Among smaller exploration and production companies, RSP Permian (RSPP, Financial) was a value creator prior to 2017. Even with depressed sentiments for the oil and gas sector in 2016, the stock moved higher by 38%.
Year to date the stock is lower by 16.3%. It currently trades at the same level where it was trading in June. This sideways movement is a good accumulation opportunity.
While I have talked about stock downside in 2017, I must also mention at the onset that on May 18 RSP Permian announced a public offering of 15 million shares.
Therefore, the stock downside has largely been due to dilution, and I expect renewed upside as potentially strong results in the coming quarters offset the impact of equity dilution.
Strong financial health
RSP Permian is targeting strong production growth in the coming years even if oil is in the range of $40 to $50 per barrel. For robust growth, the company’s financial flexibility is the first point of discussion.
As of June 30 RSP Permian had cash and undrawn credit facility of $876 million and this liquidity buffer, along with potential cash flows in the next 12 to 24 months, ensures that the company is fully financed for fiscal 2018 and fiscal 2019.
There are several other important points to mention related to the company’s financial muscles:
- As of June 30 the company’s net debt to adjusted EBITDAX (leverage) was 2.2. Leverage is in control even with robust growth in the past, and this has been possible because the company has largely funded acquisition of assets through equity offerings.
- RSP Permian has no debt maturity through 2021 and an extended debt maturity profile ensures no debt refinancing pressure. Well-hedged potential oil sales in the coming years will ensure smooth debt servicing.
- Among key financial covenants, the company’s net debt to adjusted EBITDAX covenant is at 4.25. With current leverage of 2.2, there is significant headroom for leveraging.
Considering these factors, RSP Permian is well positioned from a financial perspective. Discussion on the company’s assets will outline the reason why robust growth is likely in the next few years.
Quality assets
RSP Permian currently has 95,000 net acres in the core of Midland and Delaware Basins. The company currently has proved reserves of 280Mmboe and resource potential in the range of 2.8 to 3.4Bboe.
With 4,200 net horizontal locations in drilling inventory, RSP Permian is well positioned for targeted double-digit annual production growth in the coming years. It is important to note here that the company has been delivering constantly in terms of production growth and for the second quarter; the company’s production growth was 20% higher than the first quarter.
With acquisition in the Delaware Basin, well-hedged production profile and seven operating rigs (four in Midland and three in Delaware), I see strong production growth in fiscal 2018 taking the stock higher.
It is also important to note the following:
- RSP Permian has a deep drilling inventory and even if oil trades in the range of $50 to $60 per barrel, the company’s strong production growth will continue in the next few years.
- RSP Permian has been active when it comes to inorganic growth in the Permian Basin. With this strategy delivering results on a sustained basis, I expect further acreage acquisition in the core area to boost growth.
With these points in consideration, it is likely that RSP Permian will continue to deliver strong production growth, and that is likely to take the stock higher.
Conclusion
For the remainder of fiscal 2017 and for fiscal 2018, RSP Permian has hedges at a floor price of $45 per barrel, and this protects cash flows for the next 12 to 18 months.
The company’s strong production growth is likely to sustain with fully financed status for the next 24 months coupled with robust drilling activity.
For the long term, RSP Permian already has a deep drilling inventory and with assets in the Permian Basin, the stock promises to be a value creator.
Disclosure: No positions in the stock.
