ROCC - Ranger Oil: Net Debt Expected To Be Near $500 Million At End Of 2022

Summary

• Ranger Oil has been spending on bolt-on acquisitions and share repurchases.
• Ranger is expecting strong 2H 2022 production growth, with average production in the second half around 7% higher than its 2022 average.
• Net debt may end up around $500 million at the end of 2022 depending on further share repurchases.
• Leverage still appears reasonable at a year-end projection of 0.5x annualized 2H 2022 EBITDAX.

Ranger Oil ( ROCC ) increased its production guidance and capex budget after making more bolt-on acquisitions . It also instituted a small dividend and increased the size of its share repurchase program.

These items have increased Ranger's projected year-end net debt to around $500 million (depending on its pace of share repurchases), which is noticeably more than what I had projected in May . Ranger's leverage still appears to be reasonable though, at around 0.5x annualized 2H 2022 EBITDAX. At $38 it appears to be fairly priced for a long-term (after 2022) $70 WTI oil scenario, and if oil averages $80 (current strip) in 2023 instead, that would add $2 to $3 to its estimated value.

More Acquisitions

Ranger continued to make acquisitions during Q2 2022, mentioning that it had signed agreements for transactions involving a combined purchase price of around $110 million during the quarter.

These acquisitions were mainly composed of additional working interests in existing Ranger-operated wells along with contiguous acreage (both producing and undeveloped). The acquisitions were expected to add around 1,600 BOEPD (79% oil, 13% NGLs and 8% natural gas) in production. This boosted Ranger's Q2 2022 exit rate (pro-forma for the transactions) to over 42,000 BOEPD (including 30,000 barrels of oil production per day)

Additional Spending

Ranger is keeping its capex guidance for its original 2022 development plan at $425 million, which is at the high end of its original guidance. It is also adding $30 million for incremental D&C capex due to accelerated development activity as well as its acquisition of additional working interests and ability to do longer laterals (from the acquisition of contiguous acreage). The additional capital is expected to boost production volumes in late 2022 and into 2023.

Ranger is using a third drilling rig during Q3 2022, but expects to revert back to two rigs in Q4 2022. It is also evaluating potentially using a third rig in 2023.

2H 2022 Outlook

Based on the midpoint of its updated full-year guidance, Ranger expects to average approximately 44,200 BOEPD in total production during the second half of 2022, including approximately 31,700 barrels per day in oil production. This appears to be mid-single digits production growth from Ranger's pro-forma Q2 2022 exit rate production, with Q4 2022 production expected to be higher than Q3 2022 production.

The current strip for the second half of 2022 is approximately $90 WTI oil, and at that price Ranger is projected to generate $614 million in oil and gas revenues (before hedges). Ranger's 2H 2022 hedges have an estimated value of negative $50 million.

With around $250 million in capital expenditures in the second half of 2022, Ranger is projected to end up with $169 million in positive cash flow during this period.

Ranger's Debt Situation

Ranger had $537 million in net debt at the end of Q2 2022. It also closed on various transactions in July with a net outlay of $81 million. Ranger's current dividend payments are around $3 million per quarter. It also spent approximately $21 million on share repurchases in July 2022.

Thus Ranger is now projected to end 2022 with $476 million in net debt, before any further spending on share repurchases. This is approximately 0.5x Ranger's EBITDAX (based on annualized 2H 2022 EBITDAX). As of the end of July, Ranger had $94 million in remaining capacity for its share repurchase program.

Notes On Valuation

I now estimate Ranger's value at approximately $38 per share in a long-term (after 2022) $70 WTI oil and $4.00 NYMEX gas. This increases to around $40 to $41 per share if oil and gas prices remain at current strip until the end of 2023 before reverting back to those long-term prices.

This valuation estimate is based on 2H 2022 production levels, which appears to be roughly what Ranger expects to maintain in 2023 with a two-rig development program. Ranger noted that it expected mid-to-high single digits production growth with two rigs, and Ranger's 2H 2022 production levels are anticipated to be around 7% higher than its average 2022 production.

If Ranger goes with a three-rig development program instead, it expects low-to-mid teens production growth in 2023, which translates into approximately 47,000 BOEPD in average production during 2023.

Conclusion

Ranger may end 2022 with around $476 million in net debt if it doesn't make any more share repurchases, although it has been pretty active in that area. Ranger has also been spending on bolt-on acquisitions, so its debt level is going to end up higher than what I previously projected. With its increased production, Ranger's leverage situation remains reasonable though. At its current share price, Ranger appears to be fairly price for long-term (after 2022) $70 WTI oil, although if strip prices remain higher for 2023 (currently around $80 WTI oil), that would add $2 to $3 to Ranger's estimated value (to around $40 to $41).

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