Rosetta Resources' Strong Production Levels Are Indicative of a Better Future

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Feb 22, 2015

Rosetta Resources (ROSE, Financial) has achieved the highest production levels in the company’s history in the recently released third quarter. The company achieve a 44% growth in daily production as compared to 2013. The main reason behind the solid growth is the record highs that the company saw in each of its product components such as oil, natural gas and natural gas liquids. On the back of this success, Rosetta is expecting a better fiscal year in future. Further the successful completion of 7 operated Permian horizontal wells will also give colour to its success. Let us see how far Rosetta justifies its upbeat outlook for the upcoming quarters.

What's driving growth

There are certain headwinds that may affect the company’s smooth flow. Due to ongoing lower capital spending intensity, Rosetta is seeing a flat production in the fourth quarter. Still, it should not mind Rosette as it is on track for delivering more than 30% year-over-year production growth in 2014. Rosetta is now counting on various initiatives to improve its profitability. It is largely focusing on completion of seven operated wells in the Reeves County. These wells are expected to ramp up the flat production that the company is seeing now and add wings to its growth.

The company has successfully completed six wells across Wolfcamp which is seeing a daily production of 1,300 barrels of oil per day which is a good sign. Moving on, one of the leading performer of the company is its Monroe well and the Tell Texan well which are expected to give Rosette a near term bilateral length comparison to the intrepid well. The response from these wells are positive and the company thinks that these wells are highly potential and are expected to be one of the important growth drivers for it in the upcoming quarters.

Headwinds to consider

It does have certain headwinds also. The wells around Deacon Jim are geologically challenged and producing about 1,400 BOEs per day for 5 wells which is not impressive. To get over these headwinds, Rosette is making impressive progress in optimizing its completion methods in Wolfcamp A. Another reason for Rosette to worry is the balance sheet which is affected by the out spending cash flow at unsustainable pace. As the oil prices are soft and are expected to remain soft in 2015 as well, Rosette is working on reducing its capital spending so maintain a healthy cash flow production in 2015 as well.

To further improve its margins, Rosette is now focusing on Permian well as well. It now continues to lock the results that it is seeing and for future it will be focusing minutely on improving its economic returns through optimization efforts for drilling to achieve better profitability. In fact, Rosette looks confident of delivering a 20% annual production growth in the new fiscal year. It is seeing no significant change in the natural gas prices soon. Further, it is also making significant investments in the Eagle Ford dry gas asset. All these efforts by the company may help it to see improvements in the near term as well.

Conclusion

The stock looks impressive with a profit margin of 15.57% in this soft oil pricing. Its defensive moves are the main reason behind good profit margins which are also expected to help the company to gain enough market share in future. However, since the oil pricing looks soft in the long term as well, the stock may not be a good pick as of now as for the next five years, its earnings are declining at a CAGR of -32.80% which is less than the industry average of 11.62%. This might be because of the lower production under Rosette’s camp. So as per investment, I would like to suggest the investors to see investment Rosette Resources from side line as the overall soft oil market may affect the companies in the league badly.