Range Resources (symbol RRC) was my stock of the month for November. I closed the month of October at $37.39 and is currently trading at $44.28, a gain of 18.5% in just over a month. While that profit is a good return, my view sithat there is still a strong case to be made both for natural gas producers and for RRC in particular. As a result, I recommend holding Range Resources longer.
First, the market for natural gas has been strengthening in recent weeks. The fuel is still trading well below the price one would expect based upon the historic relationship between oil and nat gas prices. For the most part, this lower gas price is the result of heavy supply coming to market. Many natural gas producers sold their production through futures contracts in 2008 and 2009 when prices were higher. These hedges allowed some producers to keep the output high despite having costs of production at the higher end of the industry range. Most of these higher price hedges have or will soon have expired. As a result, the higher cost producers may cut back on production with the result of a concomitant increase in the market price for natural gas.
Further, the decision by president Obama to stop off shore drilling in waters off the East coast and the eastern part of the gulf of Mexico should also put upward pressure on the price of natural gas. This will be the result of both the reduction in the US supply of domestic crude which will force all energy prices higher and the more specific loss of some production of gas from offshore wells. In view of Obama's decision, this drilling ban will be in effect at least until 2013 when we may see a new president.
Second, the principal drilling area for Range Resources, the Marcellus shale in Pennsylvania is likely to proceed now with very little problem. The government in Pennsylvania is now fully in the hands of the Republicans with governor Corbett taking office and the Legislature in total control by the GOP. Corbett made clear during his campaign for governor that he was in favor of full development of the Marcellus in Pennsylvania. That view coupled with the GOP control of the Legislature means that the threat to drilling from the environmental lobby in Pennsylvania is essentially eliminated. There remains issues with regulations that could be issued by the Delaware River Basin commission, but these would affect only a small portion of the RRC drill sites.
Interestingly, the New York state ban on drilling with hydraulic fracturing will also help RRC, as it removes the potential of competition from drillers in the northern part of the Marcellus formation. While there are other methods that can be used to complete wells in NY (like the process used by GasFrac which I have written about), there is little likelihood that NY will allow any drilling permits to issue no matter what process is used.
The Pennsylvania political climate is also very helpful to RRC from the standpoint of tax rates. Again, the Republicans made clear that while they want to have a state excise tax for natural gas production, they want it to be low enough so that it will not present any obstacle to the full develoment of Pennsylvania's resources. After all, the expectation is that this natural gas industry will create over 150,000 new jobs in Pennsylvania by the middle of next year. (For comparison, this is about four times the total number of jobs created in the entire USA in November.)
The next point of the analysis is that Range Resources and the other Marcellus shale producers are the low cost gas producers in the US. In addition, the gas produced is very close to the large East Coast market, so transport costs are low as well. As a result, while prices remain low enough to deter producers in other areas from ramping up production, RRC can keep pushing its drilling program and reap nice profits. If the price of the fuel rises from that point, it will all go to RRC's bottom line.
The last item with regard to RRC is this: the company has the second largest position in the Marcellus after Chesapeake Energy. As such, RRC remains a tempting target for acquisition by a major that wants in on this play. As things improve for RRC, the likelihood of such a takeover rises as well.
My recommendation is to hold on to Range Resources for a nice long ride up.
Disclosure: I am long RRC and have added 25% additional stock to the positions in the accounts I manage since I first named RRC stock of the month for November
No comments:
Post a Comment