2023-05-03 14:08:46 ET
Summary
- Range Resources is a natural gas and gas liquids producer operating in the Marcellus (Pennsylvania) formation of Appalachia.
- This $6.1 billion company has $1.8 billion in senior notes, pays a 1.3% dividend, and has $1.1 billion share buyback authorization remaining.
- Range used last year’s windfall to pay down debt and buy back stock and expects to continue to do so. It has hedged about half of its 2023 gas production.
Range Resources ( RRC ) is an Appalachian natural gas and natural gas liquids producer that has weathered considerable lows in the sector and region.
In September 2022 I ranked Range a "hold" but recommended investors check back in a few quarters, after the winter gas price spikes, i.e., now.
I'm upgrading Range Resources to "buy" due to a) debt paydown over $500 million (20%) on the way to even smaller debt levels of $1.0-$1.5 billion, b) rising gas forward curve from a much lower starting point, c) Range's additional earnings from liquids, d) and demand increase from more LNG capacity coming online in the next 18 months.
Ironically, today's lower gas prices also increase demand for gas as a generating fuel in electricity where it's competitive with coal, but with lower emissions. In the power sector, there's also the increased realization that gas, because of its fast-off, fast-on characteristics, is a better backup for intermittent renewables than coal or nuclear. (Some grid experts recommend a 1.1:1 redundancy of gas generation for solar and wind generation to ensure grid stability.)
Investors should be aware Marcellus transportation limits and Northeast zero-hydrocarbon policies could continue to dampen demand. Because natural gas prices were so high last year, some believe the much lower free cash flow from gas this year is not fully reflected in stock prices: they could go lower.
Moreover, gas drilling is quick: Any perceived supply shortage is soon remedied.
Investors seeking capital appreciation in energy stocks may find Range Resources of interest. Dividend hunters will not.
I have purchased Range Resources shares.
Range Resources First Quarter 2023 Results and Guidance
In the first quarter of 2023 Range Resources' revenues were $1.2 billion and its net income was $481 million, or $1.95/share. This included a $368 million mark-to-market derivative gain due to commodity price decreases.
Net cash from operations for the quarter was $475 million.
Range produced 2.1 BCF-equivalent (BCFe)/day, about 70% of which was natural gas. Specifically, this divides as 1.48 BCF/day of natural gas, 103,200 BPD of natural gas liquids, and 6400 BPD of oil.
Including the impact of hedges and derivatives settlement, Range's 1Q23 natural gas, NGLs and oil price realizations averaged $4.00/mcfe.
Range expects to target flat production, about 30% liquids. Its 2023 capital budget is $570 million-$615 million and it spent about a fourth of that in 1Q23. The company notes 3000 undeveloped core locations at development costs from less than $1.50/MMBTU, a large number at less than $2.00/MMBTU, and the rest at less than $3.00/MMBTU.
Given the challenging northeast markets, Range's gas market diversification is advantageous:
*30% goes to the Midwest
*25% goes to the Gulf Coast
*25% goes to LNG export
*20 goes to local and Northeast markets.
The company also is able to export most of its propane and butane.
The company has hedged about 55% of its gas production for 2023.
Range's debt - senior notes - is $1.85 billion and its net debt is $1.62 billion. Its net debt target is $1.0 billion to $1.5 billion.
Macro
Despite the disruption of Russian gas supplies to Europe and the sabotage of the Nord Stream pipelines, making at least some of that disruption permanent, the combination of alternate sources, a very warm European winter, and conservation means European storage has entered refill season at already 56% full (2.02 trillion cubic feet ((TCF)), its highest level on record.
So now, Dutch TTF (Title Transfer Facility) LNG prices which in September 2022 reached as high as $100/MMBTU are instead a more normal, subdued $12.54/MMBTU for next-month delivery. The JKM (Japan Korea Marker) reference price for LNG in Asia is similarly now at $11.55/MMBTU, also for next-month delivery.
EIA
Thus, we see economics in action: Medium and long-term demand is more elastic, so natural gas prices have moderated. Elasticity was manifested via measures like substituting coal and nuclear, requesting "hard" conservation by asking citizens to cut gas use, and bringing in alternate supplies to replace Russian gas through existing and new LNG infrastructure.
