RSP Permian Has 30% Upside According To Imperial Capital

The brokerage's bullish thesis is based on the company's prime midland basin acreage and strong balance sheet.

Justification For Bullishness

"Compared to other Midland Basin pure play companies, we believe RSP Permian stands out on both low costs and high growth potential. The strong balance sheet and low cash flow outspend makes RSPP one of the leading performers in the domestic E&P group, in our view," analyst Kim Pacanovsky wrote in a note.

The analyst highlighted that with a nearly 100 percent operated, 64,000 net acre position, RSP Permian has "excellent geology and operational control" in the Prime Midland Basin/Permian Basin.

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Pacanovsky also noted that despite reducing its 2015 capex by 54 percent, the company's production grew by 80 percent, and despite poor year-end oil pricing, reserves rose 50 percent. In 2016, the analyst estimates a further 40 percent cut in capex and 19 percent annual production growth.

On the liquidity front, the company's recent reaffirmation of $600 million borrowing base keeps the cash position strong. The company has $674 million of liquidity with an undrawn borrowing base, and the analyst estimates it will outspend cash flow by $14 million until the end of 2016.

"However, with our expectation of better crude pricing in 2017 (our estimate is $62/bbl), we believe RSPP will generate positive free cash flow cumulatively through the end of 2017," Pacanovsky added.

The analyst expects a loss of $0.15 a share for 2016 and EPS of $0.72 for 2017 versus consensus estimate of $0.22 loss and EPS of $0.43, respectively.

Shares of RSP Permian closed Tuesday's regular trading at $34.72 and were trading down 1.32 percent at $34.26 at time of writing.