Range Resources -- an extra $60 Billion sounds good

Range Resources (RRC) announced today that it had recalculated its unproved resource potential from a range of 24-32 TCFE at year end 2009 to a range of 35 to 52 TCFE at year end 2010. The change is principally the result of three factors: higher estimates for per well reserves for those wells in the Marcellus Shale, a bigger portion of the Marcellus shale being "derisked", and the inclusion of reserves for the Upper Devonian Shale which is in the same location as the Marcellus but at a different level. A third shale in the Marcellus area, the Utica Shale has had test wells that flowed at 4.4 Mmcfe per day, but Range Resources did not include any potential reserves for the Utica in coming up with these numbers. There were also smaller increase for RRC's other properties.

This is extremely major news. Let's put it in context. If one uses the midpoint of the reserve ranges that RRC has announced one finds 28 TCFE at the end of 2009 and 43 TCFE at the end of 2010, and increase of 15 TCFE, or more than 50 percent. Valuing all this at $4 per mcf, which is less than the current market price for natural gas, the worth of the potential reserves that have been added in this report is sixty billion dollars. Of course, not all of this will be profit, but RRC's current estimates for 2011 have all-in finding costs and operating costs of under $1.60 per mcfe. With that cost estimate, the profit earned from these reserves would be 36 billion dollars, a figure about five time greater than the current market cap for the entire company.

Please do not misunderstand these figures. No one can take unproved potential reserve numbers and validly convert them into future profits. there are just too many unknowns to do that. What one can take away from the calculations, however, is this: RRC has enormous potential. Indeed, it is clearly worth much more than its current price in my opinion. Indeed, if the price of natural gas remains at its current level, RRC should continue rising.

I rate this one a strong buy. My 18 month target is $85.00.

Disclosure: I remain long RRC. I will likely add to those positions on today's news.