Meanwhile, in the US, the Federal Reserve is still trying to tame inflation. Inflation boosts Range's labor and material costs, and interest rate increases boost Range's borrowing cost. However, for context, recall that to bring down inflation in the 1980s, the Fed raised the Fed funds rate to 18%. That severe a reaction appears unlikely today.
Finally, the Biden administration's and several states' war on US hydrocarbon production and consumption continues, with New York Governor Kathy Hochul and the New York state legislature preparing to ban the use of natural gas, propane, (and presumably fuel oil) in new buildings.
LNG Exports
In its most recent reference case, the US Energy Information Administration projects growth in US gas production of 15% and growth in LNG exports of 152% between 2022 and 2050.
Expected growth in LNG exports to 10 TCF/year (+27 BCF/D) by 2050 would increase demand and prices for natural gas countrywide.
In the graphs below, the y-axis units are TCF/year, not BCF/day.
EIA
US Gas Production, Demand, and Prices
The May 2, 2023, natural gas futures price for June 2023 delivery was $2.23/MMBTU at Henry Hub, Louisiana, only about 25% of the level of $8.15/MMBTU in September 2022.
After a fairly dramatic (but normalizing) decline post-Russian-invasion, the EIA projects Henry Hub gas prices averaging between $2/MMBTU and $4/MMBTU through the end of 2024 in its 5-95 confidence interval.
EIA
Total US dry natural gas production for the week ending April 26, 2023, was 101.5 BCF/D.
Appalachian gas volumes (the green-colored Marcellus and the rust-colored Utica) are estimated to be 35.2 BCF/day in April 2023, or more than 36% of April's US gas production.
The map illustrates the Marcellus formation.
Penn State Marcellus Center for Outreach and Research
For the week ending April 26, 2023, US natural gas demand totaled 98.4 BCF/D. This varies considerably throughout the year depending on weather.
EIA and Starks Energy Economics, LLC
Natural Gas Liquids
NGLs (ethane, propane, and butane) are used to make ethylene, a critical petrochemical building block, and for heating and drying. Range also gets quite significant price uplift from its NGL production.
Reserves
Range Resources' 2022 total year-end proved reserves were 18.1 trillion cubic feet-equivalent that divide as 11.8 TCF of natural gas, 1.0 billion barrels of natural gas liquids, and 42.7 million barrels of crude oil and condensate.
Proved developed reserves were 10.9 TCFe, or about 60% of the total.
Because 2022 prices were higher than in 2021 and 2022, the PV-10 value of the reserves increased by nearly 2x from 2021, from $12.5 billion in 2021 to $24.5 billion in 2022 and nearly 9x from 2020, from $2.8 billion in 2020 to $24.5 billion.
Be aware that since 2022 gas prices were extraordinarily high, the price component of the year-end 2023 reserve measure, and thus the entire reserve value, is likely to be lower.
Competitors
Range Resources is headquartered in Fort Worth, Texas. Although poor gas price economics inhibited the Appalachian natural gas sector for years, several other companies also remain, including Antero Resources ( AR ), Chesapeake ( CHK ), CNX ( CNX ), Coterra ( CTRA ), EOG ( EOG ) with its new Utica Combo play, EQT ( EQT ), National Fuel Gas ( NFG ), Ovintiv ( OVV ), and Southwestern Energy ( SWN ).
Appalachian natural gas is at a disadvantage due to pipeline constraints to natural gas in Louisiana, Texas, and Oklahoma for meeting Gulf Coast industrial, power, Mexican export, and LNG export demand.
As the large US Permian basin matures, more of its production will be gas and associated gas - rather than oil - which could put downward pressure on prices.
Governance
At May 1, 2023, Institutional Shareholder Services ranks Range Resources' overall governance as an excellent 1, with sub-scores of audit (1), board (2), shareholder rights (1), and compensation (2). On the ISS scale, 1 represents lower governance risk and 10 represents higher governance risk.
Yet ironically, despite the recent excellent ISS score, as of January 2023, Range's ESG ratings from Sustainalytics were severe (not good) with a total risk score of 46 (96th percentile). This comprised an environmental risk score of 26.0, a social risk score of 9.7, and a governance risk score of 9.9.
Controversy level is 2, or "low," on a scale of 0-5, with 5 as the worst.
Insiders own 2.9% of the stock. Shorted stock as a percentage of float is 5.7%.
