Barclays analyst Oswald Cheung initiated coverage on Memorial Resource Development (NASDAQ: MRD) with an overweight rating and a price target of $33 (a 30 percent increase from the current price). A key catalyst discussed in Cheung’s note is Memorial’s core, Terryville Field, allows for production growth to generate considerable excess cash flow. Additional future drilling may serve as potential catalysts for the shares.
Memorial’s key asset is 96k net acres in the TerryVille Field, which includes 52k net acres in the in the core of the field where it’s focused on horizontal development of the Lower Cotton Valley. They have identified 1,146 gross drilling locations in four distinct intervals in the Cotton Valley Memorial has completed 27 horizontal wells with average return rates above 200 percent and investment payback periods of less than one year. Management predicts that its production growth rates will be 90 percent in 2014 and 50 percent in 2015.
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Cheung commented, “Short payback periods could allow Memorial to maintain a robust growth profile while generating excess cash flow.” Barclays expects excess cash of $25 million in 2014 and $135 million in 2015 and its net debt to LTM to decrease to 1.4x by 2014 and 0.7x by 2015.
In short, Memorial is attractive due to relatively high production growth rates. Shares are trending 4.5 percent higher during pre-market hours and were last trading at $26.50.
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