SRC Energy Stock Could Be a Good Buy if This Happens

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SRC Energy has been on a roller coaster ride this year. Higher oil prices in the earlier part of the year drove SRC Energy stock higher, and it was sitting on gains of around 40% at the end of April.

But the downturn in oil prices caused a massive crash in SRC stock and it went into the red for the year. However, SRC is now making a comeback on the stock market thanks to the recent recovery in oil prices. But does this make it a buy?

SRC is Delivering Impressive Growth, but There’s One Problem

SRC ended 2018 on a solid note, delivering impressive production growth for the year. It was ably assisted by an increase in oil prices, which improved the company’s financial performance. However, a weak balance sheet has been an issue for SRC.

The company has total debt of $741 million, while its cash position is thin at less than $57 million. So when oil prices decline, SRC has to resort to debt to boost production. The company delivered a 48% increase in production last year, and it is trying to maintain a strong pace in 2019 as well.

SRC now expects to deliver production of 63,000 to 66,000 barrels of oil equivalent per day this year, up from its prior estimate of 59,000-62,000 BOE/day. Assuming the company manages to hit the mid-point of its guidance range, its production will increase nearly 28% from 2018’s production level of 50,543 BPE/day.

But it looks like the company has been resorting to taking on more debt in order to increase its production. I’m saying this because at the end of 2018, SRC’s debt stood at $650 million. So it is clear that the company’s debt level has increased substantially in the first quarter of 2019.

As a result, SRC needs the tailwind of stronger oil prices to strengthen its balance sheet. Otherwise, the company will find it difficult to grow its production sustainably and will be burdened by more interest.

Higher Oil Prices are Absolutely Important for SRC

Analysts aren’t very upbeat about SRC’s prospects this year. On one hand, they expect the company to deliver top-line growth of over 16%, but its earnings per share are expected to shrink.

SRC’s earnings are expected to go down from $1.26 per share in 2018 to $1.02 in 2019, according to Yahoo Finance estimates. This makes it clear that weaker oil prices this year will take a toll on SRC’s bottom line.

A weaker earnings performance will hurt SRC’s cash generation and it might eventually have to dial down its production growth estimates. This is why the company needs a stronger oil pricing environment to prosper.

The good news is that oil prices have started moving higher once again. WTI crude is inching towards $60 per barrel, and it could go higher thanks to a variety of end market factors. For instance, the U.S.-China trade standoff could ease off, creating more demand. On the other hand, supply issues still persist and this could lead to favorable demand-supply dynamics in the end market.

As a result, SRC could benefit from higher oil prices. In that scenario, the stock could prove to be a good buy.

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.

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