In a May 17 research note, Stifel analyst Derrick Whitfield reported that a recent selloff and roughly 30% relative underperformance of Roan Resources Inc.'s (ROAN:NYSE) stock translate into a buying opportunity for investors. "We are not concerned with Roan's liquidity as we project the company to be free cash flow neutral by year-end with growing production," he added.
Yet, Stifel lowered its target price on the energy firm to $11 per share from $13, which compares to its current stock price of $2.83 per share.
The selloff occurred after the company management's conference call on May 14 and Q1/19 investor presentation the next day, during which it "disclosed several impactful developments," relayed Whitfield.
For one, Roan's executive chairman of the board Joseph Mills expressed during the call the board's unhappiness with Roan's performance in 2018 and "outlined a couple of material strategic missteps by management," Whitfield indicated. For example, the decision to expand to eight rigs was far too aggressive for a company of Roan's scale and maturity, according to Mills. About 10 drilled but uncompleted wells were spaced too tightly and therefore underperforming.
Consequently, for this year's drilling and completion operations, Mills indicated that Roan will space the wells at "5–8 WPS and target completions for a two-mile lateral with 30–45 stages per well, 1,500–2,500 pounds per foot and 8–16 cluster per stage." While correcting for 2018's problems is laudable, this approach may be going too far, Whitfield wrote.
Two, management lowered its 2019 production and capex guidance, highlighted Whitfield. It reduced 2019 production by 7% to 51.5–55.5 million barrels of oil equivalent per day (51.5–55.5 MMboe/d). It decreased the number of wells to be put online this year by 3.4% to about 70. It lowered capex by 1.8% to $515–555 million.
For Q2/19, the company guided to production about 50 MMboe/d, which is 8.8% below consensus' forecast. It expects capex of $155 million, which is about 2.5% above the Street's estimate.
"We believe the negative revisions (production and resource) and management mergers and acquisitions commentary are likely the greatest two drivers" of Roan's selloff and underperformance, Whitfield commented.
Roan also announced Q1/19 earnings, which were in line, along with a number of positive operational updates," noted Whitfield.
Stifel maintained its Buy rating on Roan.
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Disclosures from Stifel Nicolaus & Company, Roan Resources., May 17, 2019
I, Derrick Whitfield, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, Derrick Whitfield, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Our European Policy for Managing Research Conflicts of Interest is available at www.stifel.com.
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