A Lean, Low-Cost Oil Producer
Dave Meats: RSP Permian continues to trade at a steep discount to our fair value estimate, and is our top pick in the upstream E&P segment. The firm is one of the lowest-cost oil producers in our coverage. The organization is very lean, with operating expenses per barrel at the bottom of the peer group range. It has also shaved off more than 40% from its capital cost per well since the end of 2014, despite adopting more expensive enhanced completions during this period.
The firm's Midland Basin acreage is ideally located in the core of the play, supporting robust initial production rates and moderate declines. Early indications are that its recently purchased Delaware Basin property offers very strong drilling economics as well. The first in-house well on that acreage targeted the lower Wolfcamp A interval, and delivered a 30-day initial production rate of 273 barrels a day per thousand lateral feet. If widely repeatable, this result could indicate that management's initial recovery estimate of 900-1,200 thousand barrels per well is too conservative.
First-quarter production volumes were 45 thousand barrels a day, showing that the firm is on track to achieve its guidance of 90% year-over-year volume growth in 2017. And substantial growth is likely next year as well. Management's provisional plan to add two rigs looks optimistic, given our bearish views on near term oil prices, but we believe the company can still achieve its 30% growth target in 2018 with the eight rigs it is already running.