RSP Permian (RSPP, Financial) is an independent oil and natural gas company focused on the acquisition, exploration, development and production of oil and natural gas reserves in the Permian Basin. As of November 2014, the company had 76.1mmboe of proved reserves comprising of 59% oil, 21% natural-gas liquids and 20% natural gas. Further, as of November 2014, 31% of the company’s reserves were classified as proved developed reserves. This article discusses the reason to be bullish on RSP Permian for 2015 and for the next few years.
Before I discuss the reasons, I want to mention here that the stock has already surged by 12% YTD and the upside has been backed by strong fundamentals. I believe that the stock upside will continue and the reasons will be clear as the discussion progresses.
Coming to the first reason to be bullish on RSP Permian, the company has an excellent track record of production growth that is likely to be maintained in 2015. From a production of 2,807boepd in 2011, RSP Permian’s production has increased to 14,600boepd as 3Q14 exit production. While the company is still to release its 4Q14 results, the guidance for FY15 has already been provided by the company.
For FY15, the company expects production to average 17,500boepd to 18,500boepd and this will represent a 49% to 57% production growth as compared to FY14. Therefore, even in difficult times for the oil and gas industry, RSP Permian is moving ahead with strong growth estimates. I believe that this growth will translate into stock upside through 2015.
In order to achieve this production growth, RSP Permian has announced a capital expenditure of $400 to $450 million for 2015. Even if the capital expenditure is debt funded, it is not a matter of concern with the company’s net debt at just $400 million as of 3Q14. The company’s financial flexibility is therefore high and this ensures that funding growth is not a issue in 2015. I must add here that RSP Permian has a liquidity position (including undrawn credit facility) of $650 million as of September 2014. Therefore, the capital expenditure program for 2015 is already fully funded and the company can also expend its investments if oil prices recover later in the year.
Besides the cash that is with the company as of 3Q14, RSP Permian has also hedged daily production volumes of nearly 6,732boepd for 2015 at a floor price of $86.72. This hedging position is as of September 2014 and I expect an even better hedged position when the company releases its 4Q14 results on March 12. Therefore, strong hedged positions will ensure that RSP Permian also has sufficient internally generated funds for growth and development of assets.
In the past, RSP Permian has also been active in making small acquisitions in its core region of the Permian Basin. I believe that the company’s financial position allows it to make further acquisitions in 2015 depending on how oil prices move. There are several small companies that are overleveraged and make for attractive acquisition or asset sale targets. RSP Permian is well positioned to grab these opportunities.
In conclusion, the company’s track record of strong production growth, quality assets, good hedged position, high financial flexibility and a strong outlook for 2015 makes RSP Permian a stock to consider for this year and also for the long-term. Even after a 12% upside in the first two months of 2015, I believe that RSP Permian will continue to move higher.
