerable success as I mentioned, and we would anticipate having success on a going-forward basis. There is no doubt that the Reeves County area is a focus area for a lot of companies and so it's not as if we are without competition, but our land staff has done an admirable job thus far and we would expect that to continue. So it is relatively insignificant in the big picture of what it costs to drill and complete horizontal wells, for example.
As to whether it's appropriate at some point to consider trading acreage, that's something we are always opened for and we have regular discussions with a lot of different companies as we look to solidify positions in one place versus another. So that's just an ongoing effort by the Company that we evaluate on a day-to-day case-by-case basis.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [6]
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That makes sense. And then in the press release you mentioned where you would stand down on all drilling. It's interesting, stand down, but yet you still have quite a good financial position and you do mention that the costs continue to come down. Is it more on the -- what are you looking for in order to think about ramping activity again? Is it cost at a certain level that would thus generate a certain critical rate of return, or when you and Ted sit around and look at is it a required rate of return that you all are looking for? What would cause you to bring a rig back?
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Nick Sutton, Resolute Energy Corporation - CEO [7]
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Good question. I think that right now, we are looking at the world from the perspective of we want to make sure that we continue to maintain significant liquidity and liquid availability, and so that causes us to be somewhat more cautious rather than less cautious in this environment. I think that as Ted alluded to, as we look to go into the fall borrowing base redetermination we have wrung so much cost out of our system that we think that we should stand up well in that borrowing base redetermination, although we're not in the crystal ball of the banks and I don't mean to suggest by any means that we are. But I think that's an unknown out there.
The other thing, Neal, that we have to be cognizant of, and that is while our areas in the Permian Basin, both in the Midland Basin side and in the Delaware Basin side, are still very economic at recent product prices. We can't ignore the erosion that we're currently seeing out there, particularly since these wells, as you know, a lot of the production comes early on and so we have to take that into consideration.
And all of those things go into the ongoing mix of discussion that we have internally as we evaluate future options and activity. But right now our sort of base plan is let's not stand up rigs, let's evaluate this, let's maintain our liquidity, let's continue to drive cost out of the structure, protect our cash margins, and pay down debt in the process.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [8]
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Let me add one more thing if my can, Neal, and that is that as we think about the prospect of standing up one or more rig, I think from our perspective, it will be more attractive, more efficient, more effective, all those kinds of descriptive words, to be able to stand up a rig and drill for a while. We all know that drilling a program will work to your advantage in terms of the economics, so even if we wanted to stand up a rig for a well or a couple of wells, I'm not sure that we wouldn't be better served by getting to the place that we could stand up a rig and drill for a year.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [9]
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That make sense. Okay, thanks. Great details.
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Operator [10]
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Jason Wangler of Wunderlich.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [11]
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Hey, good afternoon. I was just curious with your comments in the Permian, if anything there would be related to the infrastructure you have in the Delaware. Is that something you would look at either JVing or monetizing given how probably lucrative it would be?
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Nick Sutton, Resolute Energy Corporation - CEO [12]
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That is something that we have been evaluating. We've had deep discussions with certain parties out there. As you know, the people in that midstream space are very active and have good checkbooks, and so they see -- the ones that we have spoken with, at least, see the infrastructure we have built thus far as a good starting spot to expand further infrastructure out into Reeves County. So yes, that's on our radar screen, it's more than just on our radar screen, it's an active project area here in the Company.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [13]
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That's helpful and then just on the Powder River, obviously you're going through the bids, is there a timeframe that you have or that is set in the agreements that we would be hearing something or is that just an ongoing situation given what all's going on in the commodity mix? Just wondering if there's any milestone we should be looking for.
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Nick Sutton, Resolute Energy Corporation - CEO [14]
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I would say that internally we would hope to get something wrapped up within the next 45 days plus or minus. But in this world, life is not a unilateral event so we will see.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [15]
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No, that's fair, I appreciate it. I'll turn it back. Thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [16]
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Thanks, Jason.
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Operator [17]
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Ron Mills of Johnson Rice.
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Ron Mills, Johnson Rice - Analyst [18]
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Good afternoon. Real quick on the Permian, you talked about the sequential production growth partially being due to the full quarter impact, but can you quantify or describe some of the steps you took to reduce the downtime and the sustainability of that runtime improvement?
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Nick Sutton, Resolute Energy Corporation - CEO [19]
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Yes sir. It's something I'm really very proud of our team and what they've accomplished. I would start out by making sure everyone is very much aware of the fact that this is not an effort that started commensurate with the erosion in product prices. This is an effort that started the day that we took over operations in roughly early in the second quarter of 2013.
This is particularly with reference to the Gardendale area, and we found a field that needed attention, and our team got after it, and through a period of time, they've reduced failure rates from roughly 11 a month down to more recently it's been two or three a month. And -- but again, that is not a step change and it's not a process that was initiated because of product prices. It was initiated because of our focus on operations, and as I said, well surveillance, solid engineering, solid production operations, and it's been a continuing improvement.
Now I will say that I'm really happy that all of that has come together in light of what we're dealing with in the external environment. It's been very fortuitous and when we talk about our ability to hold the LOE down on a sustainable basis, again, it's not just getting the scalpel out with our service and supply providers, it's just hard work on the operating level and the engineering level that has had significant results. So I would point to that, Ron.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [20]
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Let me make one other comment that when Nick talks about 11 wells versus three wells, we are talking about more than 100 wells here. And to be looking at three-well failure in that big a universe is an enormous step in the right direction.
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Ron Mills, Johnson Rice - Analyst [21]
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Great. And then maybe this flows through, that you or Ted talking about the production peaking and the way that production looks were relative to the guidance you put out in February. And I know still really early but a lot of people have tried to at least paint a picture around 2016 in terms of spending levels versus this year and maintenance CapEx spending. Given the lack of -- or not lack, but given the far less activity in the second half of the year, how that feeds into next year, how are you looking at that from a big picture standpoint?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [22]
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You know I think that as we look forward, and I think Nick said it earlier, what we really are trying to do is to be efficient in how we're spending our dollars, and that's both LOE -- that's LOE, CapEx, G&A. We are not forecasting large dollar expenditures on CapEx, certainly we'll continue to spend money in Aneth on CO2. We have an ongoing program in Aneth of working the field, we'll continue to do all those kinds of things.
We're not at a stage yet where we want to forecast -- provide guidance for 2016, but I think that we would rather pay down debt with cash than, at this point, do incremental CapEx spending that doesn't really move the needle. Again, I'd rather spend money by standing up a rig and drilling for a year and waiting until we can do that, rather than doing a start/stop program in anywhere in the Permian or for some of the other programs that we've talked about over time in Aneth.
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Ron Mills, Johnson Rice - Analyst [23]
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Great, and then one last one, just as you look at the second half, Ted, with that 12,000 to 13,000 barrel a day guidance for the year in your first half, coming in and averaging 13,500, if you looked at your corporate decline rate right now given no upcoming wells drilled or completed, what do you forecast that corporate decline rate is in this environment?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [24]
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I think again, I would just do the math and say if we're at 13,500 through the first half and we think that we'll be in the range of 12,000 to 13,000 you've got two endpoints, and you can come up with the decline rate. And I don't have my calculator with me or I'd do it for you.
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Ron Mills, Johnson Rice - Analyst [25]
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My cell works for that. Thanks. I'll jump back in line.
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Nick Sutton, Resolute Energy Corporation - CEO [26]
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Okay, the one thing I would add is that we talk about well downtime and failure and whatnot, most of you on the call are very familiar with what we mean when we talk about that, but it just basically stuff breaks. A pumping unit might have something that needs to be repaired, you might have parted rods or something in the tubing.
It's that kind of thing when we talk about well downtime, and you know, the need to get over a well with a pulling unit and fix things. So when I refer -- commonly it's referred to as a downtime or failure, it's just really fixing things and I want to make sure that everybody understands that.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [27]
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Let me add one other point to that, Nick, and that is that in today's price environment we focus and our team focuses very much on the dollars. In a $100 world you focus more on the barrels. So we're being very judicious as wells go down through the normal wear and tear of an oil field about where you spend the workover rig.
A two barrel a day in a $100 environment, you might go send a workover rig. You might not do that today. That's the kind of detail work that our guys are doing, developing -- we've developed a number of tools internally to really maximize and optimize the way we spend money out there and you can see it in the numbers.
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Operator [28]
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Jeff Grampp, Northland Capital Markets.
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Jeff Grampp, Northland Capital Markets - Analyst [29]
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Good afternoon.
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Nick Sutton, Resolute Energy Corporation - CEO [30]
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Hi, Jeff.
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Jeff Grampp, Northland Capital Markets - Analyst [31]
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I wanted to touch on the Delaware well performance you highlighted in the release and some outperformance from some of those longer laterals. So maybe just wanted to dig a little bit deeper on that if you have any granularity regarding quantifying what type of outperformance you're seeing or what longer-term rates you're seeing from some of those wells.
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Nick Sutton, Resolute Energy Corporation - CEO [32]
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I don't think that I'm prepared to go into much more detail than what we did in our press release, where we noted that we've gotten, in the case of two of them, I think it was 160 to 185 days of production and the outperformance is notable. I would like to get additional production and then that will result in a process where we sit down with the engineers and look to see about increasing our type curve.
But the most important thing is that two of the three are very much outpacing type curve, and the third one is slightly under type curve and on average we are at least on type curve if not higher. So, I think that's about what we would note for right now.
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Jeff Grampp, Northland Capital Markets - Analyst [33]
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Okay, fair enough, and most of my other questions have been asked. But just have maybe a housekeeping one for Ted. It looked like interest expense is maybe a bit higher than -- I was modeling for 2Q, is that more a function of maybe less being capitalized or are there some other moving parts in there with the additional second lien and things like that?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [34]
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Yes, I mean I think it may have to do with capitalization, probably that's an important part of it. And obviously, I know your models are well done, but the question of timing with additional second lien going from the $150 million at year end to $200 million currently, well, $199.1 million currently. There may be some slack there.
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Jeff Grampp, Northland Capital Markets - Analyst [35]
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Okay, great quarter, thanks.
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Nick Sutton, Resolute Energy Corporation - CEO [36]
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Thanks, Jeff.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [37]
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Thank you.
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Operator [38]
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Jeff Robertson, Barclays.
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Jeff Robertson, Barclays Capital - Analyst [39]
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Thank you. Nick, to follow up on some the LOE discussion, can you talk about any specifics around what the approach you're taking on well repair is and what impact that's having on production in the Permian or in Aneth for that matter?
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Nick Sutton, Resolute Energy Corporation - CEO [40]
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Our approach, Jeff, is to -- we look at any well that is a candidate for some work, anything that's going to cost us money. And we have in the field and in the engineering teams, tools that we've developed that look at well profitability and takes in all the complexities associated with a particular well, what is the production stream looking like, what is the LOE looking like, on basically a unit basis, down to how much electricity does it cost us to run that pump?
It's very, very precise and detailed, and then we prioritize the wells based on the profitability index, and then we will use some skilled engineering and operational judgment to supplement the basic spreadsheet calculations. As Ted indicated, what that really results in is that you're trying to optimize the production, and so it's what are you getting for what you're spending from an optimization and efficiency standpoint?
And I think the results speak for themselves as we look at how production has held up. Aneth is a good example. Production is up a few percent and that's the result of just ongoing CO2, of course, but also the guys in the field doing this kind of optimization work.
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Jeff Robertson, Barclays Capital - Analyst [41]
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You commented earlier about none of that's reflected in, obviously, in the spring borrowing base redetermination. Do you have any feel for how the banks -- or Ted, do you have any feel for how the banks will look at those types of efforts as they think about your borrowing base in the fall?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [42]
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Oh yes. We've had -- I'll tell you that in the last redetermination, which was several months ago, we had a few months of the good work that our field guys have been doing and the banks were very much interested in understanding what are we doing, how are we doing it, is it sustainable, and they got pretty granular, I have to tell you.
In the discussions that I've had with our bankers as we -- and I talk with them a lot, they're very interested in having that same discussion, they really are quite interested and well-versed in looking at the experience that we are having, understanding what we're doing and why, and I do think that they are all -- the bankers that I've spoken with have all expressed deep interest in getting behind the numbers and they are pleased with the ability to see the continuation of the good work that our teams are doing. So I'm comfortable that they will look at this and take it into consideration in a meaningful way as they do their valuation.
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Nick Sutton, Resolute Energy Corporation - CEO [43]
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And I would say that it's not as if we're sitting here waiting for the banks. We obviously run these numbers ourselves, and it's an ongoing process, and you all are so good with numbers, I mean I'm going to state the obvious, and that is the significantly reduced LOE has a dramatic impact on that asset value, as does the significant reduction in the capital of cost associated with drilling and completion, for example. Those things roll through all of the valuation metrics be they PDP, PDNP, PUD, existing production, and to be developed production, all are stronger obviously with lower cost, but it is really dramatic when one rolls that through a net asset value model.
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Jeff Robertson, Barclays Capital - Analyst [44]
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Last question, Ted, can you comment about how much of the -- how much, sorry, the Powder River Basin assets represent of the borrowing base? I know when you sold Howard County you sold it for, I think, $40 million against a borrowing base that was considerably less than that, somewhere around $5 million I think, if I remember right.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [45]
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Well the Powder asset, of course, has a higher component of PDP. So as a percentage of total value it will be higher. But I don't know that I'm prepared to say what the banks will tell us. Certainly we have some indications, but I think it's best to wait until that whole transaction occurs.
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Jeff Robertson, Barclays Capital - Analyst [46]
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Thank you.
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Operator [47]
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Noel Parks, Ladenburg Thalmann.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [48]
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Good afternoon.
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Nick Sutton, Resolute Energy Corporation - CEO [49]
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Hi, Noel.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [50]
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Hi. A few things, sorry if you touched on this and I missed it, but as far as hedging goes, looking ahead, wondering if that's been a topic with lenders in the most recent borrowing base or headed toward the upcoming one. And just wondered what your attitude or appetite might be for perhaps investing in floors and trying to leave a little more upside intact, if we assume we have a bounce-back longer-term.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [51]
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Well certainly that's a conversation that's a part of the dialogue with the banks. Obviously we think we've done a pretty good job of putting hedges in place in 2015 and 2016, and we've started in 2017. It's an ongoing dialogue both with our bankers and also internally as to how we want to spend money, and anytime you do a hedging transaction, you're spending money one way or another, whether it's a costless collar, whether it's a swap, whether it's actually buying a put, that basket of tools is available.
I think that as we move forward, my guess is we'll probably always want to try to maintain upside as you look longer, and I think that in shorter time frames I think we're likely to be more -- probably more comfortable with swaps, only because you don't have the long time horizon in front of you. Noel, as you know, we work our hedge book pretty hard and I think that over time, we've demonstrated that we use all the tools that are available to us.
Today's market isn't in very much fun. I wouldn't go -- I don't think we would go very long in today's market. But I think that it's -- but it's an ongoing dialogue internally, and it obviously has an impact on how the banks evaluate the net present value of our assets.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [52]
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Sure. And I just wanted to check, in the Permian, roughly how much of the production is more or less in or close to it's base-to-client at this point, just thinking about the slowdown activity over these last six, nine months, now.
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Nick Sutton, Resolute Energy Corporation - CEO [53]
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That's getting down into some detailed engineering. I'll give you the broad brush so that we not get too far into the weeds and of course, as you know, Noel, we'll be happy to give you more granularity at some point, get you in touch with the engineers. But basically, you're familiar with what the decline curves look like on these horizontal wells. Now, we've drilled -- we've got three in Gardendale that have been on for roughly 18 months off the top of my head, and so they're off the steepest part, they're where it's starting to bend over onto flat.
In the Permian -- in the Delaware Basin, we've got a total of eight wells and five of them date back about a year, and so you can pretty much target where they are on the decline curve. And then three of them are pretty new, and they are the ones that we talked about are exceeding type curve, and we have, again, without getting too far into the weeds, but our approach to producing wells is to choke them back and draw down the pressure very, very carefully, and so these wells have been strong producers, they will continue to be strong producers, but they will start to see decline that is more consistent with early-stage decline as we look at the next 6 to 12 months from those three.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [54]
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Got it. And just (multiple speakers).
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Nick Sutton, Resolute Energy Corporation - CEO [55]
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I would point out that is against a base of about 100 vertical wells, 98 to be precise, in Gardendale that have been in production for some time, around 20 vertical wells in Reeves County that have been in production for some time, and about 500 wells, plus or minus, in Aneth that have been on production for decades, and I sometimes feel like it's centuries.
So that's -- no decline, basically, or very little decline in Aneth, and then the Powder River assets are also relatively low decline. So we are talking about a handful of horizontal wells balanced against a base of production that is very stable, very steady, and relatively flat, which is why we are able to deliver production results like we did this quarter.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [56]
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Right, which is of course what you want when you got a tough commodity price environment and limited visibility, sure. A couple Aneth questions. With what we've seen with service costs, where roughly do -- would the cost for Desert Creek IIC completion be around now, or if you have any thoughts of how what returns might look like for those projects?
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Nick Sutton, Resolute Energy Corporation - CEO [57]
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Right now, we are in McElmo Creek Unit DC IIC test pilot project and the DC3 is sort of on the shelf to evaluate at some point when the external environment improves. So we've got plenty to do in Aneth but right now we're taking a go-slow mode and continuing to inject CO2 in the Aneth Unit project, continuing to inject CO2 in McElmo Creek. We've got people at Elmo Creek DC IIC pilot project that is really showing some interesting results, but it's kind of -- I would put that as we're walking, not running, in that project at this stage.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [58]
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Okay, great, and just one more back to the Permian, has there been any industry progress by other operators in some of the alternate horizontal targets at or near Gardendale, beyond the Spraberry in Wolfcamp B?
