Among the relatively small names in the oil and gas industry, RSP Permian (RSPP, Financial) is a stock worth considering for the near-term as well as the long-term. This article discusses the reasons to be bullish on this $2.2 billion market capitalization company.
For oil and gas stocks, my first analysis in the recent past has been leverage. In times of low oil prices, high leverage can be negative for the company’s growth and also for stock upside. I would therefore analyze the company’s balance sheet before moving to other positive.
As of March 2015, RSP Permian had a balance sheet debt of $500 million. Further, the company had a cash position of $122 million and this implies a net debt position of $378 million. Considering the company’s first quarter 2015 EBITDAX of $59 million, the annualized EBITDAX comes to $260 million and the net debt to EBITDAX comes to 1.6. Therefore, RSP Permian does not have high leverage and the company’s only debt of $500 million matures only in 2022.
In addition to low leverage, the liquidity position of $122 million in cash and $500 million in undrawn credit facility implies that the company is more than funded for FY15 capital expenditure, which is likely to be $340 million for the remainder of 2015. Therefore, even in difficult times for the industry, RSP Permian has a strong investment outlook and has the funds to make the investments.
As a result of strong investments, RSP Permian’s production for 1Q15 was 15,900 boepd, representing an increase of 86% as compared to 1Q14. Strong production growth is the next important reason to consider exposure to RSP Permian.
For the full year 2015, the company’s production is likely to average 18,000 boepd as compared to 11,868 boepd in FY14. Therefore, the decline in oil prices is likely to be offset by strong production through 2015.
In addition, RSP Permian also has strong hedged positions, and this will ensure that the EBITDAX remains robust through 2015. For the remainder of 2015, the company has 45% of the production that is hedged at a blended average floor price of $86.72. I must also add that the company’s cash cost profile is low and is another advantage in times of relatively low oil prices. For the first quarter of 2015, the company had a cash cost of $14.65 per barrel.
Besides the strong balance sheet and the robust production growth that serve as near-term upside triggers, I want to add here that strong proved reserves growth is a long-term upside trigger for the stock. The company’s proved reserves have doubled to 106.4 mmboe in FY14 as compared to 53.9 mmboe in FY13. Further, proved developed reserves as of FY14 were 41.9mmboe and this ensures that the company’s production visibility is strong in the coming years.
RSP Permian has an excellent asset in the core Midland Basin where the company has already identified more than 2,000 horizontal and 1,200 vertical drilling locations. A long-term drilling inventory, oil-rich basin, high proved reserves and strong fundamentals make RSP Permian a stock worth considering at current levels with a medium- to long-term investment horizon.