Range Resources' beta is 2.14. While much more volatile than the overall market, this is in line for an independent gas producer.
On Dec. 30, 2022, the six largest institutional stockholders, some of which represent index fund investments that match the overall market, were Fidelity/FMR (11.0%), Vanguard (10.3%), Blackrock (10.0%), State Street (4.8%), Dimensional Fund Advisors (2.9%), and Capital World (2.9%).
Blackrock, State Street, and Capital World (but not Fidelity nor Vanguard nor Dimensional Fund Advisors) are signatories to the Net Zero Asset Managers Initiative, a group that, as of Dec. 31, 2022, manages $59 trillion in assets worldwide and which - despite less energy supply due to reduced Russian exports to Europe - limits hydrocarbon investment via its commitment to achieve net zero alignment by 2050 or sooner.
Countering this, the US state of Texas has developed a list of companies and funds prohibited from doing business with the state, its state pension funds, and local governments. Other than BlackRock, most companies on the list are European. However, the list of funds (350) is lengthier, and includes, for example, funds managed by US companies Goldman Sachs and JPMorgan.
Financial and Stock Highlights
With Range's May 2, 2023, closing stock price of $25.14/share, market capitalization is $6.1 billion.
Given a 52-week price range of $22.61-$37.44/share, the closing price is 67% of the 52-week high and 79% of the one-year target price of $32.00/share.
Range's trailing twelve months' returns on assets and equity are exceptional at 26.2% and 86.5%, respectively. Trailing twelve months' EPS is an unusually high $8.50 for a current price/earnings ratio of only 3.0.
TTM operating cash flow was $1.93 billion and levered free cash flow was $748 million.
At March 31, 2023, the company had $3.577 billion in liabilities and $6.882 billion in assets moderating Range's liability-to-asset ratio from 70% several months ago to 52% now.
Of the liabilities, current liabilities are $736 million, derivative liabilities are down considerably from $647 million in September 2022 to $23 million at 3/31/2023, and senior notes are $1.83 billion.
The ratio of debt to EBITDA has shrunk to 0.6.
Analysts' average estimates of 2023 and 2024 EPS are $2.60 and $3.45, respectively, giving a forward P/E range of 9.7-7.3.
Range Resources pays a small dividend, $0.32/share, for a dividend yield of 1.3%.The remaining repurchase authorization is $1.1 billion.
The company's mean analyst rating is a 2.1, or "buy," from 34 analysts.
Notes on Valuation
The company's book value per share of $14.18, about 55% of its market price, suggests positive investor sentiment.
With an enterprise value (EV) of $8.0 billion, Range's EV/EBITDA ratio is 2.5, far less than the preferred maximum of 10 or less and so well into bargain territory.
So overall, Range Resources has
*a market capitalization of $6.1 billion,
*an enterprise value of $8.0 billion,
*reserves with a PV-10 value of $24.5 billion , and
*a balance sheet asset value of $6.9 billion .
Positive and Negative Risks
Investors should consider their natural gas and natural gas liquids price and demand expectations-especially in Appalachia with its limited takeaway capacity-as the factors most likely to affect Range.
Inflation is high and is expected to stay so. This will affect Range's costs including for drilling and financing.
Other risks are political and regulatory-particularly with the Biden administration, bankers including three of Range's largest institutional investors, and several states on the East Coast-Range's natural market--taking a race-to-zero-hydrocarbons posture.
Recommendations for Range Resources
Due to a small dividend yield, I do not recommend Range to dividend-seeking investors.
However, I recommend the company to energy investors seeking capital appreciation and have bought shares myself due to: a) successful debt paydown with more to occur, b) maintenance-level capital expenditures, c) generous share buyback authorization, d) gas market diversification to the Gulf Coast and Midwest, e) 27% upside to one-year target price and moderate forward price-earnings ratios, f) appropriate hedging and cost control, and g) uplift from natural gas liquids production and export.
The growth in the company's SEC reserve value by 9x from 2020 to $24.5 billion is outstanding. However, it's a reflection of extreme gas price volatility and could be expected to be lower this year. More impressive is Range's balance sheet improvement with a payoff of 20% of its debt in the last several months.
ir.rangeresources.com
For further details see:
Range Resources: Home On The Range