Summary
- Range Resources Corporation posted fairly strong results that include YOY growth despite the recent weakness in natural gas prices.
- The company posted very solid reserve development as it replaced all the resources that it removed from the ground.
- Near-term growth prospects are unfortunately limited as the company is not planning production growth and natural gas prices are unlikely to improve.
- The company continues to improve its balance sheet and it rates among the best companies in the industry in terms of strength.
- Range Resources Corporation is trading for an attractive valuation today.
On Monday, February 27, 2023, Appalachian-based natural gas producer Range Resources Corporation ( RRC ) announced its fourth-quarter 2022 earnings results . At first glance, these results were quite positive, as the company beat the expectations of its analysts in terms of both revenue and net income. However, Range Resources Corporation’s stock is not performing too well lately, as it is down 22.27% over the past six months:
We do see that Range Resources Corporation stock spiked alongside the earnings release, though. The reason for the poor performance is that natural gas prices plummeted during the second half of 2022 in response to a warmer-than-normal winter that reduced consumption of the product for heating purposes. This is likely only a short-term setback, though, as the long-term future for natural gas is quite positive, as the demand is likely to surge significantly over the coming years. In fact, natural gas is fairly well-positioned to benefit from the growth of renewable energy, as it serves to offset the intermittent nature of wind and solar power. Range Resources is well-positioned to take advantage of this, and when we combine this with the fact that the company appears to be significantly undervalued right now, there may be a reason to buy the company’s stock today following the strong earnings.
Earnings Results Analysis
As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Range Resources’ fourth-quarter 2023 earnings report:
- Range Resources Corporation brought in total revenue of $1.630379 billion in the fourth quarter of 2022. This represents a 4.06% increase over the $1.566830 billion that the company brought in during the prior-year quarter.
- The company reported an operating income of $1.0474 billion in the most recent quarter. This compares favorably to the $975.8 million that the company reported in the year-ago quarter.
- Range Resources produced an average of 2.204493 billion cubic feet of natural gas equivalent per day in the reporting period. This represents a 0.28% increase over the 2.198413 billion cubic feet of natural gas equivalent per day that the company reported in the equivalent quarter of last year.
- The company had total proven reserves of 18.078 trillion cubic feet of natural gas equivalent on December 31, 2022. That gives it a 101.70% reserve replacement ratio for the full-year period.
- Range Resources reported a net income of $814.236 million in the fourth quarter of 2022. This represents an 8.65% decline over the $891.366 million that the company reported in the fourth quarter of 2021.
One of the biggest stories over the past year has been the incredible surge that we saw in energy prices. This overall pricing increase is considered to be one of the drivers of the decades-high inflation rate that has permeated the American economy and has pressured the finances of many households. However, that price increase was mostly present in crude oil. Natural gas prices fell by quite a lot during 2022, particularly in the second half of the year. As of the time of writing, natural gas at Henry Hub is down 37.50% over the past twelve months:
Interestingly, this had a limited impact on Range Resources’ results. The company realized an average of $4.33 per thousand cubic feet of natural gas equivalent in the fourth quarter of 2022 compared to $4.10 per thousand cubic feet of natural gas equivalent in the prior-year quarter. One of the reasons for this is that the company employs hedges to manage its selling price. This basically means that it is using futures, forwards, and other derivatives to essentially lock in a selling price for the resources that it produces. This is a strategy used by most energy companies to provide protection against the volatility in commodity prices. These hedges only had a limited impact on the company’s results though as, with the notable exception of natural gas liquids, the unhedged sales prices that the company realized on average during the quarter were higher than a year ago.
Natural Gas ($/mcf) | Crude Oil ($/bbl) | Natural Gas Liquids ($/bbl) | |
Q4 2022 | $5.71 | $75.66 | $27.17 |
Q4 2021 | $5.38 | $70.07 | $36.26 |
(all prices reflect the company’s realized prices before hedges are considered.)
Thus, we see that Range Resources generally got higher prices than it did in the fourth quarter of 2021 despite the steep decline in natural gas prices. This had a positive impact on the company’s revenue for obvious reasons. After all, if the company receives more money for each unit of product that it sells then all else being equal it will bring in more total revenue.
However, all is rarely equal in the energy industry. For example, we see that Range Resources had higher production during the fourth quarter of 2022 than it did in the prior-year quarter. This also had a beneficial impact on the company’s revenue. After all, the fact that it produced more meant that it had more products that it could sell and generate revenue from. Thus, the combination of generally higher prices and higher production meant that more money was available to cover the company’s expenses and make its way down to profits and cash flow. This is pretty much exactly what we saw in these results as operating income and operating cash flow were both up year-over-year:
Q4 2022 | Q4 2021 | |
Operating Income | $1,047.4 | $975.8 |
Operating Cash Flow | $612.7 | $317.7 |
(all figures in millions of U.S. dollars.)
At this point, there may be some readers that notice that Range Resources’ net income was down compared to the fourth quarter of 2021. This is something that was mentioned in the highlights. The company did not provide a reason for this but a look at its financial statements reveals that it was entirely due to income taxes. In the fourth quarter of 2022, Range Resources posted an income before taxes of $997.823 million compared to $909.879 million in the prior-year quarter. Thus, the only possible cause of the lower net income is an increase in taxes. This is one of the biggest problems with net income as it does not appropriately reflect the money coming into and leaving the company. Operating cash flow was up significantly year-over-year, as we already discussed, and that provides a better idea of exactly how much cash entered and exited the company’s bank accounts (including taxes). Thus, overall, Range Resources reported better results than last year, despite the fact that net income was down year-over-year.
