RSP Permian Price Target Adjusted Higher At Bank Of America

Bank of America Merrill Lynch analysts boosted its price target on RSP Permian Inc RSPP to $41 from $35. The brokerage said RSP Permian remained one of its top ideas within the SMID-Cap E&P and retained its Buy rating.

The analysts noted the company disclosed its plans to add a third horizontal rig in the third quarter of the current year with the capacity to head to five rigs if the commodity prices allow.

Bank of America expects, "The new rig will test tighter spacing in Johnson Ranch and then move to the development of the company's recently acquired acreage in Glasscock County, where initial well results are surpassing expectations. We expect an impact to production in 2017, and in this report, we assess sensitivities on growth, capex and leverage at three, four and five rigs."

The brokerage said it models three operated rigs currently in 2017 (~11 percent growth), growing to 4.5 in 2018. The analyst felt that per sensitivity analysis, one incremental rig could drive a ~10 percent increase in production and ~15 percent further upside to implied valuation, using his base case commodity price assumptions.

The analysts also think cost reductions look sustainable with the recent wells for RSPP have seen costs of $5.25 million, which was down 35 percent from the peak, with its best well to date under $5 million. They also think that the company continues to experiment with completions and believes it could generate additional cost savings in this area.

The brokerage noted that RSP expects to close the year with 13-25 drilled uncompleted wells, which could help drive cost efficient growth in 2017. Bank of America sees the potential for capex to surprise to the downside.