By: Christopher Barry, AIM student at
Marquette University
Disclosure: The AIM Equity
Fund currently holds this position. I wrote this article, 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.
Summary
· RSP Permian, Inc. (NYSE:RSPP) is a diversified oil and gas company;
their industry exposure entails operating in the Permian Basin of west Texas as
an E & P, acquiring, and producing unconventional oil and associated
liquids-rich natural gas.
· RSP
Permian announced in their 2017 10-K that the board of directors has approved
an initial budget of between $815 to $895 million for drilling, completion, and
infrastructure of adding an additional rig and frac crew. This work is assumed
to be completed by the middle of 2018.
· The
company completed the acquisition of Silver Hill Energy Partners in March of
2017 for a price of $1.25 billion in cash and 31 million shares of common
stock. Silver Hill is fellow E&P company that owns adjoining plots of undeveloped
land located in the Permian Basin.
· Net Income
has increased 1029% from the end of the year 2016 to the end of the year 2017
· The YTD
stock price open at $40.68 and has been steadily increasing since
Key points: RSP Permian has been consistently growing
sales since their IPO in 2014. However, their net income has not yielded the
same dependability as their sales. Management believes the success of the
company is dependent on the ability to manage growth and remain competitive. An
omnipresent risk is that of competition, for RSP that competition means further
diversified oil and natural gas companies that would allow for lower prices. Another
risk is the unpredictability of federal and state environmental regulations
that could alter demand and have a material impact on revenue.
RSP’s
management is comprised of individual experience and industry knowledge, which
collectively make the team have a broad industry-wide expertise. This team has
formed a cohesion that has allowed for such successful investing as their
recent acquisition and capital plan to further grow their well presence in the
Permian Basin. They express in the 10-K their plan to continue to make sizeable
capital investments in E&P, development, and acquisition in the oil &
gas industry sector. These capital expenditures will allow RSP to grow sales
and be even more competitive.
Although
the plan to further extend their exposure in the oil & natural gas industry
will yield more growth and higher sales, they also will become more exposed to
the various risks of the oil & natural gas industry. The experienced
management team is aware of these risks and uses commodity derivatives to hedge
this risk. Although this has been an historical tactic that management has
enacted, they re-state that they are not under any obligation to hedge and thus
the amount the hedge is at management’s discretion.
What has the stock done
lately?
RSP
was able to meet or exceed projected earnings in all of the past four quarters.
These steady numbers have analysts encouraging clients to buy, which has helped
keep the price above the S&P 500 average. Earnings were released on
February 27, 2018, which resulted in a $2 dollar price increase.
Past Year Performance: Even after RSP’s strong earnings
performance for the entirety of 2017 their stock price remained volatile. This
is a result of the price volatility of oil, their ability to meet earnings
despite large price swings in oil is an indicator of management’s ability to
successfully handle short term oil price volatility.
My Takeaway
RSP’s
history of strong earnings should encourage current and potential holders that
this is a company with plenty of growth left before it matures. While the oil
& natural gas industry is filled with uncertainty, specifically with the
volatile price of oil, management has demonstrated their ability to limit the
negative effects of the price swings. RSP’s
veteran management has positioned the company for a strong future.
