RSP Permian Positioned To Outperform As Oil Recovers

| About: RSP Permian (RSPP)

Summary

Significant purchases of RSP Permian stock have been reported by noted value investors, including oilman T. Boone Pickens.

RSP Permian is strongly levered to the price of oil and has the balance sheet strength, liquidity, and organizational capacity to scale up its production rapidly alongside oil prices.

RSPP is among the lowest-cost E&Ps in the Permian and can produce very strong cash flows if oil remains near or over $50.

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RSP Permian (NYSE:RSPP) is a $3.56B market cap oil-and-gas explorer & producer "focused on horizontal drilling of multiple stacked pay zones in the oil-rich Permian Basin." RSP Permian has drilling rights over 47,000 acres in the Permian Basin around the town of Midland.

Over the course of Q1 2016, the following value gurus have initiated or added to their positions in RSP Permian, according to Gurufocus.com. The stock has increased 47%. These astute value investors are obviously on to something.

Guru

Date

(Average)*

Current Price

Change from Average

Comment

Current Shares

T. Boone Pickens

2016-03-31

Add

($23.4)

$ 34.51

47%

Add 17.58%

264,019

Barrow, Hanley, Mewhinney & Strauss

2016-03-31

Buy

($23.4)

$ 34.51

47%

New holding

2,024,713

David Dreman

2016-03-31

Buy

($23.4)

$ 34.51

47%

New holding

8,457

Steven Cohen

2016-03-31

Add

($23.4)

$ 34.51

47%

Add 180.00%

140,000

Jim Simons

2016-03-31

Add

($23.4)

$ 34.51

47%

Add 33.94%

441,200

Paul Tudor Jones

2016-03-31

Add

($23.4)

$ 34.51

47%

Add 86.14%

21,153

Ron Baron

2016-03-31

Add

($23.4)

$ 34.51

47%

Add 16.07%

175,500

Chuck Royce

2016-03-31

Buy

($23.4)

$ 34.51

47%

New holding

15,000

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RSPP has been able to grow its production in spite of the steep decline in oil prices. In Q1 2016 it reported that "production averaged 24,615 Boe/d (76% oil) Up 54% compared to 1Q15 and 2% compared to 4Q15". RSPP is strongly levered to the price of oil, and the stock has already responded strongly to oil prices in the last quarter. Oil prices appear to have put in a bottom in Q1-2016 and now are in the $50 range. The light sweet crude oil Coppock Curve has bottomed, signaling that the worst of the supply shock is now over, and oil prices will gradually recover.

It is remarkable that RSPP has been able to keep revenue per share relatively flat in spite of large equity raise and huge decline in oil prices.

Source: 2015 Annual Report

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RSPP has access to plenty of liquidity to fund its operations. Long-term debt-to-equity ratio and ebitda/interest coverage is reasonable.

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The following charts show RSPP's balance sheet. As you can see, most of the money raised by RSPP has been in the form of equity which has gone towards PP&E. The balance sheet is strong with low leverage.

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RSPP reports that in 2015 its organic reserve replacement ratio was 855%. This would denote, over a decade of drilling inventory.

Click to enlargeSource: Company presentation, June 2016.

Summary

The presence of large insider ownership (more than 25% of the outstanding shares are held by insiders) and buying by noted value investors are strong positives. RSP Permian's Balance sheet is solid which is rare for a small E&P and production volume is growing. RSP Permian is strongly levered to the price of oil, and if you believe (as I do) that the price of oil has bottomed, and will head higher, RSP Permian is a buy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Financial data downloaded from Gurufocus.com