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Nick Sutton, Resolute Energy Corporation - CEO [59]
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I think the Wolfcamp C has been tested, I think the A is being tested, but frankly you touch on the one that's got everyone's attention right now, and that's the lower Spraberry and some now into the middle Spraberry that are showing economics that are quite superior to the Wolfcamp economics. I mean very strong results, and those are all around our acreage.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [60]
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Great. That's all for me. Thanks a lot.
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Nick Sutton, Resolute Energy Corporation - CEO [61]
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Thank you, Noel.
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Operator [62]
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William Tichy, Beddow Capital.
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William Tichy, Beddow Capital - Analyst [63]
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Yes, thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [64]
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Hi, Bill.
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William Tichy, Beddow Capital - Analyst [65]
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I had a quick question -- Hi, how are you? My question's related to hedging and most of that was answered. You mentioned layering on new hedges, and a number of operators, including Resolute have been reasonably aggressive in the last couple of years in laying on hedges in a world of $75 to $100 oil. Today, of course, we're in a $43, $44 oil climate and with a lot of analysts backpedaling, not like crazy, but lowering your expectations for 2016, and recognizing that nobody knows what the price of oil is going to be in December 2016 or going into 2017, is it safe to say that you'll be far less aggressive in the next 6 to 12 months in your hedging program as you have been in, say, two years ago?
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Nick Sutton, Resolute Energy Corporation - CEO [66]
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I think that I wouldn't say less aggressive. I would say, reflecting what Ted mentioned and that is one's approach would be different. And even though we were hedging at in the $80s because we figured that we wanted to protect against the downside and we're reaping the benefits of that right now.
As we look out to 2017 or 2018, as Ted mentioned, we would look again to protect downside, because in the near term we don't know where things are going. But further out, we would be looking to protect more of the upside, while at the same time recognizing that we don't control the external environment. And we would have to look at downside protection, as well. But again, we rarely swap, and we usually come up with some a structured approach that gives us downside protection, but also leaves us upside, as well. That's not a free trade, but it's a trade that makes a lot of sense, particularly in this environment.
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William Tichy, Beddow Capital - Analyst [67]
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Okay. I have another question: as far as monetizing some assets and paying down debt, you've done a good job here in a tough environment deleveraging yourself to some extent. The Hilight Field that you said has received bids on -- 8% of your reserve, something like that, so we're talking maybe 6 million barrels of oil there. What would be the timing, roughly? Are we talking about a 6- to 12-month time horizon when it might be reasonable to expect the monetization of that asset?
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Nick Sutton, Resolute Energy Corporation - CEO [68]
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No, we would like to try to wrap something up within about 45 days. As we mentioned, we've been through a process, it was a robust process, and we've gotten bids in and we're processing those right now and taking into consideration all the variables that one might expect, and we would look to wrap something up by basically a PSA in 45 days, let's say, and then closing at some point after that.
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William Tichy, Beddow Capital - Analyst [69]
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Okay, thank you, appreciate it.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [70]
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Before you leave, Bill, let me add that one other comment about hedging, and that is as you probably noted in some of the filings that we've made and the contracts that are out there, the other piece of the hedging puzzle is that we do have some requirements. We will add hedges so that we stay in compliance with our agreements, but again, how we do it, what the pieces are, what the tools are, is the ongoing -- that's an ongoing opportunity set that we'll do our best to take advantage of.
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William Tichy, Beddow Capital - Analyst [71]
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Understood. A few moving parts there.
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Nick Sutton, Resolute Energy Corporation - CEO [72]
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Thanks, Bill.
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Operator [73]
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Andrew Smith of Global Hunter Securities.
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Andrew Smith, Global Hunter Securities, LLC - Analyst [74]
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Good afternoon. You mentioned in your press release that you participated in a nonoperated well in the Delaware Basin in the second quarter and that you expect to participate in at least one more this year. What are your working interests in those wells and do you expect an ongoing nonoperated program next year?
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Nick Sutton, Resolute Energy Corporation - CEO [75]
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The working interest is approximately 15% in the one that we've done so far. I'm not sure exactly what our working interest would be in the one that is scheduled for later this year simply because the operator may move the location around and that affects the allocation of leaseholds and therefore the percentage interest, but broad brush it's probably about 10%.
Do we expect that to continue next year? I think we will have more clarity on that as we progress through this year and operators in the area give more guidance as to their plans for 2016. We are in an area where we are fortunate to have good operators around us and they hold good acreage and so I would expect that we would see some continuing non-op, but to quantify it at this stage is very, very difficult.
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Andrew Smith, Global Hunter Securities, LLC - Analyst [76]
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Great, thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [77]
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Thank you, Andrew.
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Operator [78]
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A follow-up question from Ron Mills of Johnson Rice.
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Ron Mills, Johnson Rice - Analyst [79]
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One was a follow-up on Bill's question about the PRB: I think in the first quarter that area produced 1,600, 1,700 Boes per day. Did you provide what that number was here in the second quarter?
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Nick Sutton, Resolute Energy Corporation - CEO [80]
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I think that I mentioned that in my comments that I seem to recall that it was about 1,600 barrels a day. Understand that in the Powder, Boes, again, in this environment Boes are not all created equally, and the Powder is certainly more gas than we produce in any of our other areas. And so that's a factor that if you're doing four function calculator type work here, keep in mind that the 1,600 Boes is about 90% gas, I would say.
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Ron Mills, Johnson Rice - Analyst [81]
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Okay, great, and then one for Ted to follow up on Jeff's question, the capitalized interest level coming down quite a bit in the second quarter. Is the level of capitalization expected to remain more like the second quarter level, you think, and is that a function of some of them impairments you all have taken?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [82]
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Well the answer is yes, it will be more like the second quarter than others. It's really a function of what can you and what must you capitalize under GAAP, and if I'm working or Nick or any of us are working on capital projects, then that fraction of our time gets capitalized, given that our capital program is relatively sitting a lot smaller, actually. You can't capitalize your time to projects that aren't capital in nature.
Basically the other -- so think about it this way, if we're not doing exploration or those kinds of things, drilling, those are major capital activities that draw capitalized time. We're not doing that in the second half, and, obviously, 2016 remains to be seen.
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Ron Mills, Johnson Rice - Analyst [83]
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Great, understand it. And just to make sure I understand the $45 million to $50 million CapEx versus $30 million you spent, does that $45 million to $60 million (sic -- see press release "$45 million to $50 million") include your capitalized interest in G&A or is that just your E&P drilling completion budget?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [84]
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It's got the capitalized component of interest, but not the capitalized component of G&A.
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Ron Mills, Johnson Rice - Analyst [85]
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And do you know what that capitalized G&A was the second quarter?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [86]
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That's -- I can get back to you on that, I don't know that off the top of my head.
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Ron Mills, Johnson Rice - Analyst [87]
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Perfect, we'll just get it later. Thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [88]
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Thanks, Ron.
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Operator [89]
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This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Nicholas Sutton for any closing remarks. Please go ahead.
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Nick Sutton, Resolute Energy Corporation - CEO [90]
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My closing remark is simple and to the point. I think we've demonstrated that we've had a great quarter. I commend all the operating teams for the work that they've done, all the various support groups, be they geology, reservoir engineering, et cetera, the finance group, everybody has contributed to this effort and the numbers speak for themselves.
And beyond that I would like to say we that appreciate your interest in Resolute. It's not a very exciting time to be interested in the oil and gas space, but we think that we're doing the right things, the good things, and we've been through these cycles before and cycles turn. And I'd I'm glad we've got such a good group of people who are shareholders and good group of people who are following what we're doing on a regular basis.
As always, feel free to pick up the phone and call. We are here to do whatever we can to help you with your evaluations and your decision-making processes, and so don't ever hesitate to pick up that phone and reach out and give us a shout. So again, thank you very much.
Good afternoon, everyone. My name is Michael Stefanoudakis, I'm the Senior Vice President and General Counsel of Resolute. I'd like to read the forward-looking statement before turning the call over to Nick Sutton, our Chairman and CEO.
This investor conference call includes forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as expect, estimate, project, budget, forecast, anticipate, intend, plan, may, will, could, should, poised, believes, predicts, potential, continue, and similar expressions are intended to identify such forward-looking statements. Forward-looking statements in this conference call include matters that involve known and unknown risks, uncertainties, and other factors that may cause actual results, levels of activity, performance, or achievements to differ materially from results expressed or implied on this call.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this call. A listing of the material risk factors faced by Resolute appears in our Form 10-K and is updated periodically in the Form 10-Qs and other public filings.
At this time I'd like to turn the call over to Nick Sutton, our Chairman and CEO.
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Nick Sutton, Resolute Energy Corporation - CEO [3]
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Thank you, Michael.
Good afternoon and welcome to Resolute's second-quarter 2015 earnings conference call. I will assume that you have had an opportunity to read our press release and our filing on Form 10-Q, both of which went out last night. So I will focus my comments on the primary drivers of our performance during the past quarter. After that, Ted Gazulis will give you an overview of our financial results, and then we will open the call for Q&A.
At the beginning of the year, we established a strategic plan to keep capital spending within cash flow, to enhance operational efficiencies in order to maintain our cash margins, and to pay down debt even while maintaining production. In our last earnings call, we articulated our formula for achieving that plan to maintain production volumes, lower our controllable costs, increase liquidity, and reduce capital spending.
Our results for the second quarter and the first half of 2015 demonstrate that this formula is working, as we are on track to meet or exceed our public guidance on every metric except for a modest variance on production taxes, something over which we have no control. Let's walk through the highlights, starting with production.
Average daily production in the second quarter increased to a record rate of 13,528 Boe per day; that's up 10% from the same quarter last year. That is a notable accomplishment considering that we've ceased our operated drilling activity. And by the way, the production increase is inclusive of losing approximately 610 net Boe per day from the sale of our assets in the Midland Basin, production that was in our original guidance that we provided to you earlier this year. These higher production volumes helped offset lower commodity prices.
The primary driver of the positive production variants was our Permian Basin assets, which produced 5,566 Boe per day. That's up 3% from the previous sequential quarter and it's 28% higher than the same quarter last year. The increase was a result of having a full quarter production from three horizontal wells completed in the first quarter of 2015, and our Mustang project area in the Delaware Basin, complemented by reduced downtime at our Gardendale area in the Midland Basin and other properties in New Mexico. These factors all helped deliver above-planned production in the second quarter.
Production in Wyoming averaged 1,655 Boe per day, 3% lower than the same quarter last year and 4% lower than the first quarter of 2015. The decrease was a result of natural production declines, several well workovers, and a temporary shut-in by the gas processor to accommodate planned maintenance.
Aneth Field continues to prove the value of having a mature, low-decline asset in our portfolio, as it provides a steady source of production and cash flow. Aneth Field delivered production at an average rate of 6,370 Boe per day in the second quarter, essentially flat as compared to the same quarter last year and the first quarter of 2015. In the first half of 2015, Aneth Field produced 6,350 Boe per day, an increase of 2% over the same period last year.
The production improvement primarily is a result of increasing response to our ongoing tertiary recovery project in Aneth Field. I'm very pleased with our production performance through the first half of the year and I am impressed by the ability of our team to post production increase that more than offset the production that we lost as a result of the sale of non-core assets.
Now let's turn to cost control. We have hammered down controllable cost by rigorously focusing on efficiencies and proactively working with our service providers. We reduced lease operating expense, that's excluding non-cash share based compensation, in the second quarter by 40% to $15.64 per Boe as compared to the same quarter last year.
We also have cut overhead. Cash-based general and administrative expense in the second quarter amounted to $3.87 per Boe, 31% lower than the prior-year period. Importantly, we believe that these cost savings are sustainable. For example, our field staff has brought more tasks in-house, eliminating less competitive vendors.
But it also bears mentioning that the longer our operations team has worked with our assets, especially those we acquired in the Permian Basin, the more efficiently they produce, performing good well surveillance, solid engineering, and regular maintenance has kept wells on production, thereby avoiding costly downtime. Our team has proven itself as a strong operator and all of these factors combine to create long-term sustainable reductions in cost. Higher production volumes combined with significantly lower costs at both the field and the corporate levels have worked together to preserve our margins.
Adjusted EBITDA, a non-GAAP measure, was $35.5 million in the second quarter, essentially flat with the same quarter last year despite commodity prices that were approximately half of what they were last year. Adjusted EBITDA during the first half of this year was $70.3 million or $28.76 per Boe, only 8% lower than the same period last year, again, despite dramatically reduced commodity pricing. Clearly our team's engine is firing on all cylinders.
The first-quarter sale of the Howard and Martin County, Texas assets improved our balance sheet and strengthened our liquidity position without negatively affecting overall cash flow. Net proceeds from the sale of those properties were used to reduce bank debt. Total debt at June 30 was $31 million lower than at March 31 of this year. The borrowing base on our revolving credit facility currently is $260 million, and with $160 million of borrowings, we have approximately $100 million of availability, which is more than adequate to fund our 2015 plan.
Turning to capital spending, we invested $7.6 million in the second quarter, bringing total capital spending in the first half of this year to $30.3 million, which excludes the previously mentioned asset sales. Most of the capital spending incurred through the first half of 2015 occurred in the first quarter as we completed three Permian Basin wells. The majority of spending for the rest of 2015 will be for CO2 purchases at Aneth Field to support the production rate at this foundation asset, and we expect our 2015 CapEx spending to be in line with our 2015 public guidance.
As I mentioned in our last call with you, this is not our first cycle. We have experienced prior cycles and we have quickly put our experience to work to preserve value by taking decisive actions. I continue to be impressed with the performance delivered by our operating teams since it's down cycle began, and thanks to them we have met or exceeded our key metrics for the first half of this year.
Finally, I'll make brief mention of the ongoing process of selling our Hilight Field assets. As we mentioned in yesterday's press release, we have received bids in we are working diligently through the process. Additionally, we have had fruitful discussions with potential joint venture partners to fund drilling on our Permian Basin assets and we look forward to providing more details to you as soon as is appropriate.
Now I'm going to turn it over to Ted Gazulis.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [4]
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Thank you, Nick.
I'd like to start with a look at where we stand relative to the guidance we issued earlier this year. With regard to production, Nick mentioned earlier that we produced at an average rate of more than 13,500 Boe per day through the first half of the year. That's above the top end of full-year guidance which is 12,000 to 13,000 Boe per day.
It's important note that even though we sold our properties in Howard and Martin Counties, Texas, we have not adjusted our guidance downward. Equally, though, because we're not drilling any wells in the second half of 2015, we anticipate that production has peaked for the year and expect that natural production declines will cause volumes to be modestly lower over the next two quarters. But again, we feel confident of achieving full-year production guidance.
We've had great success in reducing costs in light of the depressed commodity price environment. Total lease operating expense in the first half of 2015 was $39.8 million, which was 31% lower than the first half of last year. And sequentially our LOE was 5% lower in the second quarter than it was in the first.
Through the first half of 2015 we reduced LOE per Boe excluding share-based compensation by 37%, $16.11 per Boe, down from $25.56 per Boe in the first half of 2014. At the current run rate, full-year LOE would come in well below our guidance range of $88 million to $98 million.
General and administrative expense in the second quarter was $7.5 million, which included $2.7 million of non-cash expense and was 28% below the same period last year. For the first half of 2015, total G&A expense was $14.8 million, inclusive of non-cash compensation expense of $5.6 million, and was 22% below the same period last year. At the current run rate, full-year cash G&A expense would come in at or below our guidance range of $25 million to $29 million.
In addition to exercising strong financial discipline, our hedge book helped to mitigate the effect of commodity price declines. Excluding commodity hedges, revenue was $48.4 million in the second quarter of 2015, down 45% from the same quarter last year to $39.31 per Boe from $78.96 per Boe in the prior-year period. However, after incorporating the effect of favorable commodity price hedges, revenue was down only 18% from the prior-year period to $53.93 per Boe.
For the first six months of 2015, revenue excluding commodity hedges was $89.5 million, or $36.60 per Boe, down 50% from the same period last year. When incorporating the impact of derivatives, though, hedge adjusted revenue was down only 21%.
We believe that hedging is an important part of managing a commodity-based business. For the remainder of 2015, we have 6,600 barrels per day hedged at an average floor price of more than $85 per barrel, and in 2016 we have hedges covering 6,500 barrels per day at an average floor price of more than $80 a barrel. We've also started layering in new hedges to carry us into 2017.
Despite a 50% decline in realized revenue per Boe before commodity hedges, in the second quarter we generated $35.5 million of adjusted EBITDA, a non-GAAP measure, which was flat with the same quarter last year. In the first half of 2015 we generated adjusted EBITDA of $70.3 million, or $28.76 per Boe, which was only 8% lower than the same period last year and a significantly smaller decline than the 54% drop in revenue per Boe before commodity hedges. We think it's a strong statement that we've maintained our adjusted EBITDA in the face of sharply downward commodity prices.
Looking at capital, we invested $7.6 million in the second quarter, bringing a total first half CapEx to $30.3 million. As you're probably aware, our 2015 capital program was front-end loaded and we remain on track to spend within our guidance in the range of $45 million to $50 million. At June 30, 2015, we had a total of $160 million drawn on our revolving credit facility, $199.1 million of second lien term loan outstanding, and $400 million of outstanding senior notes. After adjustment for the Howard and Martin County asset sale, our revolving credit facility has a borrowing base of $260 million, providing us with current availability of $100 million.
As we look to our fall borrowing base redetermination, we recognize that prevailing commodity prices are significantly lower than they were last year. But we also note that drilling, completion, LOE, and G&A costs are all down across the board. Clearly the PV-10 of our reserves will be negatively affected by lower commodity price assumptions, however, we anticipate that this impact will be mitigated somewhat by the recognition of our meaningful lower cost structure.
Given that market forces are dynamic and there are many variables at work, I'm not in a position to speculate the level at which our borrowing base will be redetermined. Under any circumstances, though, we'll work with our lenders to ensure that the Company has sufficient liquidity to run the business.
