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.
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.
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.
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
