Stock Strategist: When Digging Deeper, RSP Permian Is a Compelling Upstream Investment Opportunity

[Morningstar Logo] [Company Site] [Company News] [Membership] [Portfolio] [Stocks] [Options] [Funds] [ETFs] [Markets] [Tools] [Personal Finance] [Discuss] Stock Strategist When Digging Deeper, RSP Permian Is a Compelling Upstream Investment Opportunity The firm's track record in the Midland Basin has been impressive and consistent. [tab_bar] by Dave Meats, CFA | 10/17/2016 5:30:00 PM [RSP Permian] [RSPP] has dramatically altered its outlook for 2017 and beyond with the acquisition of Silver Hill Energy Partners. At first, the $2.4 billion price tag looks lofty, and we have nudged our fair value estimate to $49 per share from $53. That's still significantly ahead of the current stock price, though, and we continue to believe that RSP is one of the most compelling upstream investment opportunities. The deal, which closes in stages between the fourth quarter this year and the first quarter in 2017, adds 41,000 net acres in the Delaware Basin, pushing RSP's total Permian holding over 100,000 net acres. It will also provide roughly 15,000 barrels of oil equivalent per day of oil-weighted production and augment the firm's drilling inventory with 3,200 gross incremental locations (many of which are expected to yield recoveries of 1 million boe or better, though until we get more concrete data to verify, this asset is heavily risked in our model). The total consideration includes $1.2 billion cash and 30 million newly issued shares. Further, to minimize the impact on the firm's balance sheet, management opted to pair this transaction with an equity offering that is expected to raise $950 million in proceeds. Consequently, while RSP's financial leverage is a tad higher than the peer average, we expect this to improve very quickly, and net debt/EBITDA should fall below 2 times by the end of 2017. Additionally, the firm announced third-quarter average production of 29.8 mboe/d (73% oil), which was a hair above our estimate. Guidance for the full year was raised to 29 mboe/d at the midpoint from 27.5 mboe/d. Though the first portion of the deal closes during the fourth quarter, the period of ownership isn't long enough to affect the 2016 average much. Instead, management highlighted that it now expects to complete 54-58 horizontal wells in 2016, two more than previously announced. Preliminary guidance for 2017 calls for 54 mboe/d, with a budget of $600 million. To read more, click [here]. Sponsored Links [Buy a Link Now] New: ETF Managed Portfolios Center On [MorningstarAdvisor.com]: Tap into the industry's best source of information on ETF strategies for financial advisors. See key performance data, screen for specific strategy attributes, and learn more about this fast-growing area of the investment marketplace. [Click to get started]. Free Issue | Morningstar's Stock Newsletter >> Morningstar StockInvestor is celebrating more than 10 successful years of high-quality stock investing. Its two real-money portfolios have outperformed the S&P 500 since 2001. [Get new ideas for the core of your stock portfolio]. Search ABOUT OUR EMAIL TO UNSUBSCRIBE this email address to the Stock Strategist newsletter, please click "reply" and then click "send." This will unsubscribe only this email address to this specific newsletter. All subscription changes will take effect within one business day. Replies are not read by individuals, so please do not use this for queries about Morningstar.com. If you have questions about Morningstar.com or your membership, send a note to [joe@morningstar.com]. ABOUT OUR PRIVACY POLICY Please [click here] to learn about Morningstar's privacy policy. (c) Copyright 2016. Morningstar, Inc. 22 West Washington Chicago, Illinois, 60602 All rights reserved.