We are in the fortunate position of not having to face any impending debt maturities, as our revolving credit line and senior notes mature in 2018 and 2020 respectively, and our senior loan -- second lien term loan matures no later than six months after the maturity of the revolving credit line. We are in compliance with our debt covenants, and forecast sufficient liquidity and cash flow from operations to fund our 2015 capital budget and to reduce debt.
In sum, then, strong field operations, rigorous cost control, and favorable commodity hedges have helped Resolute to mitigate the effects of the recent commodity price declines and have positioned the Company to work through this product price cycle.
We thank you for your interest in Resolute. With that I'll turn it back to Nick.
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Nick Sutton, Resolute Energy Corporation - CEO [5]
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Thank you, Ted.
I said it in our first-quarter earnings call and I will say that again: I commend our team for the great job they have done to preserve value since this down cycle started last year. The attention to detail, the drive to achieve, the focus exhibited by our people in our field offices and at the corporate level, have enabled us to be in a strong position going forward. In my view, the cost reductions are sustainable, and we should have continued benefits for cash flow, returns on capital projects, and preservation of reserves.
The value of our favorable commodity hedges that Ted outlined is apparent with approximately 74% of 2015 forecast daily oil volumes hedged at a weighted average floor price in excess of $86 per barrel at 6,500 barrels per day in 2016, hedged at a weighted average price at over $80 per barrel. Our derivatives program has helped cushion our margins from the worst of commodity price declines and will continue to shore up our margins going forward. Fortunately, the majority of our acreage footprint is held by production, meaning that we do not need to drill wells in this current commodity pricing environment just to hold leases.
100% of our Aneth Field acreage is held by production. 100% of the acreage in our Gardendale project area in the Midland Basin is held by production. 100% of our Powder River Basin acreage is held by production. 100% of our acreage in New Mexico is held by production. While some of our Reeves County acreage is not yet held by production, that which is not is a amenable to lease modifications, a process with which we have had considerable success.
Our legacy asset, Aneth Field, is a strong and steady source of production and cash generation. In fact the majority of our Company-wide production is sourced from assets having shallow declines covered by favorable hedges, and as a result, we have been able to generate positive free cash flow in the quarter and we expect that to continue through the rest of the year. Our formula of production maintenance, cost control, capital discipline, and liquidity enhancement is working and our team will continue to execute on plan to help us endure this down cycle and emerge from it a more competitive Company.
I thank you all for listening and I'll now turn the call back to the operator for Q&A. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Neal Dingmann, SunTrust.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [2]
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Good afternoon. Nick, just a quick question, you mentioned just lastly here on this re-used lease modification, is that the cost, which is pretty minimal there, or is that something that you would consider with those, maybe trading that and increasing what you have in the Midland Basin, maybe if you could just talk about that a little bit.
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Nick Sutton, Resolute Energy Corporation - CEO [3]
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I'm not sure I quite got the full import of your question.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [4]
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Two things, Nick. One, the costwise to basically modify, you mentioned most everything else is 100% HPP, to modify or to hold those leases, are we talking just very minimal? A couple million dollars or less? And number one, if it is very small, obviously, that's not a big deal. If it were more than that my thought was, does it make sense to try to trade some of that acreage for something that would block in some of your other existing acreage?
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Nick Sutton, Resolute Energy Corporation - CEO [5]
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The modifications are, in the big picture, not that expensive. We've had considerable success as I mentioned, and we would anticipate having success on a going-forward basis. There is no doubt that the Reeves County area is a focus area for a lot of companies and so it's not as if we are without competition, but our land staff has done an admirable job thus far and we would expect that to continue. So it is relatively insignificant in the big picture of what it costs to drill and complete horizontal wells, for example.
As to whether it's appropriate at some point to consider trading acreage, that's something we are always opened for and we have regular discussions with a lot of different companies as we look to solidify positions in one place versus another. So that's just an ongoing effort by the Company that we evaluate on a day-to-day case-by-case basis.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [6]
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That makes sense. And then in the press release you mentioned where you would stand down on all drilling. It's interesting, stand down, but yet you still have quite a good financial position and you do mention that the costs continue to come down. Is it more on the -- what are you looking for in order to think about ramping activity again? Is it cost at a certain level that would thus generate a certain critical rate of return, or when you and Ted sit around and look at is it a required rate of return that you all are looking for? What would cause you to bring a rig back?
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Nick Sutton, Resolute Energy Corporation - CEO [7]
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Good question. I think that right now, we are looking at the world from the perspective of we want to make sure that we continue to maintain significant liquidity and liquid availability, and so that causes us to be somewhat more cautious rather than less cautious in this environment. I think that as Ted alluded to, as we look to go into the fall borrowing base redetermination we have wrung so much cost out of our system that we think that we should stand up well in that borrowing base redetermination, although we're not in the crystal ball of the banks and I don't mean to suggest by any means that we are. But I think that's an unknown out there.
The other thing, Neal, that we have to be cognizant of, and that is while our areas in the Permian Basin, both in the Midland Basin side and in the Delaware Basin side, are still very economic at recent product prices. We can't ignore the erosion that we're currently seeing out there, particularly since these wells, as you know, a lot of the production comes early on and so we have to take that into consideration.
And all of those things go into the ongoing mix of discussion that we have internally as we evaluate future options and activity. But right now our sort of base plan is let's not stand up rigs, let's evaluate this, let's maintain our liquidity, let's continue to drive cost out of the structure, protect our cash margins, and pay down debt in the process.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [8]
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Let me add one more thing if my can, Neal, and that is that as we think about the prospect of standing up one or more rig, I think from our perspective, it will be more attractive, more efficient, more effective, all those kinds of descriptive words, to be able to stand up a rig and drill for a while. We all know that drilling a program will work to your advantage in terms of the economics, so even if we wanted to stand up a rig for a well or a couple of wells, I'm not sure that we wouldn't be better served by getting to the place that we could stand up a rig and drill for a year.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [9]
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That make sense. Okay, thanks. Great details.
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Operator [10]
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Jason Wangler of Wunderlich.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [11]
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Hey, good afternoon. I was just curious with your comments in the Permian, if anything there would be related to the infrastructure you have in the Delaware. Is that something you would look at either JVing or monetizing given how probably lucrative it would be?
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Nick Sutton, Resolute Energy Corporation - CEO [12]
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That is something that we have been evaluating. We've had deep discussions with certain parties out there. As you know, the people in that midstream space are very active and have good checkbooks, and so they see -- the ones that we have spoken with, at least, see the infrastructure we have built thus far as a good starting spot to expand further infrastructure out into Reeves County. So yes, that's on our radar screen, it's more than just on our radar screen, it's an active project area here in the Company.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [13]
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That's helpful and then just on the Powder River, obviously you're going through the bids, is there a timeframe that you have or that is set in the agreements that we would be hearing something or is that just an ongoing situation given what all's going on in the commodity mix? Just wondering if there's any milestone we should be looking for.
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Nick Sutton, Resolute Energy Corporation - CEO [14]
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I would say that internally we would hope to get something wrapped up within the next 45 days plus or minus. But in this world, life is not a unilateral event so we will see.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [15]
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No, that's fair, I appreciate it. I'll turn it back. Thank you.
Related Quotes
REN
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Resolute Energy Corporation? Watchlist
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NYSEThu, Aug 20, 2015 4:06 PM EDT
10-Q for Resolute Energy Corp. Company Spotlight 8 days ago
Edited Transcript of REN earnings conference call or presentation 11-Aug-15 8:30pm GMT Thomson Reuters StreetEvents 8 days ago
More
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Nick Sutton, Resolute Energy Corporation - CEO [16]
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Thanks, Jason.
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Operator [17]
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Ron Mills of Johnson Rice.
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Ron Mills, Johnson Rice - Analyst [18]
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Good afternoon. Real quick on the Permian, you talked about the sequential production growth partially being due to the full quarter impact, but can you quantify or describe some of the steps you took to reduce the downtime and the sustainability of that runtime improvement?
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Nick Sutton, Resolute Energy Corporation - CEO [19]
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Yes sir. It's something I'm really very proud of our team and what they've accomplished. I would start out by making sure everyone is very much aware of the fact that this is not an effort that started commensurate with the erosion in product prices. This is an effort that started the day that we took over operations in roughly early in the second quarter of 2013.
This is particularly with reference to the Gardendale area, and we found a field that needed attention, and our team got after it, and through a period of time, they've reduced failure rates from roughly 11 a month down to more recently it's been two or three a month. And -- but again, that is not a step change and it's not a process that was initiated because of product prices. It was initiated because of our focus on operations, and as I said, well surveillance, solid engineering, solid production operations, and it's been a continuing improvement.
Now I will say that I'm really happy that all of that has come together in light of what we're dealing with in the external environment. It's been very fortuitous and when we talk about our ability to hold the LOE down on a sustainable basis, again, it's not just getting the scalpel out with our service and supply providers, it's just hard work on the operating level and the engineering level that has had significant results. So I would point to that, Ron.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [20]
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Let me make one other comment that when Nick talks about 11 wells versus three wells, we are talking about more than 100 wells here. And to be looking at three-well failure in that big a universe is an enormous step in the right direction.
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Ron Mills, Johnson Rice - Analyst [21]
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Great. And then maybe this flows through, that you or Ted talking about the production peaking and the way that production looks were relative to the guidance you put out in February. And I know still really early but a lot of people have tried to at least paint a picture around 2016 in terms of spending levels versus this year and maintenance CapEx spending. Given the lack of -- or not lack, but given the far less activity in the second half of the year, how that feeds into next year, how are you looking at that from a big picture standpoint?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [22]
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You know I think that as we look forward, and I think Nick said it earlier, what we really are trying to do is to be efficient in how we're spending our dollars, and that's both LOE -- that's LOE, CapEx, G&A. We are not forecasting large dollar expenditures on CapEx, certainly we'll continue to spend money in Aneth on CO2. We have an ongoing program in Aneth of working the field, we'll continue to do all those kinds of things.
We're not at a stage yet where we want to forecast -- provide guidance for 2016, but I think that we would rather pay down debt with cash than, at this point, do incremental CapEx spending that doesn't really move the needle. Again, I'd rather spend money by standing up a rig and drilling for a year and waiting until we can do that, rather than doing a start/stop program in anywhere in the Permian or for some of the other programs that we've talked about over time in Aneth.
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Ron Mills, Johnson Rice - Analyst [23]
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Great, and then one last one, just as you look at the second half, Ted, with that 12,000 to 13,000 barrel a day guidance for the year in your first half, coming in and averaging 13,500, if you looked at your corporate decline rate right now given no upcoming wells drilled or completed, what do you forecast that corporate decline rate is in this environment?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [24]
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I think again, I would just do the math and say if we're at 13,500 through the first half and we think that we'll be in the range of 12,000 to 13,000 you've got two endpoints, and you can come up with the decline rate. And I don't have my calculator with me or I'd do it for you.
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Ron Mills, Johnson Rice - Analyst [25]
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My cell works for that. Thanks. I'll jump back in line.
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Nick Sutton, Resolute Energy Corporation - CEO [26]
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Okay, the one thing I would add is that we talk about well downtime and failure and whatnot, most of you on the call are very familiar with what we mean when we talk about that, but it just basically stuff breaks. A pumping unit might have something that needs to be repaired, you might have parted rods or something in the tubing.
It's that kind of thing when we talk about well downtime, and you know, the need to get over a well with a pulling unit and fix things. So when I refer -- commonly it's referred to as a downtime or failure, it's just really fixing things and I want to make sure that everybody understands that.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [27]
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Let me add one other point to that, Nick, and that is that in today's price environment we focus and our team focuses very much on the dollars. In a $100 world you focus more on the barrels. So we're being very judicious as wells go down through the normal wear and tear of an oil field about where you spend the workover rig.
A two barrel a day in a $100 environment, you might go send a workover rig. You might not do that today. That's the kind of detail work that our guys are doing, developing -- we've developed a number of tools internally to really maximize and optimize the way we spend money out there and you can see it in the numbers.
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Operator [28]
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Jeff Grampp, Northland Capital Markets.
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Jeff Grampp, Northland Capital Markets - Analyst [29]
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Good afternoon.
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Nick Sutton, Resolute Energy Corporation - CEO [30]
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Hi, Jeff.
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Jeff Grampp, Northland Capital Markets - Analyst [31]
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I wanted to touch on the Delaware well performance you highlighted in the release and some outperformance from some of those longer laterals. So maybe just wanted to dig a little bit deeper on that if you have any granularity regarding quantifying what type of outperformance you're seeing or what longer-term rates you're seeing from some of those wells.
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Nick Sutton, Resolute Energy Corporation - CEO [32]
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I don't think that I'm prepared to go into much more detail than what we did in our press release, where we noted that we've gotten, in the case of two of them, I think it was 160 to 185 days of production and the outperformance is notable. I would like to get additional production and then that will result in a process where we sit down with the engineers and look to see about increasing our type curve.
But the most important thing is that two of the three are very much outpacing type curve, and the third one is slightly under type curve and on average we are at least on type curve if not higher. So, I think that's about what we would note for right now.
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Jeff Grampp, Northland Capital Markets - Analyst [33]
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Okay, fair enough, and most of my other questions have been asked. But just have maybe a housekeeping one for Ted. It looked like interest expense is maybe a bit higher than -- I was modeling for 2Q, is that more a function of maybe less being capitalized or are there some other moving parts in there with the additional second lien and things like that?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [34]
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Yes, I mean I think it may have to do with capitalization, probably that's an important part of it. And obviously, I know your models are well done, but the question of timing with additional second lien going from the $150 million at year end to $200 million currently, well, $199.1 million currently. There may be some slack there.
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Jeff Grampp, Northland Capital Markets - Analyst [35]
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Okay, great quarter, thanks.
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Nick Sutton, Resolute Energy Corporation - CEO [36]
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Thanks, Jeff.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [37]
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Thank you.
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Operator [38]
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Jeff Robertson, Barclays.
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Jeff Robertson, Barclays Capital - Analyst [39]
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Thank you. Nick, to follow up on some the LOE discussion, can you talk about any specifics around what the approach you're taking on well repair is and what impact that's having on production in the Permian or in Aneth for that matter?
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Nick Sutton, Resolute Energy Corporation - CEO [40]
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Our approach, Jeff, is to -- we look at any well that is a candidate for some work, anything that's going to cost us money. And we have in the field and in the engineering teams, tools that we've developed that look at well profitability and takes in all the complexities associated with a particular well, what is the production stream looking like, what is the LOE looking like, on basically a unit basis, down to how much electricity does it cost us to run that pump?
It's very, very precise and detailed, and then we prioritize the wells based on the profitability index, and then we will use some skilled engineering and operational judgment to supplement the basic spreadsheet calculations. As Ted indicated, what that really results in is that you're trying to optimize the production, and so it's what are you getting for what you're spending from an optimization and efficiency standpoint?
And I think the results speak for themselves as we look at how production has held up. Aneth is a good example. Production is up a few percent and that's the result of just ongoing CO2, of course, but also the guys in the field doing this kind of optimization work.
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Jeff Robertson, Barclays Capital - Analyst [41]
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You commented earlier about none of that's reflected in, obviously, in the spring borrowing base redetermination. Do you have any feel for how the banks -- or Ted, do you have any feel for how the banks will look at those types of efforts as they think about your borrowing base in the fall?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [42]
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Oh yes. We've had -- I'll tell you that in the last redetermination, which was several months ago, we had a few months of the good work that our field guys have been doing and the banks were very much interested in understanding what are we doing, how are we doing it, is it sustainable, and they got pretty granular, I have to tell you.
In the discussions that I've had with our bankers as we -- and I talk with them a lot, they're very interested in having that same discussion, they really are quite interested and well-versed in looking at the experience that we are having, understanding what we're doing and why, and I do think that they are all -- the bankers that I've spoken with have all expressed deep interest in getting behind the numbers and they are pleased with the ability to see the continuation of the good work that our teams are doing. So I'm comfortable that they will look at this and take it into consideration in a meaningful way as they do their valuation.
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Nick Sutton, Resolute Energy Corporation - CEO [43]
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And I would say that it's not as if we're sitting here waiting for the banks. We obviously run these numbers ourselves, and it's an ongoing process, and you all are so good with numbers, I mean I'm going to state the obvious, and that is the significantly reduced LOE has a dramatic impact on that asset value, as does the significant reduction in the capital of cost associated with drilling and completion, for example. Those things roll through all of the valuation metrics be they PDP, PDNP, PUD, existing production, and to be developed production, all are stronger obviously with lower cost, but it is really dramatic when one rolls that through a net asset value model.
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Jeff Robertson, Barclays Capital - Analyst [44]
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Last question, Ted, can you comment about how much of the -- how much, sorry, the Powder River Basin assets represent of the borrowing base? I know when you sold Howard County you sold it for, I think, $40 million against a borrowing base that was considerably less than that, somewhere around $5 million I think, if I remember right.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [45]
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Well the Powder asset, of course, has a higher component of PDP. So as a percentage of total value it will be higher. But I don't know that I'm prepared to say what the banks will tell us. Certainly we have some indications, but I think it's best to wait until that whole transaction occurs.
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Jeff Robertson, Barclays Capital - Analyst [46]
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Thank you.
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Operator [47]
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Noel Parks, Ladenburg Thalmann.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [48]
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Good afternoon.
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Nick Sutton, Resolute Energy Corporation - CEO [49]
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Hi, Noel.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [50]
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Hi. A few things, sorry if you touched on this and I missed it, but as far as hedging goes, looking ahead, wondering if that's been a topic with lenders in the most recent borrowing base or headed toward the upcoming one. And just wondered what your attitude or appetite might be for perhaps investing in floors and trying to leave a little more upside intact, if we assume we have a bounce-back longer-term.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [51]
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Well certainly that's a conversation that's a part of the dialogue with the banks. Obviously we think we've done a pretty good job of putting hedges in place in 2015 and 2016, and we've started in 2017. It's an ongoing dialogue both with our bankers and also internally as to how we want to spend money, and anytime you do a hedging transaction, you're spending money one way or another, whether it's a costless collar, whether it's a swap, whether it's actually buying a put, that basket of tools is available.
