Redhawk Resources - Fund I, LP
Managing Partner Update - May 6, 2019
May 6, 2019
Dear Redhawk Resources - Fund I, LP Partners,
Since its inception, the goal for Redhawk Resources - Fund I, LP was to fund, develop and sell the partnership assets within a reasonable time frame.
Market conditions have pushed us past that “reasonable” time. We have reached the stage of the game where we need to commit to one direction or another for the fund. I know it has been a long journey and I appreciate your patience.
I am going to recommend now is the time to consider the selling of Redhawk Resources - Fund I, LP and there are four primary considerations. First, because of weak oil prices, the partnership has missed its planned peak potential sales opportunity which was to be about 3-4 years from its starting point. Second, Investor confidence in the oil market finally looks like it is strengthening, at least for the time being. Third, by selling the asset, we avoid being burdened with plugging and abandonment liabilities along with the prospects of greater mechanical failures as the wells get older. Fourth, to recoup the major price-related loss in value of the assets would require additional capital calls to make a vigorous effort to further develop the assets at a rate overcoming the decline curve and operation expenses.
Fund I started its operation with the purchase and development of a waterflood in Okfuskee County, OK and the purchase of undeveloped leaseholds in NW Kansas with the plan to deploy the balance of capital to a shallow vertical drilling program on those leaseholds.
Shortly after Fund I’s opening in mid-2014, one of the largest oil price declines in modern history began when oil was around $105 per barrel. No one saw it coming. It resulted in greater than a 70% drop in oil value over a 24-month period. During this time, Redhawk adopted a “lower-for-longer” approach toward the oil market. We stopped any drilling in any project and turned all producing assets back by at least ½ capacity. It made no sense to spend partnership money to produce and sell oil at $30 per barrel and increase operational expenses accordingly with no price relief in sight
As if in an “imperfect storm,” an oil supply glut followed the 2014 price plunge and held prices from making any significant rebound. While the development hiatus was in effect, the Fund engineered a 2nd Okfuskee County waterflood to be “turned on” upon notice. It wasn’t until oil began to reach and choppily sustain a price in the mid-$50 range did we begin any additional production activities.
The drilling results for Fund I had been less than successful as projected on acreage the Fund had acquired in Kansas. This term leasehold began to expire, and the leasehold was determined virtually worthless due to results and expirations. Because of that, the Fund opted to purchase a portion of working interests in Pecos County, Texas for a waterflood development in the Permian Basin. The Pecos County waterflood development proposed to pay, over time, more than the corresponding number of wells that may have or may not have been successfully drilled on the NW Kansas acreage.
To date, we have exhausted all economically feasible options, which are restricted and limited to the revenue from current production, for increasing production for the two Oklahoma floods in Okfuskee County and the Permian waterflood in Pecos County, TX. All the floods are currently operating and maintain value. However, they continue to battle operation expenses and repairs that limit income and often do not cash flow.
I went to Tulsa two weeks ago and met with our Oklahoma operating partners to discuss multiple exit possibilities. All options were discussed, considering both long and short-term considerations. One option is to put Fund I on the market for sale, putting our best foot forward. I am not proposing a price at this time, so please understand and do not inquire, as it is very difficult to determine value given the cash flow and the current status of the assets ultimately needing further development.
We will need to test the market and search out a potential buyer that is willing and able to commit the amount of additional capital beyond just the initial purchase price. If we pursue this option, we will keep you informed of buyer proposed prices, etc. However, please be aware, we expect any potential buyer’s offer to be made in full consideration that additional capital would be needed to further develop the assets beyond what can be achieved with the current revenue stream from the assets. This reality would most likely be reflected in the price for which we need to expect.
The second option is to go on for the “long-haul,” and continue to operate the assets while dedicating to substantial further development. This would involve increasing the density of wells in our Permian basin field by drilling infill wells to provide new primary production. This would concurrently provide new wellbores with more integrity than our aged wellbore casing and machinery and for the secondary production efforts of the flood unit as a whole.
We would need to drill a new injection well in the East side of the flood area in our second waterflood asset in Oklahoma where we believe most of our oil has collected. Additionally, we need to consider that the older operated wells in both flood assets will continue to deteriorate and most likely increase operational expenses. Further, and ultimately, the Partnership would be liable for plugging and abandoning the wells as each is determined uneconomical to justify operation. This would require capital calls to all partners to fund this further development. The intent and expectation would be that we would increase the marketable value of the current assets above the amount being contributed while also increasing the current revenue stream of the assets.
I wanted to share these considerations within our group. Although the Managing Partner is responsible for determining the final decision, it is important to inform all the Partners. I would appreciate your feedback as expressed by your vote on the specific issues and options.
Regards,
Jack Nichols
Managing Partner
Redhawk Investment Group
Jack Nichols
Managing Partner
Redhawk Investment Group
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Redhawk Investment Group
6060 N. Central Expressway
Suite 725
Dallas, TX 75206
Our mailing address is:
Redhawk Investment Group
6060 N. Central Expressway
Suite 725
Dallas, TX 75206