Wednesday, May 10, 2017

A current AIM Fund holding: RSP Permian (RSPP) by William Reckamp. "A Pure-Play Permian Basin Opportunity"

RSP Permian, Inc.  (RSPP, $38.05): Permian’s Production Drives Profits
By: William Reckamp, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

·         RSP Permian, Inc. (NYSE: RSPP) is a pure-play Permian basin company that focuses on the exploration and production of oil (91% of revenue), natural gas (4%), and natural gas liquids (5%).

·         Commodity price risk increases as WTI drops to April lows due to uncertainty in OPEC’s extended production cuts and the reopening of Libya’s oilfields.

·         In 1Q17 RSPP completed a $2.4 bln transaction resulting in an addition of 41,000 net acres within the Delaware sub-basin.

·         Management has announced an 82%-95% increase in average net daily production for 2017.

·          RSPP Boosted rig count projections from a current 5 rig program to 8 by the end of next year.

Key points: Large influxes in commodity prices create headwinds for all exploration and production companies. It appears as though the oil industry has withstood the declining prices in the last two years by focusing on the most efficient wellheads that extract the highest oil content in their designated acreage. 

Additionally exploration and production companies, specifically RSPP, were able to hedge against these declining prices through cap ex. reduction. Based on CME Group future prices, a barrel of oil is projected at $51.50 in 2021 providing a slight positive outlook.

RSPP acquired Silver Hill Energy Partners LLC along with Silver Hill E&P II LLC for $2.4 bln in order to increase their Permian basin footprint. The acquisition adds another 41,000 net acres to its portfolio resulting in a total net acreage of 97,000. Their net drilling locations should increase by 1,950 with an average lateral length of ~6,300’. 15 MBoe/d are planned to be added to its total daily production of 29 MBoe/d through the Silver Hill merger. 

One of the most promising outlooks for RSPP comes from management’s guidance regarding their daily production increase. With the new acquisition in the Delaware sub-basin average production is estimated to increase between 82%-95% by the end of 2017. Production is projected to increase another 30% in both 2018 and 2019 largely based on the assumption of future inorganic growth within the Delaware sub-basin.

Another driving factor in management’s production outlook results from the additional rig implementations. Currently, RSPP operates on a 5 drilling rig program but has made the intention of increasing this number to 8 by the end of 2017. The number of production wells should increase substantially through with these new rigs thus providing further justification for management’s daily production projections.

What has the stock done lately?

In the month of April RSPP’s share price has been highly correlated with the influxes of WTI’s oil price. On April 10th oil hit a month high of $53.80 while hitting a low on the last week at $48.33. RSPP also jumped to a high on April 10th with a low occurring on April 19th at $37. 

Uncertainty in Syria, especially after the United States launched an airstrike on a Syrian government airfield, steadied oil prices above $50 for the first part of the month. However there is increasing doubt that OPEC will extend its production cuts in addition to the resurgence of production in Libya. RSPP dropped 7% in the month of April from $41.07 to $38.05.

Past Year Performance: Over the course of a year RSPP’s share price has increased nearly 24% from $30.61-38.05. It seems on this longer time horizon oil has not played a large role in RSPP’s price as it has increased only .6% from April 2016. Two main drivers accounted for this stock increase: a 137% jump in total acreage and consistent daily production increases.

 Source: FactSet

My Takeaway

This is one of the stronger pure-play oil companies that continuously focus on factors that can drive production growth. Management has forecasted a production increase of ~80-95% by the end of the year with growth following in 2018 and 2019. The largest risk for oil companies is, of course, oil price uncertainty. With the slide in oil prices from 2014-2016, 

RSPP’s revenue grew 1% in 2015 and 25% in 2016 due to a competitor revenue decrease of 27% and 10% in those respective years. It has withstood commodity headwinds and has made several attempts to bump up future production levels.

 Source: FactSet

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