I think that as we move forward, my guess is we'll probably always want to try to maintain upside as you look longer, and I think that in shorter time frames I think we're likely to be more -- probably more comfortable with swaps, only because you don't have the long time horizon in front of you. Noel, as you know, we work our hedge book pretty hard and I think that over time, we've demonstrated that we use all the tools that are available to us.
Today's market isn't in very much fun. I wouldn't go -- I don't think we would go very long in today's market. But I think that it's -- but it's an ongoing dialogue internally, and it obviously has an impact on how the banks evaluate the net present value of our assets.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [52]
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Sure. And I just wanted to check, in the Permian, roughly how much of the production is more or less in or close to it's base-to-client at this point, just thinking about the slowdown activity over these last six, nine months, now.
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Nick Sutton, Resolute Energy Corporation - CEO [53]
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That's getting down into some detailed engineering. I'll give you the broad brush so that we not get too far into the weeds and of course, as you know, Noel, we'll be happy to give you more granularity at some point, get you in touch with the engineers. But basically, you're familiar with what the decline curves look like on these horizontal wells. Now, we've drilled -- we've got three in Gardendale that have been on for roughly 18 months off the top of my head, and so they're off the steepest part, they're where it's starting to bend over onto flat.
In the Permian -- in the Delaware Basin, we've got a total of eight wells and five of them date back about a year, and so you can pretty much target where they are on the decline curve. And then three of them are pretty new, and they are the ones that we talked about are exceeding type curve, and we have, again, without getting too far into the weeds, but our approach to producing wells is to choke them back and draw down the pressure very, very carefully, and so these wells have been strong producers, they will continue to be strong producers, but they will start to see decline that is more consistent with early-stage decline as we look at the next 6 to 12 months from those three.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [54]
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Got it. And just (multiple speakers).
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Nick Sutton, Resolute Energy Corporation - CEO [55]
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I would point out that is against a base of about 100 vertical wells, 98 to be precise, in Gardendale that have been in production for some time, around 20 vertical wells in Reeves County that have been in production for some time, and about 500 wells, plus or minus, in Aneth that have been on production for decades, and I sometimes feel like it's centuries.
So that's -- no decline, basically, or very little decline in Aneth, and then the Powder River assets are also relatively low decline. So we are talking about a handful of horizontal wells balanced against a base of production that is very stable, very steady, and relatively flat, which is why we are able to deliver production results like we did this quarter.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [56]
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Right, which is of course what you want when you got a tough commodity price environment and limited visibility, sure. A couple Aneth questions. With what we've seen with service costs, where roughly do -- would the cost for Desert Creek IIC completion be around now, or if you have any thoughts of how what returns might look like for those projects?
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Nick Sutton, Resolute Energy Corporation - CEO [57]
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Right now, we are in McElmo Creek Unit DC IIC test pilot project and the DC3 is sort of on the shelf to evaluate at some point when the external environment improves. So we've got plenty to do in Aneth but right now we're taking a go-slow mode and continuing to inject CO2 in the Aneth Unit project, continuing to inject CO2 in McElmo Creek. We've got people at Elmo Creek DC IIC pilot project that is really showing some interesting results, but it's kind of -- I would put that as we're walking, not running, in that project at this stage.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [58]
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Okay, great, and just one more back to the Permian, has there been any industry progress by other operators in some of the alternate horizontal targets at or near Gardendale, beyond the Spraberry in Wolfcamp B?
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Nick Sutton, Resolute Energy Corporation - CEO [59]
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I think the Wolfcamp C has been tested, I think the A is being tested, but frankly you touch on the one that's got everyone's attention right now, and that's the lower Spraberry and some now into the middle Spraberry that are showing economics that are quite superior to the Wolfcamp economics. I mean very strong results, and those are all around our acreage.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [60]
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Great. That's all for me. Thanks a lot.
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Nick Sutton, Resolute Energy Corporation - CEO [61]
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Thank you, Noel.
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Operator [62]
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William Tichy, Beddow Capital.
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William Tichy, Beddow Capital - Analyst [63]
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Yes, thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [64]
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Hi, Bill.
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William Tichy, Beddow Capital - Analyst [65]
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I had a quick question -- Hi, how are you? My question's related to hedging and most of that was answered. You mentioned layering on new hedges, and a number of operators, including Resolute have been reasonably aggressive in the last couple of years in laying on hedges in a world of $75 to $100 oil. Today, of course, we're in a $43, $44 oil climate and with a lot of analysts backpedaling, not like crazy, but lowering your expectations for 2016, and recognizing that nobody knows what the price of oil is going to be in December 2016 or going into 2017, is it safe to say that you'll be far less aggressive in the next 6 to 12 months in your hedging program as you have been in, say, two years ago?
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Nick Sutton, Resolute Energy Corporation - CEO [66]
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I think that I wouldn't say less aggressive. I would say, reflecting what Ted mentioned and that is one's approach would be different. And even though we were hedging at in the $80s because we figured that we wanted to protect against the downside and we're reaping the benefits of that right now.
As we look out to 2017 or 2018, as Ted mentioned, we would look again to protect downside, because in the near term we don't know where things are going. But further out, we would be looking to protect more of the upside, while at the same time recognizing that we don't control the external environment. And we would have to look at downside protection, as well. But again, we rarely swap, and we usually come up with some a structured approach that gives us downside protection, but also leaves us upside, as well. That's not a free trade, but it's a trade that makes a lot of sense, particularly in this environment.
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William Tichy, Beddow Capital - Analyst [67]
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Okay. I have another question: as far as monetizing some assets and paying down debt, you've done a good job here in a tough environment deleveraging yourself to some extent. The Hilight Field that you said has received bids on -- 8% of your reserve, something like that, so we're talking maybe 6 million barrels of oil there. What would be the timing, roughly? Are we talking about a 6- to 12-month time horizon when it might be reasonable to expect the monetization of that asset?
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Nick Sutton, Resolute Energy Corporation - CEO [68]
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No, we would like to try to wrap something up within about 45 days. As we mentioned, we've been through a process, it was a robust process, and we've gotten bids in and we're processing those right now and taking into consideration all the variables that one might expect, and we would look to wrap something up by basically a PSA in 45 days, let's say, and then closing at some point after that.
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William Tichy, Beddow Capital - Analyst [69]
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Okay, thank you, appreciate it.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [70]
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Before you leave, Bill, let me add that one other comment about hedging, and that is as you probably noted in some of the filings that we've made and the contracts that are out there, the other piece of the hedging puzzle is that we do have some requirements. We will add hedges so that we stay in compliance with our agreements, but again, how we do it, what the pieces are, what the tools are, is the ongoing -- that's an ongoing opportunity set that we'll do our best to take advantage of.
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William Tichy, Beddow Capital - Analyst [71]
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Understood. A few moving parts there.
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Nick Sutton, Resolute Energy Corporation - CEO [72]
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Thanks, Bill.
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Operator [73]
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Andrew Smith of Global Hunter Securities.
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Andrew Smith, Global Hunter Securities, LLC - Analyst [74]
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Good afternoon. You mentioned in your press release that you participated in a nonoperated well in the Delaware Basin in the second quarter and that you expect to participate in at least one more this year. What are your working interests in those wells and do you expect an ongoing nonoperated program next year?
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Nick Sutton, Resolute Energy Corporation - CEO [75]
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The working interest is approximately 15% in the one that we've done so far. I'm not sure exactly what our working interest would be in the one that is scheduled for later this year simply because the operator may move the location around and that affects the allocation of leaseholds and therefore the percentage interest, but broad brush it's probably about 10%.
Do we expect that to continue next year? I think we will have more clarity on that as we progress through this year and operators in the area give more guidance as to their plans for 2016. We are in an area where we are fortunate to have good operators around us and they hold good acreage and so I would expect that we would see some continuing non-op, but to quantify it at this stage is very, very difficult.
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Andrew Smith, Global Hunter Securities, LLC - Analyst [76]
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Great, thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [77]
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Thank you, Andrew.
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Operator [78]
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A follow-up question from Ron Mills of Johnson Rice.
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Ron Mills, Johnson Rice - Analyst [79]
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One was a follow-up on Bill's question about the PRB: I think in the first quarter that area produced 1,600, 1,700 Boes per day. Did you provide what that number was here in the second quarter?
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Nick Sutton, Resolute Energy Corporation - CEO [80]
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I think that I mentioned that in my comments that I seem to recall that it was about 1,600 barrels a day. Understand that in the Powder, Boes, again, in this environment Boes are not all created equally, and the Powder is certainly more gas than we produce in any of our other areas. And so that's a factor that if you're doing four function calculator type work here, keep in mind that the 1,600 Boes is about 90% gas, I would say.
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Ron Mills, Johnson Rice - Analyst [81]
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Okay, great, and then one for Ted to follow up on Jeff's question, the capitalized interest level coming down quite a bit in the second quarter. Is the level of capitalization expected to remain more like the second quarter level, you think, and is that a function of some of them impairments you all have taken?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [82]
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Well the answer is yes, it will be more like the second quarter than others. It's really a function of what can you and what must you capitalize under GAAP, and if I'm working or Nick or any of us are working on capital projects, then that fraction of our time gets capitalized, given that our capital program is relatively sitting a lot smaller, actually. You can't capitalize your time to projects that aren't capital in nature.
Basically the other -- so think about it this way, if we're not doing exploration or those kinds of things, drilling, those are major capital activities that draw capitalized time. We're not doing that in the second half, and, obviously, 2016 remains to be seen.
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Ron Mills, Johnson Rice - Analyst [83]
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Great, understand it. And just to make sure I understand the $45 million to $50 million CapEx versus $30 million you spent, does that $45 million to $60 million (sic -- see press release "$45 million to $50 million") include your capitalized interest in G&A or is that just your E&P drilling completion budget?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [84]
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It's got the capitalized component of interest, but not the capitalized component of G&A.
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Ron Mills, Johnson Rice - Analyst [85]
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And do you know what that capitalized G&A was the second quarter?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [86]
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That's -- I can get back to you on that, I don't know that off the top of my head.
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Ron Mills, Johnson Rice - Analyst [87]
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Perfect, we'll just get it later. Thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [88]
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Thanks, Ron.
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Operator [89]
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This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Nicholas Sutton for any closing remarks. Please go ahead.
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Nick Sutton, Resolute Energy Corporation - CEO [90]
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My closing remark is simple and to the point. I think we've demonstrated that we've had a great quarter. I commend all the operating teams for the work that they've done, all the various support groups, be they geology, reservoir engineering, et cetera, the finance group, everybody has contributed to this effort and the numbers speak for themselves.
And beyond that I would like to say we that appreciate your interest in Resolute. It's not a very exciting time to be interested in the oil and gas space, but we think that we're doing the right things, the good things, and we've been through these cycles before and cycles turn. And I'd I'm glad we've got such a good group of people who are shareholders and good group of people who are following what we're doing on a regular basis.
As always, feel free to pick up the phone and call. We are here to do whatever we can to help you with your evaluations and your decision-making processes, and so don't ever hesitate to pick up that phone and reach out and give us a shout. So again, thank you very much.
Good afternoon, everyone. My name is Michael Stefanoudakis, I'm the Senior Vice President and General Counsel of Resolute. I'd like to read the forward-looking statement before turning the call over to Nick Sutton, our Chairman and CEO.
This investor conference call includes forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as expect, estimate, project, budget, forecast, anticipate, intend, plan, may, will, could, should, poised, believes, predicts, potential, continue, and similar expressions are intended to identify such forward-looking statements. Forward-looking statements in this conference call include matters that involve known and unknown risks, uncertainties, and other factors that may cause actual results, levels of activity, performance, or achievements to differ materially from results expressed or implied on this call.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this call. A listing of the material risk factors faced by Resolute appears in our Form 10-K and is updated periodically in the Form 10-Qs and other public filings.
At this time I'd like to turn the call over to Nick Sutton, our Chairman and CEO.
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Nick Sutton, Resolute Energy Corporation - CEO [3]
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Thank you, Michael.
Good afternoon and welcome to Resolute's second-quarter 2015 earnings conference call. I will assume that you have had an opportunity to read our press release and our filing on Form 10-Q, both of which went out last night. So I will focus my comments on the primary drivers of our performance during the past quarter. After that, Ted Gazulis will give you an overview of our financial results, and then we will open the call for Q&A.
At the beginning of the year, we established a strategic plan to keep capital spending within cash flow, to enhance operational efficiencies in order to maintain our cash margins, and to pay down debt even while maintaining production. In our last earnings call, we articulated our formula for achieving that plan to maintain production volumes, lower our controllable costs, increase liquidity, and reduce capital spending.
Our results for the second quarter and the first half of 2015 demonstrate that this formula is working, as we are on track to meet or exceed our public guidance on every metric except for a modest variance on production taxes, something over which we have no control. Let's walk through the highlights, starting with production.
Average daily production in the second quarter increased to a record rate of 13,528 Boe per day; that's up 10% from the same quarter last year. That is a notable accomplishment considering that we've ceased our operated drilling activity. And by the way, the production increase is inclusive of losing approximately 610 net Boe per day from the sale of our assets in the Midland Basin, production that was in our original guidance that we provided to you earlier this year. These higher production volumes helped offset lower commodity prices.
The primary driver of the positive production variants was our Permian Basin assets, which produced 5,566 Boe per day. That's up 3% from the previous sequential quarter and it's 28% higher than the same quarter last year. The increase was a result of having a full quarter production from three horizontal wells completed in the first quarter of 2015, and our Mustang project area in the Delaware Basin, complemented by reduced downtime at our Gardendale area in the Midland Basin and other properties in New Mexico. These factors all helped deliver above-planned production in the second quarter.
Production in Wyoming averaged 1,655 Boe per day, 3% lower than the same quarter last year and 4% lower than the first quarter of 2015. The decrease was a result of natural production declines, several well workovers, and a temporary shut-in by the gas processor to accommodate planned maintenance.
Aneth Field continues to prove the value of having a mature, low-decline asset in our portfolio, as it provides a steady source of production and cash flow. Aneth Field delivered production at an average rate of 6,370 Boe per day in the second quarter, essentially flat as compared to the same quarter last year and the first quarter of 2015. In the first half of 2015, Aneth Field produced 6,350 Boe per day, an increase of 2% over the same period last year.
The production improvement primarily is a result of increasing response to our ongoing tertiary recovery project in Aneth Field. I'm very pleased with our production performance through the first half of the year and I am impressed by the ability of our team to post production increase that more than offset the production that we lost as a result of the sale of non-core assets.
Now let's turn to cost control. We have hammered down controllable cost by rigorously focusing on efficiencies and proactively working with our service providers. We reduced lease operating expense, that's excluding non-cash share based compensation, in the second quarter by 40% to $15.64 per Boe as compared to the same quarter last year.
We also have cut overhead. Cash-based general and administrative expense in the second quarter amounted to $3.87 per Boe, 31% lower than the prior-year period. Importantly, we believe that these cost savings are sustainable. For example, our field staff has brought more tasks in-house, eliminating less competitive vendors.
But it also bears mentioning that the longer our operations team has worked with our assets, especially those we acquired in the Permian Basin, the more efficiently they produce, performing good well surveillance, solid engineering, and regular maintenance has kept wells on production, thereby avoiding costly downtime. Our team has proven itself as a strong operator and all of these factors combine to create long-term sustainable reductions in cost. Higher production volumes combined with significantly lower costs at both the field and the corporate levels have worked together to preserve our margins.
Adjusted EBITDA, a non-GAAP measure, was $35.5 million in the second quarter, essentially flat with the same quarter last year despite commodity prices that were approximately half of what they were last year. Adjusted EBITDA during the first half of this year was $70.3 million or $28.76 per Boe, only 8% lower than the same period last year, again, despite dramatically reduced commodity pricing. Clearly our team's engine is firing on all cylinders.
The first-quarter sale of the Howard and Martin County, Texas assets improved our balance sheet and strengthened our liquidity position without negatively affecting overall cash flow. Net proceeds from the sale of those properties were used to reduce bank debt. Total debt at June 30 was $31 million lower than at March 31 of this year. The borrowing base on our revolving credit facility currently is $260 million, and with $160 million of borrowings, we have approximately $100 million of availability, which is more than adequate to fund our 2015 plan.
Turning to capital spending, we invested $7.6 million in the second quarter, bringing total capital spending in the first half of this year to $30.3 million, which excludes the previously mentioned asset sales. Most of the capital spending incurred through the first half of 2015 occurred in the first quarter as we completed three Permian Basin wells. The majority of spending for the rest of 2015 will be for CO2 purchases at Aneth Field to support the production rate at this foundation asset, and we expect our 2015 CapEx spending to be in line with our 2015 public guidance.
As I mentioned in our last call with you, this is not our first cycle. We have experienced prior cycles and we have quickly put our experience to work to preserve value by taking decisive actions. I continue to be impressed with the performance delivered by our operating teams since it's down cycle began, and thanks to them we have met or exceeded our key metrics for the first half of this year.
Finally, I'll make brief mention of the ongoing process of selling our Hilight Field assets. As we mentioned in yesterday's press release, we have received bids in we are working diligently through the process. Additionally, we have had fruitful discussions with potential joint venture partners to fund drilling on our Permian Basin assets and we look forward to providing more details to you as soon as is appropriate.
Now I'm going to turn it over to Ted Gazulis.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [4]
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Thank you, Nick.
I'd like to start with a look at where we stand relative to the guidance we issued earlier this year. With regard to production, Nick mentioned earlier that we produced at an average rate of more than 13,500 Boe per day through the first half of the year. That's above the top end of full-year guidance which is 12,000 to 13,000 Boe per day.
