RSP Permian ends 2014 with $556 million liquidity, 1.7 times leverage and no near-term maturities

By Paul Deckelman

New York, March 17 – RSP Permian, Inc., which made its first forays into the public capital markets last year, just months after its founding, with an initial public offering of its stock and its first-ever bond deal, finished that first full year of operations having pretty much achieved its immediate financial goals, company executives said Tuesday.

One of these, said chief executive officer Steven D. Gray, was “to maintain a conservative capital structure to build for the future.”

Gray told analysts on the Dallas-based independent oil and natural gas exploration and production company’s conference call following the release of its financial results for the 2014 fourth quarter and full fiscal year ended Dec. 31 that “we have positioned the company to grow with a strong balance sheet.”

‘Strong liquidity position’

The company’s chief financial officer, Scott McNeill, said on the call that RSP Permian ended the year with $56 million of cash, and was undrawn on its $500 million revolving credit facility during the year, leaving it in “a strong liquidity position to execute our drilling plan, with $556 million of liquidity.”

As of the end of the year, the company had $500 million of outstanding debt, consisting solely of its 6 5/8% senior notes due 2022. The company priced those notes at par on Sept. 23 as a regularly scheduled deal off the forward calendar, after upsizing the transaction from an originally announced $450 million.

Proceeds were slated to repay revolver debt and for general corporate purposes.

The company began 2014 with its initial public offering of stock, which closed in January of that year. It sold 9,225,000 shares at $19.50 per share, realizing total net proceeds from the sale of $166 million. Selling stockholders sold another 13,775,000 shares, including a 3-million-share greenshoe, but the company did not receive any proceeds form that separate sale.

RSP Permian slated the proceeds from its portion of the IPO for fully repaying its then-existing term loan, making cash payments to certain existing investors as partial consideration for the properties that they had contributed to the company, paying bonuses to some employees in connection with the successful completion of the IPO, reducing its outstanding revolver borrowings and funding a portion of its capital spending plan.

In early August, the company did a follow-on equity offering that raised gross proceeds of about $294 million, selling 11.5 million shares at $25.65 per share, with proceeds slated to repay revolver debt.

The company originally had a $300 million revolver due 2017; in June, lenders agreed to up its borrowing base to $375 million.

In August, it announced plans to use new revolver borrowings to fund its $257 million cash acquisition of properties in Glasscock County, Texas.

In early September, the company announced that it had amended its revolver again, raising the borrowing base to $500 million from $375 million and lifting the lenders’ maximum facility commitments to $1 billion from $500 million.

It also extended the maturity by two years to August 2019 and amended the loan terms to allow RSP to issue the senior notes later that month, saying the amendments were carried out in connection with the Glasscock transaction.

Low leverage ratio

McNeill said that as of the year-end, the company’s leverage ratio of net debt as a multiple of adjusted EBITDAX – an energy industry version of the widely employed EBITDA earnings measure that includes exploration costs as well – stood at just 1.7 times. The company used annualized fourth-quarter EBITDAX for its calculations.

“We intend to keep a strong balance sheet and will monitor our leverage position, the changing market and industry conditions,” McNeill declared.

He also noted that “our debt maturities are far out into the future, with our credit facility not maturing till 2019 and our senior notes not maturing till 2022,” giving RSP ample financial flexibility.

During the question-and-answer portion of the conference call that followed the formal presentations by Gray, McNeill and by the company’s chief operating officer, Zane W. Arrott, an analyst asked McNeill whether he anticipated lenders making any changes in the revolver’s borrowing base or overall commitment size when the facility comes up for its semiannual borrowing-base redetermination in May.

“We’ve taken a look at that, and we don’t anticipate any changes to that,” the CFO replied.

Another analyst asked whether the company was looking at various data points when deciding whether to keep running its current three contracted drilling rigs, increasing that number or decreasing it, including its leverage ratio (which would tend to rise as EBITDAX declines in a weaker oil market), commodity prices and the service costs of such drilling.

Gray said that “we’ve looked at all of that, and I think one of the governors is just how much we want to outspend cash flow this year. So certainly, at a lower commodity price, if service costs come down enough, the wells we’re drilling are certainly still economic; that’s the good news.”

However, he added, “but at the same time, there’s a limit to how much debt we want to incur to develop properties. So we’re kind of constantly looking at the debt metrics and the cash outspend as well as the returns on the investments that we’re making.”

The bottom line, he said, is “if commodity prices go back up and we’re back in a $60 world, we’ll probably keep the three rigs running. If we stay at $50 or sub-$50, I would suspect we’d go ahead and drop that third rig when the contract expires.

In a follow-up, the analyst asked what kind of leverage metric the company would start to feel uncomfortable with.

Gray answered that “last year, everybody’s marker was 2 times, 2 turns of EBITDA – that was kind of the governor.”

He warned that “if oil goes to $30, there’s not going to be very many people that are less than 2 times. Having said that, 2-to-2.25 [times] is kind of the range where we’d prefer it not to get above, so we constantly keep an eye on that.”

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