Reserves Update
As stated in the highlights, Range Resources benefited from positive reserve development over the course of 2022. This is an area of the business that investors frequently overlook but it is critically important. This is because the production of crude oil and natural gas is by its nature an extractive process. After all, Range Resources literally obtains the products that it sells by pulling them out of reservoirs in the ground. As these reservoirs only contain a finite quantity of resources, a company must continually discover or otherwise acquire new sources of resources, or it will ultimately run out of products to sell. A company’s reserve replacement ratio tells us how successful it was at this important task.
As stated in the highlights, Range Resources started the year with proven reserves of 17.775 trillion cubic feet of natural gas equivalent. It finished the year with proven reserves of 18.078 trillion cubic feet of natural gas equivalent. Thus, the company successfully discovered or acquired sufficient new resources to replace everything that it pulled out of the ground and then some. This is something that is very nice to see as it helps ensure the long-term sustainability of the company’s operations.
At the company’s current production rate, it has sufficient reserves to last for 8,200 days, which is approximately 22 and a half years. This is substantially more than the ten-year reserve life that we usually consider to be acceptable for a company like this. It is a longer reserve life than most of the company’s peers have, and it also gives the company the ability to grow its production somewhat without really needing to grow its reserves. Overall, we should not really need to worry about Range Resources’ long-term sustainability.
Growth Prospects
Range Resources provided the following guidance with its earnings release:
The biggest thing that we note here is that the company expects to produce an average of 2.12 to 2.16 billion cubic feet of natural gas equivalent per day over the course of 2023. That is actually a bit less than the company produced on average during the fourth quarter of 2022. As such, we should not expect any significant production growth over the course of the year. Thus, any near-term growth will come from an increase in natural gas prices. That is not especially likely to occur in the near future as an impending recession combined with the Federal Reserve’s monetary tightening will be applying strong downward pricing pressure on the resource. However, as I discussed in a recent blog post , the long-term case for natural gas remains quite strong and we will probably see prices rise over the next few years. However, I am not expecting Range Resources to deliver stellar gains to its stockholders in 2023.
Financial Considerations
It is always important to look at the way that a company finances its operations before making an investment in it. This is because debt is a riskier way to finance a company than equity because debt must be repaid at maturity. This is usually accomplished by issuing new debt and using the money to repay the existing debt, which can cause a company’s interest expenses to rise following the rollover in certain market conditions. As the Federal Reserve has been steadily increasing interest rates over the past year and that seems unlikely to change in the near future, this is a risk that we need to consider today. In addition to this, a company must make regular payments on its debt if it is to remain solvent. Thus, an event that causes a decline in cash flows could push a firm into financial distress if it has too much debt. When we consider the overall volatility of natural gas prices, this is a very real risk with Range Resources.
The usual way that we judge an upstream company’s ability to carry its debt is by looking at its net debt-to-EBITDAX ratio, which is generally called the leverage ratio. This ratio basically tells us how many years it would take the company to completely repay its debt if it were to devote all of its pre-tax cash flow to that task.
As of December 31, 2022, Range Resources had a leverage ratio of 0.8x based on its full-year 2022 EBITDAX. That is a very reasonable ratio that is below the 1.0x maximum possessed by the most financially secure exploration and production companies in the energy industry. We have seen many of these companies actively working to reduce their debt over the past two years, including Range Resources. It is very nice to see this as the debt was a very real problem for Range Resources prior to the pandemic:
As we can see though, Range Resource is not satisfied with its current attractive ratio and wants to reduce its debt even more over the next year or so. That would be quite nice to see considering that many traditional energy companies have been finding it increasingly difficult to raise capital as several large asset management firms have embraced environmental, social, and governance principles that have caused them to shun these companies and at least one major bank are now refusing to lend money to any fossil fuel company.
Overall, we can conclude that Range Resources’ debt should not be a real concern for us as investors anymore. The company’s current leverage ratio is acceptable, and it will get even more so as it continues to reduce its debt.
Valuation
It is always critical that we do not overpay for any asset in our portfolios. This is because overpaying for any asset is a surefire way to generate a suboptimal return on that asset. In the case of an upstream exploration and production company like Range Resources, one method that we can use to value it is the forward price-to-earnings ratio. This ratio basically tells us how much we would have to pay today for each dollar of earnings the company is expected to generate over the next year.
According to Zacks Investment Research , Range Resources has a forward price-to-earnings ratio of 8.38 at the current stock price. That is quite a bit lower than the 20.05 ratio of the S&P 500 Index ( SP500 ) today:
However, as I have pointed out before, pretty much everything in the traditional energy industry is undervalued at their current prices. Thus, it makes sense to compare Range Resources with some of its peers in order to see which company currently offers the most attractive relative valuation:
Company | Forward P/E Ratio |
Range Resources | 8.38 |
EQT Corporation ( EQT ) | 5.51 |
Antero Resources ( AR ) | 6.62 |
Comstock Resources ( CRK ) | 4.54 |
Chesapeake Energy ( CHK ) | 9.11 |
(all figures courtesy of Zacks Investment Research.)
As we can clearly see, Range Resources is one of the more expensive companies compared to its peers. This is somewhat disappointing as it may be a sign that the company is rather expensive. However, it is still substantially below the valuation of pretty much any company outside of the traditional energy industry, so it still appears to be offering a reasonable proposition for value investors today. Overall, it could still be worth purchasing today.
Conclusion
In conclusion, Range Resources Corporation’s most recent results were reasonably attractive as the company managed to deliver revenue and cash flow growth despite the weakness in natural gas prices. Unfortunately, we are probably not going to see much growth in 2023 as the company is not planning to increase its production and we probably will not see natural gas prices deliver much improvement. However, Range Resources Corporation still has strong long-term fundamentals and offers an attractive valuation, so it might still be worth adding to a portfolio today.
For further details see:
Range Resources: Don't Expect Near-Term Growth But Valuation Still Attractive