It's important note that even though we sold our properties in Howard and Martin Counties, Texas, we have not adjusted our guidance downward. Equally, though, because we're not drilling any wells in the second half of 2015, we anticipate that production has peaked for the year and expect that natural production declines will cause volumes to be modestly lower over the next two quarters. But again, we feel confident of achieving full-year production guidance.
We've had great success in reducing costs in light of the depressed commodity price environment. Total lease operating expense in the first half of 2015 was $39.8 million, which was 31% lower than the first half of last year. And sequentially our LOE was 5% lower in the second quarter than it was in the first.
Through the first half of 2015 we reduced LOE per Boe excluding share-based compensation by 37%, $16.11 per Boe, down from $25.56 per Boe in the first half of 2014. At the current run rate, full-year LOE would come in well below our guidance range of $88 million to $98 million.
General and administrative expense in the second quarter was $7.5 million, which included $2.7 million of non-cash expense and was 28% below the same period last year. For the first half of 2015, total G&A expense was $14.8 million, inclusive of non-cash compensation expense of $5.6 million, and was 22% below the same period last year. At the current run rate, full-year cash G&A expense would come in at or below our guidance range of $25 million to $29 million.
In addition to exercising strong financial discipline, our hedge book helped to mitigate the effect of commodity price declines. Excluding commodity hedges, revenue was $48.4 million in the second quarter of 2015, down 45% from the same quarter last year to $39.31 per Boe from $78.96 per Boe in the prior-year period. However, after incorporating the effect of favorable commodity price hedges, revenue was down only 18% from the prior-year period to $53.93 per Boe.
For the first six months of 2015, revenue excluding commodity hedges was $89.5 million, or $36.60 per Boe, down 50% from the same period last year. When incorporating the impact of derivatives, though, hedge adjusted revenue was down only 21%.
We believe that hedging is an important part of managing a commodity-based business. For the remainder of 2015, we have 6,600 barrels per day hedged at an average floor price of more than $85 per barrel, and in 2016 we have hedges covering 6,500 barrels per day at an average floor price of more than $80 a barrel. We've also started layering in new hedges to carry us into 2017.
Despite a 50% decline in realized revenue per Boe before commodity hedges, in the second quarter we generated $35.5 million of adjusted EBITDA, a non-GAAP measure, which was flat with the same quarter last year. In the first half of 2015 we generated adjusted EBITDA of $70.3 million, or $28.76 per Boe, which was only 8% lower than the same period last year and a significantly smaller decline than the 54% drop in revenue per Boe before commodity hedges. We think it's a strong statement that we've maintained our adjusted EBITDA in the face of sharply downward commodity prices.
Looking at capital, we invested $7.6 million in the second quarter, bringing a total first half CapEx to $30.3 million. As you're probably aware, our 2015 capital program was front-end loaded and we remain on track to spend within our guidance in the range of $45 million to $50 million. At June 30, 2015, we had a total of $160 million drawn on our revolving credit facility, $199.1 million of second lien term loan outstanding, and $400 million of outstanding senior notes. After adjustment for the Howard and Martin County asset sale, our revolving credit facility has a borrowing base of $260 million, providing us with current availability of $100 million.
As we look to our fall borrowing base redetermination, we recognize that prevailing commodity prices are significantly lower than they were last year. But we also note that drilling, completion, LOE, and G&A costs are all down across the board. Clearly the PV-10 of our reserves will be negatively affected by lower commodity price assumptions, however, we anticipate that this impact will be mitigated somewhat by the recognition of our meaningful lower cost structure.
Given that market forces are dynamic and there are many variables at work, I'm not in a position to speculate the level at which our borrowing base will be redetermined. Under any circumstances, though, we'll work with our lenders to ensure that the Company has sufficient liquidity to run the business.
We are in the fortunate position of not having to face any impending debt maturities, as our revolving credit line and senior notes mature in 2018 and 2020 respectively, and our senior loan -- second lien term loan matures no later than six months after the maturity of the revolving credit line. We are in compliance with our debt covenants, and forecast sufficient liquidity and cash flow from operations to fund our 2015 capital budget and to reduce debt.
In sum, then, strong field operations, rigorous cost control, and favorable commodity hedges have helped Resolute to mitigate the effects of the recent commodity price declines and have positioned the Company to work through this product price cycle.
We thank you for your interest in Resolute. With that I'll turn it back to Nick.
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Nick Sutton, Resolute Energy Corporation - CEO [5]
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Thank you, Ted.
I said it in our first-quarter earnings call and I will say that again: I commend our team for the great job they have done to preserve value since this down cycle started last year. The attention to detail, the drive to achieve, the focus exhibited by our people in our field offices and at the corporate level, have enabled us to be in a strong position going forward. In my view, the cost reductions are sustainable, and we should have continued benefits for cash flow, returns on capital projects, and preservation of reserves.
The value of our favorable commodity hedges that Ted outlined is apparent with approximately 74% of 2015 forecast daily oil volumes hedged at a weighted average floor price in excess of $86 per barrel at 6,500 barrels per day in 2016, hedged at a weighted average price at over $80 per barrel. Our derivatives program has helped cushion our margins from the worst of commodity price declines and will continue to shore up our margins going forward. Fortunately, the majority of our acreage footprint is held by production, meaning that we do not need to drill wells in this current commodity pricing environment just to hold leases.
100% of our Aneth Field acreage is held by production. 100% of the acreage in our Gardendale project area in the Midland Basin is held by production. 100% of our Powder River Basin acreage is held by production. 100% of our acreage in New Mexico is held by production. While some of our Reeves County acreage is not yet held by production, that which is not is a amenable to lease modifications, a process with which we have had considerable success.
Our legacy asset, Aneth Field, is a strong and steady source of production and cash generation. In fact the majority of our Company-wide production is sourced from assets having shallow declines covered by favorable hedges, and as a result, we have been able to generate positive free cash flow in the quarter and we expect that to continue through the rest of the year. Our formula of production maintenance, cost control, capital discipline, and liquidity enhancement is working and our team will continue to execute on plan to help us endure this down cycle and emerge from it a more competitive Company.
I thank you all for listening and I'll now turn the call back to the operator for Q&A. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Neal Dingmann, SunTrust.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [2]
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Good afternoon. Nick, just a quick question, you mentioned just lastly here on this re-used lease modification, is that the cost, which is pretty minimal there, or is that something that you would consider with those, maybe trading that and increasing what you have in the Midland Basin, maybe if you could just talk about that a little bit.
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Nick Sutton, Resolute Energy Corporation - CEO [3]
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I'm not sure I quite got the full import of your question.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [4]
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Two things, Nick. One, the costwise to basically modify, you mentioned most everything else is 100% HPP, to modify or to hold those leases, are we talking just very minimal? A couple million dollars or less? And number one, if it is very small, obviously, that's not a big deal. If it were more than that my thought was, does it make sense to try to trade some of that acreage for something that would block in some of your other existing acreage?
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Nick Sutton, Resolute Energy Corporation - CEO [5]
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The modifications are, in the big picture, not that expensive. We've had considerable success as I mentioned, and we would anticipate having success on a going-forward basis. There is no doubt that the Reeves County area is a focus area for a lot of companies and so it's not as if we are without competition, but our land staff has done an admirable job thus far and we would expect that to continue. So it is relatively insignificant in the big picture of what it costs to drill and complete horizontal wells, for example.
As to whether it's appropriate at some point to consider trading acreage, that's something we are always opened for and we have regular discussions with a lot of different companies as we look to solidify positions in one place versus another. So that's just an ongoing effort by the Company that we evaluate on a day-to-day case-by-case basis.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [6]
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That makes sense. And then in the press release you mentioned where you would stand down on all drilling. It's interesting, stand down, but yet you still have quite a good financial position and you do mention that the costs continue to come down. Is it more on the -- what are you looking for in order to think about ramping activity again? Is it cost at a certain level that would thus generate a certain critical rate of return, or when you and Ted sit around and look at is it a required rate of return that you all are looking for? What would cause you to bring a rig back?
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Nick Sutton, Resolute Energy Corporation - CEO [7]
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Good question. I think that right now, we are looking at the world from the perspective of we want to make sure that we continue to maintain significant liquidity and liquid availability, and so that causes us to be somewhat more cautious rather than less cautious in this environment. I think that as Ted alluded to, as we look to go into the fall borrowing base redetermination we have wrung so much cost out of our system that we think that we should stand up well in that borrowing base redetermination, although we're not in the crystal ball of the banks and I don't mean to suggest by any means that we are. But I think that's an unknown out there.
The other thing, Neal, that we have to be cognizant of, and that is while our areas in the Permian Basin, both in the Midland Basin side and in the Delaware Basin side, are still very economic at recent product prices. We can't ignore the erosion that we're currently seeing out there, particularly since these wells, as you know, a lot of the production comes early on and so we have to take that into consideration.
And all of those things go into the ongoing mix of discussion that we have internally as we evaluate future options and activity. But right now our sort of base plan is let's not stand up rigs, let's evaluate this, let's maintain our liquidity, let's continue to drive cost out of the structure, protect our cash margins, and pay down debt in the process.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [8]
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Let me add one more thing if my can, Neal, and that is that as we think about the prospect of standing up one or more rig, I think from our perspective, it will be more attractive, more efficient, more effective, all those kinds of descriptive words, to be able to stand up a rig and drill for a while. We all know that drilling a program will work to your advantage in terms of the economics, so even if we wanted to stand up a rig for a well or a couple of wells, I'm not sure that we wouldn't be better served by getting to the place that we could stand up a rig and drill for a year.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [9]
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That make sense. Okay, thanks. Great details.
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Operator [10]
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Jason Wangler of Wunderlich.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [11]
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Hey, good afternoon. I was just curious with your comments in the Permian, if anything there would be related to the infrastructure you have in the Delaware. Is that something you would look at either JVing or monetizing given how probably lucrative it would be?
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Nick Sutton, Resolute Energy Corporation - CEO [12]
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That is something that we have been evaluating. We've had deep discussions with certain parties out there. As you know, the people in that midstream space are very active and have good checkbooks, and so they see -- the ones that we have spoken with, at least, see the infrastructure we have built thus far as a good starting spot to expand further infrastructure out into Reeves County. So yes, that's on our radar screen, it's more than just on our radar screen, it's an active project area here in the Company.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [13]
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That's helpful and then just on the Powder River, obviously you're going through the bids, is there a timeframe that you have or that is set in the agreements that we would be hearing something or is that just an ongoing situation given what all's going on in the commodity mix? Just wondering if there's any milestone we should be looking for.
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Nick Sutton, Resolute Energy Corporation - CEO [14]
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I would say that internally we would hope to get something wrapped up within the next 45 days plus or minus. But in this world, life is not a unilateral event so we will see.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [15]
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No, that's fair, I appreciate it. I'll turn it back. Thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [16]
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Thanks, Jason.
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Operator [17]
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Ron Mills of Johnson Rice.
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Ron Mills, Johnson Rice - Analyst [18]
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Good afternoon. Real quick on the Permian, you talked about the sequential production growth partially being due to the full quarter impact, but can you quantify or describe some of the steps you took to reduce the downtime and the sustainability of that runtime improvement?
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Nick Sutton, Resolute Energy Corporation - CEO [19]
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Yes sir. It's something I'm really very proud of our team and what they've accomplished. I would start out by making sure everyone is very much aware of the fact that this is not an effort that started commensurate with the erosion in product prices. This is an effort that started the day that we took over operations in roughly early in the second quarter of 2013.
This is particularly with reference to the Gardendale area, and we found a field that needed attention, and our team got after it, and through a period of time, they've reduced failure rates from roughly 11 a month down to more recently it's been two or three a month. And -- but again, that is not a step change and it's not a process that was initiated because of product prices. It was initiated because of our focus on operations, and as I said, well surveillance, solid engineering, solid production operations, and it's been a continuing improvement.
Now I will say that I'm really happy that all of that has come together in light of what we're dealing with in the external environment. It's been very fortuitous and when we talk about our ability to hold the LOE down on a sustainable basis, again, it's not just getting the scalpel out with our service and supply providers, it's just hard work on the operating level and the engineering level that has had significant results. So I would point to that, Ron.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [20]
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Let me make one other comment that when Nick talks about 11 wells versus three wells, we are talking about more than 100 wells here. And to be looking at three-well failure in that big a universe is an enormous step in the right direction.
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Ron Mills, Johnson Rice - Analyst [21]
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Great. And then maybe this flows through, that you or Ted talking about the production peaking and the way that production looks were relative to the guidance you put out in February. And I know still really early but a lot of people have tried to at least paint a picture around 2016 in terms of spending levels versus this year and maintenance CapEx spending. Given the lack of -- or not lack, but given the far less activity in the second half of the year, how that feeds into next year, how are you looking at that from a big picture standpoint?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [22]
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You know I think that as we look forward, and I think Nick said it earlier, what we really are trying to do is to be efficient in how we're spending our dollars, and that's both LOE -- that's LOE, CapEx, G&A. We are not forecasting large dollar expenditures on CapEx, certainly we'll continue to spend money in Aneth on CO2. We have an ongoing program in Aneth of working the field, we'll continue to do all those kinds of things.
We're not at a stage yet where we want to forecast -- provide guidance for 2016, but I think that we would rather pay down debt with cash than, at this point, do incremental CapEx spending that doesn't really move the needle. Again, I'd rather spend money by standing up a rig and drilling for a year and waiting until we can do that, rather than doing a start/stop program in anywhere in the Permian or for some of the other programs that we've talked about over time in Aneth.
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Ron Mills, Johnson Rice - Analyst [23]
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Great, and then one last one, just as you look at the second half, Ted, with that 12,000 to 13,000 barrel a day guidance for the year in your first half, coming in and averaging 13,500, if you looked at your corporate decline rate right now given no upcoming wells drilled or completed, what do you forecast that corporate decline rate is in this environment?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [24]
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I think again, I would just do the math and say if we're at 13,500 through the first half and we think that we'll be in the range of 12,000 to 13,000 you've got two endpoints, and you can come up with the decline rate. And I don't have my calculator with me or I'd do it for you.
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Ron Mills, Johnson Rice - Analyst [25]
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My cell works for that. Thanks. I'll jump back in line.
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Nick Sutton, Resolute Energy Corporation - CEO [26]
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Okay, the one thing I would add is that we talk about well downtime and failure and whatnot, most of you on the call are very familiar with what we mean when we talk about that, but it just basically stuff breaks. A pumping unit might have something that needs to be repaired, you might have parted rods or something in the tubing.
It's that kind of thing when we talk about well downtime, and you know, the need to get over a well with a pulling unit and fix things. So when I refer -- commonly it's referred to as a downtime or failure, it's just really fixing things and I want to make sure that everybody understands that.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [27]
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Let me add one other point to that, Nick, and that is that in today's price environment we focus and our team focuses very much on the dollars. In a $100 world you focus more on the barrels. So we're being very judicious as wells go down through the normal wear and tear of an oil field about where you spend the workover rig.
A two barrel a day in a $100 environment, you might go send a workover rig. You might not do that today. That's the kind of detail work that our guys are doing, developing -- we've developed a number of tools internally to really maximize and optimize the way we spend money out there and you can see it in the numbers.
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Operator [28]
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Jeff Grampp, Northland Capital Markets.
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Jeff Grampp, Northland Capital Markets - Analyst [29]
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Good afternoon.
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Nick Sutton, Resolute Energy Corporation - CEO [30]
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Hi, Jeff.
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Jeff Grampp, Northland Capital Markets - Analyst [31]
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I wanted to touch on the Delaware well performance you highlighted in the release and some outperformance from some of those longer laterals. So maybe just wanted to dig a little bit deeper on that if you have any granularity regarding quantifying what type of outperformance you're seeing or what longer-term rates you're seeing from some of those wells.
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Nick Sutton, Resolute Energy Corporation - CEO [32]
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I don't think that I'm prepared to go into much more detail than what we did in our press release, where we noted that we've gotten, in the case of two of them, I think it was 160 to 185 days of production and the outperformance is notable. I would like to get additional production and then that will result in a process where we sit down with the engineers and look to see about increasing our type curve.
But the most important thing is that two of the three are very much outpacing type curve, and the third one is slightly under type curve and on average we are at least on type curve if not higher. So, I think that's about what we would note for right now.
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Jeff Grampp, Northland Capital Markets - Analyst [33]
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Okay, fair enough, and most of my other questions have been asked. But just have maybe a housekeeping one for Ted. It looked like interest expense is maybe a bit higher than -- I was modeling for 2Q, is that more a function of maybe less being capitalized or are there some other moving parts in there with the additional second lien and things like that?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [34]
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Yes, I mean I think it may have to do with capitalization, probably that's an important part of it. And obviously, I know your models are well done, but the question of timing with additional second lien going from the $150 million at year end to $200 million currently, well, $199.1 million currently. There may be some slack there.
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Jeff Grampp, Northland Capital Markets - Analyst [35]
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Okay, great quarter, thanks.
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Nick Sutton, Resolute Energy Corporation - CEO [36]
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Thanks, Jeff.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [37]
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Thank you.
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Operator [38]
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Jeff Robertson, Barclays.
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Jeff Robertson, Barclays Capital - Analyst [39]
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Thank you. Nick, to follow up on some the LOE discussion, can you talk about any specifics around what the approach you're taking on well repair is and what impact that's having on production in the Permian or in Aneth for that matter?
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Nick Sutton, Resolute Energy Corporation - CEO [40]
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Our approach, Jeff, is to -- we look at any well that is a candidate for some work, anything that's going to cost us money. And we have in the field and in the engineering teams, tools that we've developed that look at well profitability and takes in all the complexities associated with a particular well, what is the production stream looking like, what is the LOE looking like, on basically a unit basis, down to how much electricity does it cost us to run that pump?
It's very, very precise and detailed, and then we prioritize the wells based on the profitability index, and then we will use some skilled engineering and operational judgment to supplement the basic spreadsheet calculations. As Ted indicated, what that really results in is that you're trying to optimize the production, and so it's what are you getting for what you're spending from an optimization and efficiency standpoint?
