Strong Oil Prices Can Drive SRC Stock Higher After Q4 Results


Shares of SRC Energy (NYSE: ) have nearly halved in value over the past year as the market sentiment has turned against energy stocks thanks to weak oil and gas prices. But the company’s latest fourth-quarter and full-year 2018 results prove that it is capable of bouncing back.

SRC delivered handsome growth in the fourth quarter and for the full year, and easily beat Wall Street’s estimates. Unsurprisingly, investors were delighted at the results and the stock gained after the report was released. Let’s see what worked for SRC last quarter and why it is on track for a solid year.

SRC Delivers on Oil Production

SRC delivered production of 59,821 barrels of oil equivalent per day during the fourth quarter of 2018, up 31% from the prior-year period’s production. The average price per barrel of oil equivalent also increased 3% year over year to $33.97. These increments helped boost the company’s quarterly revenue by 36% year over year to $190 million, while net income shot up 61% year over year to $82 million.

On a full-year basis, SRC delivered production of 50,543 barrels of oil equivalent per day, up 48% as compared to 2017. What’s more, it realized a 20% increase in the average realized price to $34.50 per barrel, which boosted its annual revenue by 78% to $645 million as compared to the previous year. As a result, the company’s net income shot up an impressive 82% during the year to $260 million.

Will Balance Sheet Issues Dampen 2019 Growth?

SRC stock has taken a massive beating on account of a negative energy pricing environment.

Despite these terrific growth rates, SRC stock has taken a massive beating on account of a negative energy pricing environment. Investors are probably spooked about the company’s shaky balance sheet, which is laden with more than $650 million in debt and a thin cash position of less than $20 million. As a result, the company will have to restrict its capital expenses to the extent of its operating cash flow in order to avoid taking on more debt.

When oil prices were on the rise, SRC was easily able to take on debt and was generating enough cash flow to fund its production growth. But this year, the company will restrict its capital expenses to a range of $425 million to $450 million, down from $583 million last year.

That cut will hurt SRC’s production profile in 2019. The company expects to produce between 59,000 and 62,000 barrels of oil equivalent per day this year, which represents 19% year over year growth at the mid-point of the guidance range. That clearly represents a massive drop in SRC’s production growth as compared to the 2018 rate.

Moreover, the company has designed its 2019 capital plan assuming a West Texas Intermediate (WTI) crude oil price of $50 per barrel. The good news is that WTI oil prices are well above this level right now, indicating that SRC’s 2019 production forecast is in safe territory right now.

Oil Price Rally a Catalyst

WTI oil has rallied in recent months thanks to the supply cuts pledged by major oil cartels such as OPEC and its partners.

WTI oil has rallied in recent months thanks to the supply cuts pledged by major oil cartels such as OPEC and its partners. However, U.S. crude oil production continues unabated, which puts shale players such as SRC at risk of a global slowdown on account of the trade stand-off with China.

However, there’s news that the U.S. and China are working out a deal to end their trade war. Such a move would provide a boost to the oil market’s economics and help SRC Energy deliver on its promises this year. In such a scenario, it won’t be surprising to see the stock deliver upside going forward as it will benefit from improved pricing and higher production.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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