RSP Permian Inc. (RSPP, Financial) has been in my coverage for a while, and the stock has been a favorite among small companies in the oil and gas exploration sector. The company has grown at a stellar pace over the last few years. Investors holding the stock for the last three to four years have received strong returns. Even when oil was sliding, RSP Permian was among the few stocks in the industry that performed relatively better.
Year to date, the company has declined 16%, which I see as a good accumulation opportunity. Several factors will take RSP Permian higher over the next 12 to 24 months.
Strong first-quarter numbers
The first reason RSP Permian is likely to trend higher in the foreseeable future is the company’s strong numbers for first-quarter 2017. I believe this sets the positive trend for the year and the stock is likely to move higher on strong financial results.
In terms of numbers, RSP Permian reported robust production growth of 84% in the first quarter to 45.2 million barrels of oil equivalent per day from 24.6 million barrels in first-quarter 2016. Production growth as compared to fourth-quarter 2016 was higher by 24%. This has been the trend for RSP Permian in the recent past and the company’s aggressive organic and inorganic growth strategy has translated into stellar growth.
The next important point to note in the company’s results is the average realized price for the first quarter increased to $41.1 per barrel compared to $25.8 in first-quarter 2016 and $36.6 in fourth-quarter 2016. With oil having moved higher, RSP Permian is benefiting from strong production growth translating into higher cash flows. To put things into perspective, the company reported adjusted EBITDAX of $124.5 million in first-quarter 2017 as compared to $35.6 million in first-quarter 2016 and $90.5 million in fourth-quarter 2016.
If we analyze other numbers as well, growth has been strong for RSP Permian. While the stock is down 15% year to date, I expect the trend to reverse on strong results.
Robust growth will continue
A key reason to believe RSP Permian will trend higher is growth is likely in the coming quarters. The company expects approximately 90% production growth in fiscal 2017 and expects at least 30% production growth in fiscal 2018.
Since RSP Permian has been actively engaged in inorganic growth, it would not be surprising if production growth for fiscal 2018 is well above 30%. Therefore, with strong production growth visibility for the next 24 months, the stock will likely move higher.
The second important point is the company has $1.1 billion available under its revolving credit facility, $900 in elected commitments and $54 million in cash as of the first quarter. With total liquidity of $2,054 million coupled with operating cash flow buffer, the company is fully funded for strong growth over the next 24 months. Therefore, there are no financial roadblocks for the organic or inorganic growth trajectory.
Long-term value assets
As I believe oil will be higher in the coming years, I am bullish on the oil and gas sector for the long term.
RSP Permian is one name that deserves a place in long-term portfolios. With 160,000 gross acres in the Midland and Delaware Basin, the company’s growth visibility is strong. The company currently has 3,700 net locations in drilling inventory. Even with a ramp up in the number of rigs, the drilling inventory is solid for several years.
It is important to note that with declining well costs and an attractive internal rate of return, RSP Permian is positioned to deliver healthy cash flows at current oil prices. If oil moves above $60 per barrel in the next 12 to 24 months, however, the cash flow outlook can change meaningfully.
Conclusion
Overall, RSP Permian is a quality exploration stock that has delivered strong production growth along with healthy fundamentals. While equity dilution has been frequent to fund inorganic growth, I do not consider that a concern since acquisitions have aided strong growth.
For long-term investors, RSP Permian is worth considering.
Disclosure: No positions in the stock.
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