And I think the results speak for themselves as we look at how production has held up. Aneth is a good example. Production is up a few percent and that's the result of just ongoing CO2, of course, but also the guys in the field doing this kind of optimization work.
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Jeff Robertson, Barclays Capital - Analyst [41]
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You commented earlier about none of that's reflected in, obviously, in the spring borrowing base redetermination. Do you have any feel for how the banks -- or Ted, do you have any feel for how the banks will look at those types of efforts as they think about your borrowing base in the fall?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [42]
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Oh yes. We've had -- I'll tell you that in the last redetermination, which was several months ago, we had a few months of the good work that our field guys have been doing and the banks were very much interested in understanding what are we doing, how are we doing it, is it sustainable, and they got pretty granular, I have to tell you.
In the discussions that I've had with our bankers as we -- and I talk with them a lot, they're very interested in having that same discussion, they really are quite interested and well-versed in looking at the experience that we are having, understanding what we're doing and why, and I do think that they are all -- the bankers that I've spoken with have all expressed deep interest in getting behind the numbers and they are pleased with the ability to see the continuation of the good work that our teams are doing. So I'm comfortable that they will look at this and take it into consideration in a meaningful way as they do their valuation.
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Nick Sutton, Resolute Energy Corporation - CEO [43]
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And I would say that it's not as if we're sitting here waiting for the banks. We obviously run these numbers ourselves, and it's an ongoing process, and you all are so good with numbers, I mean I'm going to state the obvious, and that is the significantly reduced LOE has a dramatic impact on that asset value, as does the significant reduction in the capital of cost associated with drilling and completion, for example. Those things roll through all of the valuation metrics be they PDP, PDNP, PUD, existing production, and to be developed production, all are stronger obviously with lower cost, but it is really dramatic when one rolls that through a net asset value model.
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Jeff Robertson, Barclays Capital - Analyst [44]
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Last question, Ted, can you comment about how much of the -- how much, sorry, the Powder River Basin assets represent of the borrowing base? I know when you sold Howard County you sold it for, I think, $40 million against a borrowing base that was considerably less than that, somewhere around $5 million I think, if I remember right.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [45]
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Well the Powder asset, of course, has a higher component of PDP. So as a percentage of total value it will be higher. But I don't know that I'm prepared to say what the banks will tell us. Certainly we have some indications, but I think it's best to wait until that whole transaction occurs.
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Jeff Robertson, Barclays Capital - Analyst [46]
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Thank you.
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Operator [47]
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Noel Parks, Ladenburg Thalmann.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [48]
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Good afternoon.
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Nick Sutton, Resolute Energy Corporation - CEO [49]
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Hi, Noel.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [50]
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Hi. A few things, sorry if you touched on this and I missed it, but as far as hedging goes, looking ahead, wondering if that's been a topic with lenders in the most recent borrowing base or headed toward the upcoming one. And just wondered what your attitude or appetite might be for perhaps investing in floors and trying to leave a little more upside intact, if we assume we have a bounce-back longer-term.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [51]
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Well certainly that's a conversation that's a part of the dialogue with the banks. Obviously we think we've done a pretty good job of putting hedges in place in 2015 and 2016, and we've started in 2017. It's an ongoing dialogue both with our bankers and also internally as to how we want to spend money, and anytime you do a hedging transaction, you're spending money one way or another, whether it's a costless collar, whether it's a swap, whether it's actually buying a put, that basket of tools is available.
I think that as we move forward, my guess is we'll probably always want to try to maintain upside as you look longer, and I think that in shorter time frames I think we're likely to be more -- probably more comfortable with swaps, only because you don't have the long time horizon in front of you. Noel, as you know, we work our hedge book pretty hard and I think that over time, we've demonstrated that we use all the tools that are available to us.
Today's market isn't in very much fun. I wouldn't go -- I don't think we would go very long in today's market. But I think that it's -- but it's an ongoing dialogue internally, and it obviously has an impact on how the banks evaluate the net present value of our assets.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [52]
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Sure. And I just wanted to check, in the Permian, roughly how much of the production is more or less in or close to it's base-to-client at this point, just thinking about the slowdown activity over these last six, nine months, now.
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Nick Sutton, Resolute Energy Corporation - CEO [53]
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That's getting down into some detailed engineering. I'll give you the broad brush so that we not get too far into the weeds and of course, as you know, Noel, we'll be happy to give you more granularity at some point, get you in touch with the engineers. But basically, you're familiar with what the decline curves look like on these horizontal wells. Now, we've drilled -- we've got three in Gardendale that have been on for roughly 18 months off the top of my head, and so they're off the steepest part, they're where it's starting to bend over onto flat.
In the Permian -- in the Delaware Basin, we've got a total of eight wells and five of them date back about a year, and so you can pretty much target where they are on the decline curve. And then three of them are pretty new, and they are the ones that we talked about are exceeding type curve, and we have, again, without getting too far into the weeds, but our approach to producing wells is to choke them back and draw down the pressure very, very carefully, and so these wells have been strong producers, they will continue to be strong producers, but they will start to see decline that is more consistent with early-stage decline as we look at the next 6 to 12 months from those three.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [54]
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Got it. And just (multiple speakers).
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Nick Sutton, Resolute Energy Corporation - CEO [55]
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I would point out that is against a base of about 100 vertical wells, 98 to be precise, in Gardendale that have been in production for some time, around 20 vertical wells in Reeves County that have been in production for some time, and about 500 wells, plus or minus, in Aneth that have been on production for decades, and I sometimes feel like it's centuries.
So that's -- no decline, basically, or very little decline in Aneth, and then the Powder River assets are also relatively low decline. So we are talking about a handful of horizontal wells balanced against a base of production that is very stable, very steady, and relatively flat, which is why we are able to deliver production results like we did this quarter.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [56]
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Right, which is of course what you want when you got a tough commodity price environment and limited visibility, sure. A couple Aneth questions. With what we've seen with service costs, where roughly do -- would the cost for Desert Creek IIC completion be around now, or if you have any thoughts of how what returns might look like for those projects?
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Nick Sutton, Resolute Energy Corporation - CEO [57]
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Right now, we are in McElmo Creek Unit DC IIC test pilot project and the DC3 is sort of on the shelf to evaluate at some point when the external environment improves. So we've got plenty to do in Aneth but right now we're taking a go-slow mode and continuing to inject CO2 in the Aneth Unit project, continuing to inject CO2 in McElmo Creek. We've got people at Elmo Creek DC IIC pilot project that is really showing some interesting results, but it's kind of -- I would put that as we're walking, not running, in that project at this stage.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [58]
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Okay, great, and just one more back to the Permian, has there been any industry progress by other operators in some of the alternate horizontal targets at or near Gardendale, beyond the Spraberry in Wolfcamp B?
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Nick Sutton, Resolute Energy Corporation - CEO [59]
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I think the Wolfcamp C has been tested, I think the A is being tested, but frankly you touch on the one that's got everyone's attention right now, and that's the lower Spraberry and some now into the middle Spraberry that are showing economics that are quite superior to the Wolfcamp economics. I mean very strong results, and those are all around our acreage.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [60]
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Great. That's all for me. Thanks a lot.
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Nick Sutton, Resolute Energy Corporation - CEO [61]
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Thank you, Noel.
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Operator [62]
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William Tichy, Beddow Capital.
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William Tichy, Beddow Capital - Analyst [63]
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Yes, thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [64]
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Hi, Bill.
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William Tichy, Beddow Capital - Analyst [65]
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I had a quick question -- Hi, how are you? My question's related to hedging and most of that was answered. You mentioned layering on new hedges, and a number of operators, including Resolute have been reasonably aggressive in the last couple of years in laying on hedges in a world of $75 to $100 oil. Today, of course, we're in a $43, $44 oil climate and with a lot of analysts backpedaling, not like crazy, but lowering your expectations for 2016, and recognizing that nobody knows what the price of oil is going to be in December 2016 or going into 2017, is it safe to say that you'll be far less aggressive in the next 6 to 12 months in your hedging program as you have been in, say, two years ago?
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Nick Sutton, Resolute Energy Corporation - CEO [66]
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I think that I wouldn't say less aggressive. I would say, reflecting what Ted mentioned and that is one's approach would be different. And even though we were hedging at in the $80s because we figured that we wanted to protect against the downside and we're reaping the benefits of that right now.
As we look out to 2017 or 2018, as Ted mentioned, we would look again to protect downside, because in the near term we don't know where things are going. But further out, we would be looking to protect more of the upside, while at the same time recognizing that we don't control the external environment. And we would have to look at downside protection, as well. But again, we rarely swap, and we usually come up with some a structured approach that gives us downside protection, but also leaves us upside, as well. That's not a free trade, but it's a trade that makes a lot of sense, particularly in this environment.
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William Tichy, Beddow Capital - Analyst [67]
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Okay. I have another question: as far as monetizing some assets and paying down debt, you've done a good job here in a tough environment deleveraging yourself to some extent. The Hilight Field that you said has received bids on -- 8% of your reserve, something like that, so we're talking maybe 6 million barrels of oil there. What would be the timing, roughly? Are we talking about a 6- to 12-month time horizon when it might be reasonable to expect the monetization of that asset?
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Nick Sutton, Resolute Energy Corporation - CEO [68]
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No, we would like to try to wrap something up within about 45 days. As we mentioned, we've been through a process, it was a robust process, and we've gotten bids in and we're processing those right now and taking into consideration all the variables that one might expect, and we would look to wrap something up by basically a PSA in 45 days, let's say, and then closing at some point after that.
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William Tichy, Beddow Capital - Analyst [69]
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Okay, thank you, appreciate it.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [70]
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Before you leave, Bill, let me add that one other comment about hedging, and that is as you probably noted in some of the filings that we've made and the contracts that are out there, the other piece of the hedging puzzle is that we do have some requirements. We will add hedges so that we stay in compliance with our agreements, but again, how we do it, what the pieces are, what the tools are, is the ongoing -- that's an ongoing opportunity set that we'll do our best to take advantage of.
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William Tichy, Beddow Capital - Analyst [71]
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Understood. A few moving parts there.
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Nick Sutton, Resolute Energy Corporation - CEO [72]
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Thanks, Bill.
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Operator [73]
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Andrew Smith of Global Hunter Securities.
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Andrew Smith, Global Hunter Securities, LLC - Analyst [74]
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Good afternoon. You mentioned in your press release that you participated in a nonoperated well in the Delaware Basin in the second quarter and that you expect to participate in at least one more this year. What are your working interests in those wells and do you expect an ongoing nonoperated program next year?
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Nick Sutton, Resolute Energy Corporation - CEO [75]
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The working interest is approximately 15% in the one that we've done so far. I'm not sure exactly what our working interest would be in the one that is scheduled for later this year simply because the operator may move the location around and that affects the allocation of leaseholds and therefore the percentage interest, but broad brush it's probably about 10%.
Do we expect that to continue next year? I think we will have more clarity on that as we progress through this year and operators in the area give more guidance as to their plans for 2016. We are in an area where we are fortunate to have good operators around us and they hold good acreage and so I would expect that we would see some continuing non-op, but to quantify it at this stage is very, very difficult.
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Andrew Smith, Global Hunter Securities, LLC - Analyst [76]
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Great, thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [77]
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Thank you, Andrew.
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Operator [78]
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A follow-up question from Ron Mills of Johnson Rice.
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Ron Mills, Johnson Rice - Analyst [79]
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One was a follow-up on Bill's question about the PRB: I think in the first quarter that area produced 1,600, 1,700 Boes per day. Did you provide what that number was here in the second quarter?
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Nick Sutton, Resolute Energy Corporation - CEO [80]
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I think that I mentioned that in my comments that I seem to recall that it was about 1,600 barrels a day. Understand that in the Powder, Boes, again, in this environment Boes are not all created equally, and the Powder is certainly more gas than we produce in any of our other areas. And so that's a factor that if you're doing four function calculator type work here, keep in mind that the 1,600 Boes is about 90% gas, I would say.
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Ron Mills, Johnson Rice - Analyst [81]
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Okay, great, and then one for Ted to follow up on Jeff's question, the capitalized interest level coming down quite a bit in the second quarter. Is the level of capitalization expected to remain more like the second quarter level, you think, and is that a function of some of them impairments you all have taken?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [82]
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Well the answer is yes, it will be more like the second quarter than others. It's really a function of what can you and what must you capitalize under GAAP, and if I'm working or Nick or any of us are working on capital projects, then that fraction of our time gets capitalized, given that our capital program is relatively sitting a lot smaller, actually. You can't capitalize your time to projects that aren't capital in nature.
Basically the other -- so think about it this way, if we're not doing exploration or those kinds of things, drilling, those are major capital activities that draw capitalized time. We're not doing that in the second half, and, obviously, 2016 remains to be seen.
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Ron Mills, Johnson Rice - Analyst [83]
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Great, understand it. And just to make sure I understand the $45 million to $50 million CapEx versus $30 million you spent, does that $45 million to $60 million (sic -- see press release "$45 million to $50 million") include your capitalized interest in G&A or is that just your E&P drilling completion budget?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [84]
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It's got the capitalized component of interest, but not the capitalized component of G&A.
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Ron Mills, Johnson Rice - Analyst [85]
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And do you know what that capitalized G&A was the second quarter?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [86]
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That's -- I can get back to you on that, I don't know that off the top of my head.
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Ron Mills, Johnson Rice - Analyst [87]
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Perfect, we'll just get it later. Thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [88]
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Thanks, Ron.
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Operator [89]
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This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Nicholas Sutton for any closing remarks. Please go ahead.
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Nick Sutton, Resolute Energy Corporation - CEO [90]
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My closing remark is simple and to the point. I think we've demonstrated that we've had a great quarter. I commend all the operating teams for the work that they've done, all the various support groups, be they geology, reservoir engineering, et cetera, the finance group, everybody has contributed to this effort and the numbers speak for themselves.
And beyond that I would like to say we that appreciate your interest in Resolute. It's not a very exciting time to be interested in the oil and gas space, but we think that we're doing the right things, the good things, and we've been through these cycles before and cycles turn. And I'd I'm glad we've got such a good group of people who are shareholders and good group of people who are following what we're doing on a regular basis.
As always, feel free to pick up the phone and call. We are here to do whatever we can to help you with your evaluations and your decision-making processes, and so don't ever hesitate to pick up that phone and reach out and give us a shout. So again, thank you very much.
Good afternoon, everyone. My name is Michael Stefanoudakis, I'm the Senior Vice President and General Counsel of Resolute. I'd like to read the forward-looking statement before turning the call over to Nick Sutton, our Chairman and CEO.
This investor conference call includes forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as expect, estimate, project, budget, forecast, anticipate, intend, plan, may, will, could, should, poised, believes, predicts, potential, continue, and similar expressions are intended to identify such forward-looking statements. Forward-looking statements in this conference call include matters that involve known and unknown risks, uncertainties, and other factors that may cause actual results, levels of activity, performance, or achievements to differ materially from results expressed or implied on this call.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this call. A listing of the material risk factors faced by Resolute appears in our Form 10-K and is updated periodically in the Form 10-Qs and other public filings.
At this time I'd like to turn the call over to Nick Sutton, our Chairman and CEO.
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Nick Sutton, Resolute Energy Corporation - CEO [3]
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Thank you, Michael.
Good afternoon and welcome to Resolute's second-quarter 2015 earnings conference call. I will assume that you have had an opportunity to read our press release and our filing on Form 10-Q, both of which went out last night. So I will focus my comments on the primary drivers of our performance during the past quarter. After that, Ted Gazulis will give you an overview of our financial results, and then we will open the call for Q&A.
At the beginning of the year, we established a strategic plan to keep capital spending within cash flow, to enhance operational efficiencies in order to maintain our cash margins, and to pay down debt even while maintaining production. In our last earnings call, we articulated our formula for achieving that plan to maintain production volumes, lower our controllable costs, increase liquidity, and reduce capital spending.
Our results for the second quarter and the first half of 2015 demonstrate that this formula is working, as we are on track to meet or exceed our public guidance on every metric except for a modest variance on production taxes, something over which we have no control. Let's walk through the highlights, starting with production.
Average daily production in the second quarter increased to a record rate of 13,528 Boe per day; that's up 10% from the same quarter last year. That is a notable accomplishment considering that we've ceased our operated drilling activity. And by the way, the production increase is inclusive of losing approximately 610 net Boe per day from the sale of our assets in the Midland Basin, production that was in our original guidance that we provided to you earlier this year. These higher production volumes helped offset lower commodity prices.
The primary driver of the positive production variants was our Permian Basin assets, which produced 5,566 Boe per day. That's up 3% from the previous sequential quarter and it's 28% higher than the same quarter last year. The increase was a result of having a full quarter production from three horizontal wells completed in the first quarter of 2015, and our Mustang project area in the Delaware Basin, complemented by reduced downtime at our Gardendale area in the Midland Basin and other properties in New Mexico. These factors all helped deliver above-planned production in the second quarter.
Production in Wyoming averaged 1,655 Boe per day, 3% lower than the same quarter last year and 4% lower than the first quarter of 2015. The decrease was a result of natural production declines, several well workovers, and a temporary shut-in by the gas processor to accommodate planned maintenance.
Aneth Field continues to prove the value of having a mature, low-decline asset in our portfolio, as it provides a steady source of production and cash flow. Aneth Field delivered production at an average rate of 6,370 Boe per day in the second quarter, essentially flat as compared to the same quarter last year and the first quarter of 2015. In the first half of 2015, Aneth Field produced 6,350 Boe per day, an increase of 2% over the same period last year.
The production improvement primarily is a result of increasing response to our ongoing tertiary recovery project in Aneth Field. I'm very pleased with our production performance through the first half of the year and I am impressed by the ability of our team to post production increase that more than offset the production that we lost as a result of the sale of non-core assets.
