RSP Permian Growth Spurts In Midland Basin Drilling
RSP Permian ( RSPP ) may not rank among the largest players in the oil-rich Permian Basin of West Texas.
But that hasn't stopped investors from gushing over prospects for the newly public independent oil and natural gas producer.
RSP Permian stock has risen 43.6% from its January IPO price. The company can boast the 11th best stock performance of the 92 IPOs priced this year, according to Cindi Profaca, managing director of IPOfinancial.com.
RSP has the vast majority of its acres located on large contiguous acreage blocks in the core of the Midland Basin, a subbasin of the Permian Basin, primarily in the adjacent counties of Midland, Martin, Andrews, Dawson and Ector.
Since its inception in 2010, RSP has participated in drilling more than 300 vertical wells in the Wolfberry shale area of the basin and has served as the operator of over 180 of those wells.
In 2012, it shifted its primary focus to horizontal drilling, which it believes offers more "attractive returns," on most of its acreage, according to a company filing with the SEC.
RSP's exclusive focus on the Midland Basin has been a draw for investors.
"It's a pure play in the Midland Basin," said Meade. "It's one of the small handful of ways investors can gain exposure to the hottest part of the Permian Basin, particularly with horizontal development."
Going After Gains
Horizontal drilling is a technique used in certain formations where a well is drilled vertically to a certain depth, then drilled at a right angle within a specified interval.
"RSP is among those players in the Midland Basin that is using horizontal wells with multistage completions to get oil and gas out of zones that were productive vertically but not at the same scale," said Meade.
He says RSP has been a leader in the horizontal development of the Spraberry and Wolfcamp shale formations.
RSP successfully drilled and completed the first horizontal well targeting the Middle Spraberry and Lower Spraberry shales, and it's among the first operators in the core of the Midland Basin to successfully drill and complete a well targeting Wolfcamp B.
Since initiating its horizontal drilling program, it's participated in the drilling and completion of 40 horizontal wells, 17 of which it operated as of the end of 2013.
As of Dec. 31, RSP had 33,933 acres. That's a far cry from the 643,000 that Meade estimates Pioneer has in the Permian Basin and the 102,000 acres he estimates for Athlon. But RSP's acreage falls "in the most highly prospective and de-risked portion of the Midland Basin," Meade wrote in a report.
"Proven horizontal targets in the immediate area include Wolfcamp B, A and D as well as Middle and Lower Spraberry shales," he said. "In 2014, RSP will focus the bulk of its activity on the most attractive of these zones, the Wolfcamp B and Lower Spraberry shales."
In a year-end filing with the SEC, RSP said it's seeing "strong horizontal well results. Horizontal Wolfcamp results (are) tracking expectations, and early horizontal Spraberry results (are) outperforming type curve and economic returns look as strong as the Wolfcamp."
Room To Grow
Renaissance Capital analyst William Preston says a big draw for investors is the fact that RSP is "in the early stages of accelerating their production growth, and they have the ability with their financial position to support near-term results."
Preston added: "I definitely think investors can buy into this strong production growth. It comes down to an execution strategy. They're not a very large or mature E&P (exploration and production company). But they're rapidly expanding the rigs and locations where they're drilling."
In its year-end SEC filing, the company noted it's accelerating its drilling program. At the time, it was running three operated horizontal rigs and one operated vertical rig in the Midland Basin.
A fourth operated horizontal rig and second operated vertical rig will arrive in the second quarter.
RSP has also recently acquired additional acreage in the Midland Basin that has helped it expand the drilling inventory in areas of its operations.
"These opportunistic acquisitions expand our horizontal inventory in properties that are located primarily adjacent to our existing leasehold, further blocking up contiguous acreage in our area of operations," RSP CEO Steve Gray said in a 2013 year-end report filed with the Securities and Exchange Commission. "These acquisitions were accomplished using our deep-rooted relationships within the Permian Basin, which we believe is a core strength of the RSP organization and will lead to future attractive acquisition opportunities in our core areas."
RSP was formed by the management team and an affiliate of Natural Gas Partners, a family of energy-focused private equity investment funds. Meade says RSP's management team has been working in the Permian Basin for decades.
Followers are upbeat about the company's prospects.
Analysts polled by Thomson Reuters expect 2014 earnings to spurt 63% to 91 cents a share. They see a 45% gain in 2015 and a 51% increase in 2016.