RSP Permian (RSPP) Q3 Results

[dan_s]

Third quarter production beat my forecast. The big acquisition announced 10/13 sets this company up for STRONG GROWTH in 2017. - Dan

Third Quarter 2016 Highlights
•Production increased by 24% to 29.8 MBoe/d as compared to 3Q15 and increased by 13% as compared to 2Q16
•Net income of $1.0 million, or $0.01 per diluted share. Adjusted Net Loss, which does not include impairment, non-cash loss on derivatives and non-recurring income tax adjustments among other items, was ($0.8) million, or ($0.01) per diluted share
•Adjusted EBITDAX increased by 12% to $65.7 million as compared to 2Q16
•Cash operating expenses were a record low $9.36 per Boe, 6% lower than 2Q16
•Completed 17 operated horizontal wells (11 Lower Spraberry, three Wolfcamp A and three Wolfcamp B) and one operated vertical well •Completed strongest Wolfcamp A well to date (Kemmer 4217 WA) with an IP30/1,000' of 254 Boe/d. Represents RSP's westernmost Wolfcamp A well drilled and implies potential for strong Wolfcamp A results on western acreage position
•RSP's previously announced Lower Spraberry 500' spacing pilot at Cross Bar Ranch is exceeding expectations. Results continue to support the effectiveness of high density completion designs in conjunction with downspacing

•Completed strongest Wolfcamp A well to date (Kemmer 4217 WA) with an IP30/1,000' of 254 Boe/d. Represents RSP's westernmost Wolfcamp A well drilled and implies potential for strong Wolfcamp A results on western acreage position
•RSP's previously announced Lower Spraberry 500' spacing pilot at Cross Bar Ranch is exceeding expectations. Results continue to support the effectiveness of high density completion designs in conjunction with downspacing
•Continued to block up core leasehold position, closing an additional $19 million of bolt-on acquisitions during the third quarter, bringing total year-to-date acquisitions to $62 million through September
•Maintained strong liquidity position, with $22 million of cash and $35 million of borrowings under our $600 million revolving credit facility at quarter-end

Recent Announcements
•On October 13, 2016, RSP agreed to acquire Silver Hill Energy Partners, LLC ("SHEP I") and Silver Hill E&P II, LLC ("SHEP II", and together with SHEP I, "Silver Hill") for $1.25 billion of cash and 31.0 million shares of RSP common stock in aggregate, implying a total purchase price of approximately $2.4 billion (based on the 20-day volume weighted average price of RSP shares as of October 12, 2016). SHEP I is expected to close in the fourth quarter of 2016, for $604 million in cash and 15.0 million RSP shares and SHEP II is expected to close in the first quarter of 2017, for $646 million in cash and 16.0 million RSP shares. Both transactions are subject to customary closing conditions and purchase price adjustments •Silver Hill owns ~68,000 gross, 41,000 net acres in northeast Loving and northwest Winkler Counties, Texas, in the thickest, deepest part of Delaware Basin, which is significantly over-pressured
•Contiguous and blocked up acreage position with significant operational control, conducive to efficient long lateral development
•~15 MBoe/d of current net production (69% oil, 86% liquids) from 58 producing wells (49 horizontals)
•Over 4,500 feet stacked pay with seven currently producing, horizontal zones
•Decades of highly economic horizontal drilling inventory with ~3,200 gross / ~1,950 net total undeveloped locations

•Silver Hill owns ~68,000 gross, 41,000 net acres in northeast Loving and northwest Winkler Counties, Texas, in the thickest, deepest part of Delaware Basin, which is significantly over-pressured
•Contiguous and blocked up acreage position with significant operational control, conducive to efficient long lateral development
•~15 MBoe/d of current net production (69% oil, 86% liquids) from 58 producing wells (49 horizontals)
•Over 4,500 feet stacked pay with seven currently producing, horizontal zones
•Decades of highly economic horizontal drilling inventory with ~3,200 gross / ~1,950 net total undeveloped locations
•On October 19, 2016, the Company completed an underwritten public offering of 25.3 million shares of common stock of RSP, including the exercise of the underwriter's option to purchase additional shares, raising approximately $1.0 billion in net proceeds. RSP plans to use the net proceeds raised in the offering to fund a portion of the cash consideration of the Silver Hill acquisitions
•Increased expected 2016 average daily production by 5% at the mid-point to 28.5 - 29.5 MBoe/d, primarily due to increased well productivity and narrowed development capital expenditure budget range to $295 - $315 million
•Estimated net daily production in 2017 to average in the range of 52.0 - 56.0 MBoe/d, 86% above 2016 mid-point guidance. Preliminary 2017 drilling and completion budget expected to be in the range of $520 - $560 million, with a total capital expenditure budget, including infrastructure and workovers, expected to be $570 - $630 million
•Enhanced hedge positions to 53% of expected 4Q 2016 oil production and 56% of preliminary 2017 oil production at mid-point, at weighted average floor prices of $43.49/Bbl and $44.63/Bbl, respectively

Steve Gray, Chief Executive Officer, commented, "We're pleased to report another strong quarter highlighted by our sequential double digit production growth and record low cash operating costs per barrel. Our recent horizontal wells appear to confirm the effectiveness of our enhanced completion designs. The excellent well results across our asset base along with our current record production led us to raise our annual production guidance for the second consecutive quarter. As a result of the increased rate of return on our capital, we began accelerating our drilling and completion pace during the third quarter with the addition of a third operated horizontal rig. We expect to add a fourth rig in early 2017." Mr. Gray added, "We are on track to close the first stage of our recently announced acquisition of Silver Hill later this month. We have been working closely with the Silver Hill team to ensure a smooth transition and to make preparations for enhanced infrastructure to accommodate a more robust horizontal development program on our newly acquired Delaware position."

[dan_s]

I have updated my forecast/valuation model for RSPP and it will be posted to the EPG website later today.

Each time I update a forecast model the final step is to compare it to what other analysts have submitted to First Call. The Wall Street analysts have just recently updated their models for RSPP to include the impact of the BIG ACQUISITION that will close before year-end. For a company of this size it is a "Game Changer". RSPP's production will jump from ~30,000 Boepd in Q3 to ~50,000 Boepd when the deals close. Their preliminary production guidance for 2017 is 52,000 to 56,000 Boepd. With a four rig program, my guess is that they will increase guidance several times next year, but I am using their guidance as the basis for my valuation.

RSPP trades today at a much lower multiple of operating cash flow than FANG and the other pure plays on the Permian.

Due to more clarity on 2017, I have increased my valuation by $4.00/share to $51.00. First Call's price target is $49.88 and I expect it to move higher as more analysts update their forecast models.