Now let's turn to cost control. We have hammered down controllable cost by rigorously focusing on efficiencies and proactively working with our service providers. We reduced lease operating expense, that's excluding non-cash share based compensation, in the second quarter by 40% to $15.64 per Boe as compared to the same quarter last year.
We also have cut overhead. Cash-based general and administrative expense in the second quarter amounted to $3.87 per Boe, 31% lower than the prior-year period. Importantly, we believe that these cost savings are sustainable. For example, our field staff has brought more tasks in-house, eliminating less competitive vendors.
But it also bears mentioning that the longer our operations team has worked with our assets, especially those we acquired in the Permian Basin, the more efficiently they produce, performing good well surveillance, solid engineering, and regular maintenance has kept wells on production, thereby avoiding costly downtime. Our team has proven itself as a strong operator and all of these factors combine to create long-term sustainable reductions in cost. Higher production volumes combined with significantly lower costs at both the field and the corporate levels have worked together to preserve our margins.
Adjusted EBITDA, a non-GAAP measure, was $35.5 million in the second quarter, essentially flat with the same quarter last year despite commodity prices that were approximately half of what they were last year. Adjusted EBITDA during the first half of this year was $70.3 million or $28.76 per Boe, only 8% lower than the same period last year, again, despite dramatically reduced commodity pricing. Clearly our team's engine is firing on all cylinders.
The first-quarter sale of the Howard and Martin County, Texas assets improved our balance sheet and strengthened our liquidity position without negatively affecting overall cash flow. Net proceeds from the sale of those properties were used to reduce bank debt. Total debt at June 30 was $31 million lower than at March 31 of this year. The borrowing base on our revolving credit facility currently is $260 million, and with $160 million of borrowings, we have approximately $100 million of availability, which is more than adequate to fund our 2015 plan.
Turning to capital spending, we invested $7.6 million in the second quarter, bringing total capital spending in the first half of this year to $30.3 million, which excludes the previously mentioned asset sales. Most of the capital spending incurred through the first half of 2015 occurred in the first quarter as we completed three Permian Basin wells. The majority of spending for the rest of 2015 will be for CO2 purchases at Aneth Field to support the production rate at this foundation asset, and we expect our 2015 CapEx spending to be in line with our 2015 public guidance.
As I mentioned in our last call with you, this is not our first cycle. We have experienced prior cycles and we have quickly put our experience to work to preserve value by taking decisive actions. I continue to be impressed with the performance delivered by our operating teams since it's down cycle began, and thanks to them we have met or exceeded our key metrics for the first half of this year.
Finally, I'll make brief mention of the ongoing process of selling our Hilight Field assets. As we mentioned in yesterday's press release, we have received bids in we are working diligently through the process. Additionally, we have had fruitful discussions with potential joint venture partners to fund drilling on our Permian Basin assets and we look forward to providing more details to you as soon as is appropriate.
Now I'm going to turn it over to Ted Gazulis.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [4]
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Thank you, Nick.
I'd like to start with a look at where we stand relative to the guidance we issued earlier this year. With regard to production, Nick mentioned earlier that we produced at an average rate of more than 13,500 Boe per day through the first half of the year. That's above the top end of full-year guidance which is 12,000 to 13,000 Boe per day.
It's important note that even though we sold our properties in Howard and Martin Counties, Texas, we have not adjusted our guidance downward. Equally, though, because we're not drilling any wells in the second half of 2015, we anticipate that production has peaked for the year and expect that natural production declines will cause volumes to be modestly lower over the next two quarters. But again, we feel confident of achieving full-year production guidance.
We've had great success in reducing costs in light of the depressed commodity price environment. Total lease operating expense in the first half of 2015 was $39.8 million, which was 31% lower than the first half of last year. And sequentially our LOE was 5% lower in the second quarter than it was in the first.
Through the first half of 2015 we reduced LOE per Boe excluding share-based compensation by 37%, $16.11 per Boe, down from $25.56 per Boe in the first half of 2014. At the current run rate, full-year LOE would come in well below our guidance range of $88 million to $98 million.
General and administrative expense in the second quarter was $7.5 million, which included $2.7 million of non-cash expense and was 28% below the same period last year. For the first half of 2015, total G&A expense was $14.8 million, inclusive of non-cash compensation expense of $5.6 million, and was 22% below the same period last year. At the current run rate, full-year cash G&A expense would come in at or below our guidance range of $25 million to $29 million.
In addition to exercising strong financial discipline, our hedge book helped to mitigate the effect of commodity price declines. Excluding commodity hedges, revenue was $48.4 million in the second quarter of 2015, down 45% from the same quarter last year to $39.31 per Boe from $78.96 per Boe in the prior-year period. However, after incorporating the effect of favorable commodity price hedges, revenue was down only 18% from the prior-year period to $53.93 per Boe.
For the first six months of 2015, revenue excluding commodity hedges was $89.5 million, or $36.60 per Boe, down 50% from the same period last year. When incorporating the impact of derivatives, though, hedge adjusted revenue was down only 21%.
We believe that hedging is an important part of managing a commodity-based business. For the remainder of 2015, we have 6,600 barrels per day hedged at an average floor price of more than $85 per barrel, and in 2016 we have hedges covering 6,500 barrels per day at an average floor price of more than $80 a barrel. We've also started layering in new hedges to carry us into 2017.
Despite a 50% decline in realized revenue per Boe before commodity hedges, in the second quarter we generated $35.5 million of adjusted EBITDA, a non-GAAP measure, which was flat with the same quarter last year. In the first half of 2015 we generated adjusted EBITDA of $70.3 million, or $28.76 per Boe, which was only 8% lower than the same period last year and a significantly smaller decline than the 54% drop in revenue per Boe before commodity hedges. We think it's a strong statement that we've maintained our adjusted EBITDA in the face of sharply downward commodity prices.
Looking at capital, we invested $7.6 million in the second quarter, bringing a total first half CapEx to $30.3 million. As you're probably aware, our 2015 capital program was front-end loaded and we remain on track to spend within our guidance in the range of $45 million to $50 million. At June 30, 2015, we had a total of $160 million drawn on our revolving credit facility, $199.1 million of second lien term loan outstanding, and $400 million of outstanding senior notes. After adjustment for the Howard and Martin County asset sale, our revolving credit facility has a borrowing base of $260 million, providing us with current availability of $100 million.
As we look to our fall borrowing base redetermination, we recognize that prevailing commodity prices are significantly lower than they were last year. But we also note that drilling, completion, LOE, and G&A costs are all down across the board. Clearly the PV-10 of our reserves will be negatively affected by lower commodity price assumptions, however, we anticipate that this impact will be mitigated somewhat by the recognition of our meaningful lower cost structure.
Given that market forces are dynamic and there are many variables at work, I'm not in a position to speculate the level at which our borrowing base will be redetermined. Under any circumstances, though, we'll work with our lenders to ensure that the Company has sufficient liquidity to run the business.
We are in the fortunate position of not having to face any impending debt maturities, as our revolving credit line and senior notes mature in 2018 and 2020 respectively, and our senior loan -- second lien term loan matures no later than six months after the maturity of the revolving credit line. We are in compliance with our debt covenants, and forecast sufficient liquidity and cash flow from operations to fund our 2015 capital budget and to reduce debt.
In sum, then, strong field operations, rigorous cost control, and favorable commodity hedges have helped Resolute to mitigate the effects of the recent commodity price declines and have positioned the Company to work through this product price cycle.
We thank you for your interest in Resolute. With that I'll turn it back to Nick.
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Nick Sutton, Resolute Energy Corporation - CEO [5]
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Thank you, Ted.
I said it in our first-quarter earnings call and I will say that again: I commend our team for the great job they have done to preserve value since this down cycle started last year. The attention to detail, the drive to achieve, the focus exhibited by our people in our field offices and at the corporate level, have enabled us to be in a strong position going forward. In my view, the cost reductions are sustainable, and we should have continued benefits for cash flow, returns on capital projects, and preservation of reserves.
The value of our favorable commodity hedges that Ted outlined is apparent with approximately 74% of 2015 forecast daily oil volumes hedged at a weighted average floor price in excess of $86 per barrel at 6,500 barrels per day in 2016, hedged at a weighted average price at over $80 per barrel. Our derivatives program has helped cushion our margins from the worst of commodity price declines and will continue to shore up our margins going forward. Fortunately, the majority of our acreage footprint is held by production, meaning that we do not need to drill wells in this current commodity pricing environment just to hold leases.
100% of our Aneth Field acreage is held by production. 100% of the acreage in our Gardendale project area in the Midland Basin is held by production. 100% of our Powder River Basin acreage is held by production. 100% of our acreage in New Mexico is held by production. While some of our Reeves County acreage is not yet held by production, that which is not is a amenable to lease modifications, a process with which we have had considerable success.
Our legacy asset, Aneth Field, is a strong and steady source of production and cash generation. In fact the majority of our Company-wide production is sourced from assets having shallow declines covered by favorable hedges, and as a result, we have been able to generate positive free cash flow in the quarter and we expect that to continue through the rest of the year. Our formula of production maintenance, cost control, capital discipline, and liquidity enhancement is working and our team will continue to execute on plan to help us endure this down cycle and emerge from it a more competitive Company.
I thank you all for listening and I'll now turn the call back to the operator for Q&A. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Neal Dingmann, SunTrust.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [2]
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Good afternoon. Nick, just a quick question, you mentioned just lastly here on this re-used lease modification, is that the cost, which is pretty minimal there, or is that something that you would consider with those, maybe trading that and increasing what you have in the Midland Basin, maybe if you could just talk about that a little bit.
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Nick Sutton, Resolute Energy Corporation - CEO [3]
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I'm not sure I quite got the full import of your question.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [4]
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Two things, Nick. One, the costwise to basically modify, you mentioned most everything else is 100% HPP, to modify or to hold those leases, are we talking just very minimal? A couple million dollars or less? And number one, if it is very small, obviously, that's not a big deal. If it were more than that my thought was, does it make sense to try to trade some of that acreage for something that would block in some of your other existing acreage?
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Nick Sutton, Resolute Energy Corporation - CEO [5]
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The modifications are, in the big picture, not that expensive. We've had considerable success as I mentioned, and we would anticipate having success on a going-forward basis. There is no doubt that the Reeves County area is a focus area for a lot of companies and so it's not as if we are without competition, but our land staff has done an admirable job thus far and we would expect that to continue. So it is relatively insignificant in the big picture of what it costs to drill and complete horizontal wells, for example.
As to whether it's appropriate at some point to consider trading acreage, that's something we are always opened for and we have regular discussions with a lot of different companies as we look to solidify positions in one place versus another. So that's just an ongoing effort by the Company that we evaluate on a day-to-day case-by-case basis.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [6]
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That makes sense. And then in the press release you mentioned where you would stand down on all drilling. It's interesting, stand down, but yet you still have quite a good financial position and you do mention that the costs continue to come down. Is it more on the -- what are you looking for in order to think about ramping activity again? Is it cost at a certain level that would thus generate a certain critical rate of return, or when you and Ted sit around and look at is it a required rate of return that you all are looking for? What would cause you to bring a rig back?
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Nick Sutton, Resolute Energy Corporation - CEO [7]
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Good question. I think that right now, we are looking at the world from the perspective of we want to make sure that we continue to maintain significant liquidity and liquid availability, and so that causes us to be somewhat more cautious rather than less cautious in this environment. I think that as Ted alluded to, as we look to go into the fall borrowing base redetermination we have wrung so much cost out of our system that we think that we should stand up well in that borrowing base redetermination, although we're not in the crystal ball of the banks and I don't mean to suggest by any means that we are. But I think that's an unknown out there.
The other thing, Neal, that we have to be cognizant of, and that is while our areas in the Permian Basin, both in the Midland Basin side and in the Delaware Basin side, are still very economic at recent product prices. We can't ignore the erosion that we're currently seeing out there, particularly since these wells, as you know, a lot of the production comes early on and so we have to take that into consideration.
And all of those things go into the ongoing mix of discussion that we have internally as we evaluate future options and activity. But right now our sort of base plan is let's not stand up rigs, let's evaluate this, let's maintain our liquidity, let's continue to drive cost out of the structure, protect our cash margins, and pay down debt in the process.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [8]
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Let me add one more thing if my can, Neal, and that is that as we think about the prospect of standing up one or more rig, I think from our perspective, it will be more attractive, more efficient, more effective, all those kinds of descriptive words, to be able to stand up a rig and drill for a while. We all know that drilling a program will work to your advantage in terms of the economics, so even if we wanted to stand up a rig for a well or a couple of wells, I'm not sure that we wouldn't be better served by getting to the place that we could stand up a rig and drill for a year.
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Neal Dingmann, SunTrust Robinson Humphrey - Analyst [9]
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That make sense. Okay, thanks. Great details.
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Operator [10]
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Jason Wangler of Wunderlich.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [11]
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Hey, good afternoon. I was just curious with your comments in the Permian, if anything there would be related to the infrastructure you have in the Delaware. Is that something you would look at either JVing or monetizing given how probably lucrative it would be?
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Nick Sutton, Resolute Energy Corporation - CEO [12]
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That is something that we have been evaluating. We've had deep discussions with certain parties out there. As you know, the people in that midstream space are very active and have good checkbooks, and so they see -- the ones that we have spoken with, at least, see the infrastructure we have built thus far as a good starting spot to expand further infrastructure out into Reeves County. So yes, that's on our radar screen, it's more than just on our radar screen, it's an active project area here in the Company.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [13]
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That's helpful and then just on the Powder River, obviously you're going through the bids, is there a timeframe that you have or that is set in the agreements that we would be hearing something or is that just an ongoing situation given what all's going on in the commodity mix? Just wondering if there's any milestone we should be looking for.
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Nick Sutton, Resolute Energy Corporation - CEO [14]
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I would say that internally we would hope to get something wrapped up within the next 45 days plus or minus. But in this world, life is not a unilateral event so we will see.
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Jason Wangler, Wunderlich Securities, Inc. - Analyst [15]
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No, that's fair, I appreciate it. I'll turn it back. Thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [16]
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Thanks, Jason.
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Operator [17]
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Ron Mills of Johnson Rice.
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Ron Mills, Johnson Rice - Analyst [18]
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Good afternoon. Real quick on the Permian, you talked about the sequential production growth partially being due to the full quarter impact, but can you quantify or describe some of the steps you took to reduce the downtime and the sustainability of that runtime improvement?
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Nick Sutton, Resolute Energy Corporation - CEO [19]
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Yes sir. It's something I'm really very proud of our team and what they've accomplished. I would start out by making sure everyone is very much aware of the fact that this is not an effort that started commensurate with the erosion in product prices. This is an effort that started the day that we took over operations in roughly early in the second quarter of 2013.
This is particularly with reference to the Gardendale area, and we found a field that needed attention, and our team got after it, and through a period of time, they've reduced failure rates from roughly 11 a month down to more recently it's been two or three a month. And -- but again, that is not a step change and it's not a process that was initiated because of product prices. It was initiated because of our focus on operations, and as I said, well surveillance, solid engineering, solid production operations, and it's been a continuing improvement.
Now I will say that I'm really happy that all of that has come together in light of what we're dealing with in the external environment. It's been very fortuitous and when we talk about our ability to hold the LOE down on a sustainable basis, again, it's not just getting the scalpel out with our service and supply providers, it's just hard work on the operating level and the engineering level that has had significant results. So I would point to that, Ron.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [20]
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Let me make one other comment that when Nick talks about 11 wells versus three wells, we are talking about more than 100 wells here. And to be looking at three-well failure in that big a universe is an enormous step in the right direction.
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Ron Mills, Johnson Rice - Analyst [21]
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Great. And then maybe this flows through, that you or Ted talking about the production peaking and the way that production looks were relative to the guidance you put out in February. And I know still really early but a lot of people have tried to at least paint a picture around 2016 in terms of spending levels versus this year and maintenance CapEx spending. Given the lack of -- or not lack, but given the far less activity in the second half of the year, how that feeds into next year, how are you looking at that from a big picture standpoint?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [22]
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You know I think that as we look forward, and I think Nick said it earlier, what we really are trying to do is to be efficient in how we're spending our dollars, and that's both LOE -- that's LOE, CapEx, G&A. We are not forecasting large dollar expenditures on CapEx, certainly we'll continue to spend money in Aneth on CO2. We have an ongoing program in Aneth of working the field, we'll continue to do all those kinds of things.
We're not at a stage yet where we want to forecast -- provide guidance for 2016, but I think that we would rather pay down debt with cash than, at this point, do incremental CapEx spending that doesn't really move the needle. Again, I'd rather spend money by standing up a rig and drilling for a year and waiting until we can do that, rather than doing a start/stop program in anywhere in the Permian or for some of the other programs that we've talked about over time in Aneth.
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Ron Mills, Johnson Rice - Analyst [23]
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Great, and then one last one, just as you look at the second half, Ted, with that 12,000 to 13,000 barrel a day guidance for the year in your first half, coming in and averaging 13,500, if you looked at your corporate decline rate right now given no upcoming wells drilled or completed, what do you forecast that corporate decline rate is in this environment?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [24]
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I think again, I would just do the math and say if we're at 13,500 through the first half and we think that we'll be in the range of 12,000 to 13,000 you've got two endpoints, and you can come up with the decline rate. And I don't have my calculator with me or I'd do it for you.
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Ron Mills, Johnson Rice - Analyst [25]
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My cell works for that. Thanks. I'll jump back in line.
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Nick Sutton, Resolute Energy Corporation - CEO [26]
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Okay, the one thing I would add is that we talk about well downtime and failure and whatnot, most of you on the call are very familiar with what we mean when we talk about that, but it just basically stuff breaks. A pumping unit might have something that needs to be repaired, you might have parted rods or something in the tubing.
It's that kind of thing when we talk about well downtime, and you know, the need to get over a well with a pulling unit and fix things. So when I refer -- commonly it's referred to as a downtime or failure, it's just really fixing things and I want to make sure that everybody understands that.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [27]
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Let me add one other point to that, Nick, and that is that in today's price environment we focus and our team focuses very much on the dollars. In a $100 world you focus more on the barrels. So we're being very judicious as wells go down through the normal wear and tear of an oil field about where you spend the workover rig.
