Even as challenging times continue for the energy industry, there are individual stocks that have outperformed. One such exploration name has delivered 72% returns year to date and looks good to trend higher in the coming quarters.
RSP Permian (RSPP, Financial) is an independent oil and natural gas company focused on the Permian Basin of West Texas. The company has been on a robust growth trajectory aided by organic as well as inorganic growth. While I have discussed the stock in the past, the trigger for this discussion was oil prices firming up coupled with another recent acquisition.
Coming to the recent acquisition, RSP Permian entered into an agreement to acquire Silver Hill for $1.25 billion of cash and 31.0 million shares of RSP common stock. Some of the key positive triggers related to the acquisition are as follows:
- The acquisition acreage (41,000 net) is located in the deepest part of the Delaware Basin and in an oil-weighted area of the Delaware Basin. With 69% oil and 86% liquids, the acquisition is appealing.
- The asset being acquired has current net production of 15,000boepd, and this provides immediate upside to production, revenue and EBITDA. While the company will be diluting equity for the acquisition, I see the dilution being offset by current production coupled with potential production growth.
- The acquisition comes with 1,950 net drilling locations, and this adds to the deep drilling inventory that RSP Permian already has in its portfolio. As oil trends higher, I expect more rig deployments and accelerated investment plans.
Overall, the acquisition seems to be well times and is in the company’s core area of operation. While RSP Permian has announced a common stock offering of 22,000,000 shares, I don’t see equity dilution as a worry. In the medium to long-term, the positive impact of the acquisition will ensure that the upward trajectory for the stock sustains.
Looking beyond the acquisition and its impact, I must mention here that RSP Permian has already been in a high growth trajectory. Just to put things into perspective, the company expected (prior to acquisition) annualized production growth in excess of 30% if oil were at $55 per barrel or higher. Even at $45 to $55 per barrel oil, the company’s growth expectation was in the range of 10% to 30%.
Therefore, with oil likely to stay at or above $50 per barrel, I expect strong production growth (organic) to continue in the coming quarters. For RSP Permian, the financial position supports robust investment with $632 million liquidity as of June 30. Further, the LTM debt to EBITDAX is not aggressive at 2.7. Also, from a financial perspective, no debt maturity in the coming years is a big advantage, and the company’s debt servicing capabilities are robust.
From an operations perspective, I am bullish on RSP Permian considering the company’s strong cash margin (excluding hedges). While the company’s cash margin was 69% in the second quarter of 2015, it has increased by 200 basis points to 71% in the second quarter. As oil trends higher, I expect further improvement in cash margin and the overall cost structure of the company also continues to improve through operational efficiencies. Just as an example, the cash G&A cost has declined from $2.47 per barrel in second quarter 2015 to $2.06 per barrel in the second quarter.
Considering these factors, RSP Permian is certainly appealing from a medium to long-term perspective. Further, I expect the company to continue pursuing inorganic growth opportunities and that provides additional growth and stock upside trigger. While I am not expecting oil to surge from current levels, I do expect gradual upside that will translate into expanded EBITDAX margin in the coming quarters.
Disclosure: No positions in the stock
