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Should Investors Be Cautious of WildHorse Resource Development?

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WRD is ~17% below its 52-week high

WildHorse Resource Development (WRD), an Eagle Ford Shale–focused exploration and production company, is trading ~91% above its 52-week low, possibly due to its strong production growth and higher average realized sale prices. However, it is still 21% below its 52-week high of $29.70, reached in May. 

According to WRD’s second-quarter earnings release, “Crude oil realizations in the second quarter of 2018 were 100% of WTI as a result of low differentials and favorable Louisiana Light Sweet (“LLS”) pricing.” The company’s production grew 107% year-over-year during the second quarter, driven by higher drilling activity.

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Should investors be cautious?

WRD has significant crude oil exposure: crude oil formed ~72% of the company’s total average daily production in Q2 2018, and liquids formed ~85% of its total production. A sharp decline in crude oil prices could make drilling slightly unattractive in the Eagle Ford Shale, while a rise in crude oil prices could improve WRD’s average realized prices and margins.

Analysts expect the company’s CFFO (cash flow from operations) to grow 120% YoY (year-over-year) in fiscal 2018, 24% YoY in fiscal 2019, and 29% YoY in fiscal 2020. WRD’s forward price-to-CFFO ratio is 4.1x, below the industry median of 5.1x. The industry’s median growth is expected to be 60.5% in fiscal 2018.

Analysts’ recommendations

Of the analysts tracking WildHorse Resource Development, ~86% recommend “buy,” and ~14% recommend “hold.” Their average target price of $35 for WRD implies a ~48% upside to its current price of $24.

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