A two barrel a day in a $100 environment, you might go send a workover rig. You might not do that today. That's the kind of detail work that our guys are doing, developing -- we've developed a number of tools internally to really maximize and optimize the way we spend money out there and you can see it in the numbers.
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Operator [28]
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Jeff Grampp, Northland Capital Markets.
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Jeff Grampp, Northland Capital Markets - Analyst [29]
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Good afternoon.
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Nick Sutton, Resolute Energy Corporation - CEO [30]
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Hi, Jeff.
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Jeff Grampp, Northland Capital Markets - Analyst [31]
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I wanted to touch on the Delaware well performance you highlighted in the release and some outperformance from some of those longer laterals. So maybe just wanted to dig a little bit deeper on that if you have any granularity regarding quantifying what type of outperformance you're seeing or what longer-term rates you're seeing from some of those wells.
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Nick Sutton, Resolute Energy Corporation - CEO [32]
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I don't think that I'm prepared to go into much more detail than what we did in our press release, where we noted that we've gotten, in the case of two of them, I think it was 160 to 185 days of production and the outperformance is notable. I would like to get additional production and then that will result in a process where we sit down with the engineers and look to see about increasing our type curve.
But the most important thing is that two of the three are very much outpacing type curve, and the third one is slightly under type curve and on average we are at least on type curve if not higher. So, I think that's about what we would note for right now.
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Jeff Grampp, Northland Capital Markets - Analyst [33]
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Okay, fair enough, and most of my other questions have been asked. But just have maybe a housekeeping one for Ted. It looked like interest expense is maybe a bit higher than -- I was modeling for 2Q, is that more a function of maybe less being capitalized or are there some other moving parts in there with the additional second lien and things like that?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [34]
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Yes, I mean I think it may have to do with capitalization, probably that's an important part of it. And obviously, I know your models are well done, but the question of timing with additional second lien going from the $150 million at year end to $200 million currently, well, $199.1 million currently. There may be some slack there.
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Jeff Grampp, Northland Capital Markets - Analyst [35]
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Okay, great quarter, thanks.
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Nick Sutton, Resolute Energy Corporation - CEO [36]
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Thanks, Jeff.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [37]
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Thank you.
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Operator [38]
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Jeff Robertson, Barclays.
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Jeff Robertson, Barclays Capital - Analyst [39]
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Thank you. Nick, to follow up on some the LOE discussion, can you talk about any specifics around what the approach you're taking on well repair is and what impact that's having on production in the Permian or in Aneth for that matter?
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Nick Sutton, Resolute Energy Corporation - CEO [40]
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Our approach, Jeff, is to -- we look at any well that is a candidate for some work, anything that's going to cost us money. And we have in the field and in the engineering teams, tools that we've developed that look at well profitability and takes in all the complexities associated with a particular well, what is the production stream looking like, what is the LOE looking like, on basically a unit basis, down to how much electricity does it cost us to run that pump?
It's very, very precise and detailed, and then we prioritize the wells based on the profitability index, and then we will use some skilled engineering and operational judgment to supplement the basic spreadsheet calculations. As Ted indicated, what that really results in is that you're trying to optimize the production, and so it's what are you getting for what you're spending from an optimization and efficiency standpoint?
And I think the results speak for themselves as we look at how production has held up. Aneth is a good example. Production is up a few percent and that's the result of just ongoing CO2, of course, but also the guys in the field doing this kind of optimization work.
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Jeff Robertson, Barclays Capital - Analyst [41]
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You commented earlier about none of that's reflected in, obviously, in the spring borrowing base redetermination. Do you have any feel for how the banks -- or Ted, do you have any feel for how the banks will look at those types of efforts as they think about your borrowing base in the fall?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [42]
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Oh yes. We've had -- I'll tell you that in the last redetermination, which was several months ago, we had a few months of the good work that our field guys have been doing and the banks were very much interested in understanding what are we doing, how are we doing it, is it sustainable, and they got pretty granular, I have to tell you.
In the discussions that I've had with our bankers as we -- and I talk with them a lot, they're very interested in having that same discussion, they really are quite interested and well-versed in looking at the experience that we are having, understanding what we're doing and why, and I do think that they are all -- the bankers that I've spoken with have all expressed deep interest in getting behind the numbers and they are pleased with the ability to see the continuation of the good work that our teams are doing. So I'm comfortable that they will look at this and take it into consideration in a meaningful way as they do their valuation.
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Nick Sutton, Resolute Energy Corporation - CEO [43]
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And I would say that it's not as if we're sitting here waiting for the banks. We obviously run these numbers ourselves, and it's an ongoing process, and you all are so good with numbers, I mean I'm going to state the obvious, and that is the significantly reduced LOE has a dramatic impact on that asset value, as does the significant reduction in the capital of cost associated with drilling and completion, for example. Those things roll through all of the valuation metrics be they PDP, PDNP, PUD, existing production, and to be developed production, all are stronger obviously with lower cost, but it is really dramatic when one rolls that through a net asset value model.
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Jeff Robertson, Barclays Capital - Analyst [44]
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Last question, Ted, can you comment about how much of the -- how much, sorry, the Powder River Basin assets represent of the borrowing base? I know when you sold Howard County you sold it for, I think, $40 million against a borrowing base that was considerably less than that, somewhere around $5 million I think, if I remember right.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [45]
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Well the Powder asset, of course, has a higher component of PDP. So as a percentage of total value it will be higher. But I don't know that I'm prepared to say what the banks will tell us. Certainly we have some indications, but I think it's best to wait until that whole transaction occurs.
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Jeff Robertson, Barclays Capital - Analyst [46]
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Thank you.
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Operator [47]
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Noel Parks, Ladenburg Thalmann.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [48]
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Good afternoon.
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Nick Sutton, Resolute Energy Corporation - CEO [49]
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Hi, Noel.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [50]
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Hi. A few things, sorry if you touched on this and I missed it, but as far as hedging goes, looking ahead, wondering if that's been a topic with lenders in the most recent borrowing base or headed toward the upcoming one. And just wondered what your attitude or appetite might be for perhaps investing in floors and trying to leave a little more upside intact, if we assume we have a bounce-back longer-term.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [51]
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Well certainly that's a conversation that's a part of the dialogue with the banks. Obviously we think we've done a pretty good job of putting hedges in place in 2015 and 2016, and we've started in 2017. It's an ongoing dialogue both with our bankers and also internally as to how we want to spend money, and anytime you do a hedging transaction, you're spending money one way or another, whether it's a costless collar, whether it's a swap, whether it's actually buying a put, that basket of tools is available.
I think that as we move forward, my guess is we'll probably always want to try to maintain upside as you look longer, and I think that in shorter time frames I think we're likely to be more -- probably more comfortable with swaps, only because you don't have the long time horizon in front of you. Noel, as you know, we work our hedge book pretty hard and I think that over time, we've demonstrated that we use all the tools that are available to us.
Today's market isn't in very much fun. I wouldn't go -- I don't think we would go very long in today's market. But I think that it's -- but it's an ongoing dialogue internally, and it obviously has an impact on how the banks evaluate the net present value of our assets.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [52]
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Sure. And I just wanted to check, in the Permian, roughly how much of the production is more or less in or close to it's base-to-client at this point, just thinking about the slowdown activity over these last six, nine months, now.
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Nick Sutton, Resolute Energy Corporation - CEO [53]
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That's getting down into some detailed engineering. I'll give you the broad brush so that we not get too far into the weeds and of course, as you know, Noel, we'll be happy to give you more granularity at some point, get you in touch with the engineers. But basically, you're familiar with what the decline curves look like on these horizontal wells. Now, we've drilled -- we've got three in Gardendale that have been on for roughly 18 months off the top of my head, and so they're off the steepest part, they're where it's starting to bend over onto flat.
In the Permian -- in the Delaware Basin, we've got a total of eight wells and five of them date back about a year, and so you can pretty much target where they are on the decline curve. And then three of them are pretty new, and they are the ones that we talked about are exceeding type curve, and we have, again, without getting too far into the weeds, but our approach to producing wells is to choke them back and draw down the pressure very, very carefully, and so these wells have been strong producers, they will continue to be strong producers, but they will start to see decline that is more consistent with early-stage decline as we look at the next 6 to 12 months from those three.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [54]
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Got it. And just (multiple speakers).
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Nick Sutton, Resolute Energy Corporation - CEO [55]
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I would point out that is against a base of about 100 vertical wells, 98 to be precise, in Gardendale that have been in production for some time, around 20 vertical wells in Reeves County that have been in production for some time, and about 500 wells, plus or minus, in Aneth that have been on production for decades, and I sometimes feel like it's centuries.
So that's -- no decline, basically, or very little decline in Aneth, and then the Powder River assets are also relatively low decline. So we are talking about a handful of horizontal wells balanced against a base of production that is very stable, very steady, and relatively flat, which is why we are able to deliver production results like we did this quarter.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [56]
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Right, which is of course what you want when you got a tough commodity price environment and limited visibility, sure. A couple Aneth questions. With what we've seen with service costs, where roughly do -- would the cost for Desert Creek IIC completion be around now, or if you have any thoughts of how what returns might look like for those projects?
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Nick Sutton, Resolute Energy Corporation - CEO [57]
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Right now, we are in McElmo Creek Unit DC IIC test pilot project and the DC3 is sort of on the shelf to evaluate at some point when the external environment improves. So we've got plenty to do in Aneth but right now we're taking a go-slow mode and continuing to inject CO2 in the Aneth Unit project, continuing to inject CO2 in McElmo Creek. We've got people at Elmo Creek DC IIC pilot project that is really showing some interesting results, but it's kind of -- I would put that as we're walking, not running, in that project at this stage.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [58]
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Okay, great, and just one more back to the Permian, has there been any industry progress by other operators in some of the alternate horizontal targets at or near Gardendale, beyond the Spraberry in Wolfcamp B?
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Nick Sutton, Resolute Energy Corporation - CEO [59]
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I think the Wolfcamp C has been tested, I think the A is being tested, but frankly you touch on the one that's got everyone's attention right now, and that's the lower Spraberry and some now into the middle Spraberry that are showing economics that are quite superior to the Wolfcamp economics. I mean very strong results, and those are all around our acreage.
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Noel Parks, Ladenburg Thalmann & Company Inc. - Analyst [60]
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Great. That's all for me. Thanks a lot.
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Nick Sutton, Resolute Energy Corporation - CEO [61]
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Thank you, Noel.
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Operator [62]
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William Tichy, Beddow Capital.
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William Tichy, Beddow Capital - Analyst [63]
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Yes, thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [64]
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Hi, Bill.
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William Tichy, Beddow Capital - Analyst [65]
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I had a quick question -- Hi, how are you? My question's related to hedging and most of that was answered. You mentioned layering on new hedges, and a number of operators, including Resolute have been reasonably aggressive in the last couple of years in laying on hedges in a world of $75 to $100 oil. Today, of course, we're in a $43, $44 oil climate and with a lot of analysts backpedaling, not like crazy, but lowering your expectations for 2016, and recognizing that nobody knows what the price of oil is going to be in December 2016 or going into 2017, is it safe to say that you'll be far less aggressive in the next 6 to 12 months in your hedging program as you have been in, say, two years ago?
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Nick Sutton, Resolute Energy Corporation - CEO [66]
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I think that I wouldn't say less aggressive. I would say, reflecting what Ted mentioned and that is one's approach would be different. And even though we were hedging at in the $80s because we figured that we wanted to protect against the downside and we're reaping the benefits of that right now.
As we look out to 2017 or 2018, as Ted mentioned, we would look again to protect downside, because in the near term we don't know where things are going. But further out, we would be looking to protect more of the upside, while at the same time recognizing that we don't control the external environment. And we would have to look at downside protection, as well. But again, we rarely swap, and we usually come up with some a structured approach that gives us downside protection, but also leaves us upside, as well. That's not a free trade, but it's a trade that makes a lot of sense, particularly in this environment.
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William Tichy, Beddow Capital - Analyst [67]
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Okay. I have another question: as far as monetizing some assets and paying down debt, you've done a good job here in a tough environment deleveraging yourself to some extent. The Hilight Field that you said has received bids on -- 8% of your reserve, something like that, so we're talking maybe 6 million barrels of oil there. What would be the timing, roughly? Are we talking about a 6- to 12-month time horizon when it might be reasonable to expect the monetization of that asset?
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Nick Sutton, Resolute Energy Corporation - CEO [68]
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No, we would like to try to wrap something up within about 45 days. As we mentioned, we've been through a process, it was a robust process, and we've gotten bids in and we're processing those right now and taking into consideration all the variables that one might expect, and we would look to wrap something up by basically a PSA in 45 days, let's say, and then closing at some point after that.
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William Tichy, Beddow Capital - Analyst [69]
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Okay, thank you, appreciate it.
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [70]
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Before you leave, Bill, let me add that one other comment about hedging, and that is as you probably noted in some of the filings that we've made and the contracts that are out there, the other piece of the hedging puzzle is that we do have some requirements. We will add hedges so that we stay in compliance with our agreements, but again, how we do it, what the pieces are, what the tools are, is the ongoing -- that's an ongoing opportunity set that we'll do our best to take advantage of.
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William Tichy, Beddow Capital - Analyst [71]
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Understood. A few moving parts there.
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Nick Sutton, Resolute Energy Corporation - CEO [72]
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Thanks, Bill.
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Operator [73]
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Andrew Smith of Global Hunter Securities.
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Andrew Smith, Global Hunter Securities, LLC - Analyst [74]
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Good afternoon. You mentioned in your press release that you participated in a nonoperated well in the Delaware Basin in the second quarter and that you expect to participate in at least one more this year. What are your working interests in those wells and do you expect an ongoing nonoperated program next year?
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Nick Sutton, Resolute Energy Corporation - CEO [75]
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The working interest is approximately 15% in the one that we've done so far. I'm not sure exactly what our working interest would be in the one that is scheduled for later this year simply because the operator may move the location around and that affects the allocation of leaseholds and therefore the percentage interest, but broad brush it's probably about 10%.
Do we expect that to continue next year? I think we will have more clarity on that as we progress through this year and operators in the area give more guidance as to their plans for 2016. We are in an area where we are fortunate to have good operators around us and they hold good acreage and so I would expect that we would see some continuing non-op, but to quantify it at this stage is very, very difficult.
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Andrew Smith, Global Hunter Securities, LLC - Analyst [76]
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Great, thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [77]
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Thank you, Andrew.
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Operator [78]
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A follow-up question from Ron Mills of Johnson Rice.
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Ron Mills, Johnson Rice - Analyst [79]
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One was a follow-up on Bill's question about the PRB: I think in the first quarter that area produced 1,600, 1,700 Boes per day. Did you provide what that number was here in the second quarter?
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Nick Sutton, Resolute Energy Corporation - CEO [80]
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I think that I mentioned that in my comments that I seem to recall that it was about 1,600 barrels a day. Understand that in the Powder, Boes, again, in this environment Boes are not all created equally, and the Powder is certainly more gas than we produce in any of our other areas. And so that's a factor that if you're doing four function calculator type work here, keep in mind that the 1,600 Boes is about 90% gas, I would say.
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Ron Mills, Johnson Rice - Analyst [81]
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Okay, great, and then one for Ted to follow up on Jeff's question, the capitalized interest level coming down quite a bit in the second quarter. Is the level of capitalization expected to remain more like the second quarter level, you think, and is that a function of some of them impairments you all have taken?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [82]
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Well the answer is yes, it will be more like the second quarter than others. It's really a function of what can you and what must you capitalize under GAAP, and if I'm working or Nick or any of us are working on capital projects, then that fraction of our time gets capitalized, given that our capital program is relatively sitting a lot smaller, actually. You can't capitalize your time to projects that aren't capital in nature.
Basically the other -- so think about it this way, if we're not doing exploration or those kinds of things, drilling, those are major capital activities that draw capitalized time. We're not doing that in the second half, and, obviously, 2016 remains to be seen.
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Ron Mills, Johnson Rice - Analyst [83]
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Great, understand it. And just to make sure I understand the $45 million to $50 million CapEx versus $30 million you spent, does that $45 million to $60 million (sic -- see press release "$45 million to $50 million") include your capitalized interest in G&A or is that just your E&P drilling completion budget?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [84]
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It's got the capitalized component of interest, but not the capitalized component of G&A.
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Ron Mills, Johnson Rice - Analyst [85]
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And do you know what that capitalized G&A was the second quarter?
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Ted Gazulis, Resolute Energy Corporation - CFO, SVP & Treasurer [86]
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That's -- I can get back to you on that, I don't know that off the top of my head.
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Ron Mills, Johnson Rice - Analyst [87]
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Perfect, we'll just get it later. Thank you.
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Nick Sutton, Resolute Energy Corporation - CEO [88]
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Thanks, Ron.
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Operator [89]
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This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Nicholas Sutton for any closing remarks. Please go ahead.
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Nick Sutton, Resolute Energy Corporation - CEO [90]
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My closing remark is simple and to the point. I think we've demonstrated that we've had a great quarter. I commend all the operating teams for the work that they've done, all the various support groups, be they geology, reservoir engineering, et cetera, the finance group, everybody has contributed to this effort and the numbers speak for themselves.
And beyond that I would like to say we that appreciate your interest in Resolute. It's not a very exciting time to be interested in the oil and gas space, but we think that we're doing the right things, the good things, and we've been through these cycles before and cycles turn. And I'd I'm glad we've got such a good group of people who are shareholders and good group of people who are following what we're doing on a regular basis.
As always, feel free to pick up the phone and call. We are here to do whatever we can to help you with your evaluations and your decision-making processes, and so don't ever hesitate to pick up that phone and reach out and give us a shout. So again, thank you very much.
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