Range Resources Corporation is quite correctly the company most associated with the Marcellus Shale gas field which underlies much of Pennsylvania, West Virginia and (to a lesser extent) New York. Range Resources has the second largest acreage position in the field after Chesapeake Energy Corp. For Chesapeake, however, the majority of its holdings are elsewhere, while Range Resources has over 80% of its activity in the Marcellus. Indeed, Range Resources is in the process of selling its wells and acreage in the Barnett shale field in order to redeploy the funds obtained into the Marcellus.
2010 was not kind to Range Resources; it ended 2009 at $49.85 per share and finished 2010 some $4.44 lower at $44.98 per share. This price drop took place even though Range Resources met its ambitious goals for increased production. Range was a victim of the weak prices for natural gas. So far in 2011, the stock price has recovered; at $49.67, it has just about reached the level of the close of 2009. This is also up over $10.00 from when I made RRC my stock for November. Even with this recovery in the price, I believe that the case for this company is compelling.
First, one needs to understand the economics of Range Resources wells in the Marcellus. Range estimates that it has reserves on the acres it already controls in the area of 20 to 27 tcfe (trillion cubic feet equivalents). This is an enormous quantity of natural gas. Better still, of this total, Range estimates that 14 to 19 tcfe is wet gas which comes from southwestern Pennsylvania where Range is by far the largest presence. Range estimates that its all-in cost for finding and development in 2011 will be less than $1.00 per mcfe (thousand cubic feet equivalents). Operating costs are estimated to be less than 60 cents per mcfe. Since the price for natural gas is now around $4.50, the profit potential is clear. Indeed, the consensus of analysts covering the stock shows a near doubling of profits for 2011 to 97 cents per share.
These numbers do not tell the entire story, however, for two reasons. First, with so much of Range’s production being wet gas, one needs to consider the extra revenue that the natural gas liquids bring in for Range. According to Range’s last public presentation, a price of $5 per mcfe for natural gas and a price of $75 per barrel for oil means that Range recovers about $7.28 per mcfe after the extra revenue for the liquids is included. This is quite a boost to revenue, particularly with oil now flirting with $100 per barrel. Second, Range has announced that it has hedged 84% of its 2011 production with a floor of $5.56 and a maximum of $6.48 per mcfe. So Range has taken much of the worry of lower gas prices out of the picture.
To give a better picture of what these numbers all mean, one can look at the date that Range Resources itself has released. According to the company, at a price of $5.56 per mcfe (the floor on the hedges) and with wells that produce about 5 bcfe each, the internal rate of return for Range’s investments is in the area of 90%.
A further improvement in the outlook for the company comes from three other facts. First, the company has a strong balance sheet. It has all of its 2011 capital expenditures funded by the proceeds of an expected sale of its interest in the Barnett Shale field. It also has reasonable long term debt with no maturities until 2015 when about 10% of the total will come due. Second, after the election last November, Pennsylvania is governed by both a governor and legislature that are strongly pro-growth for drilling. Since the current estimate is that the natural gas industry will bring over 100,000 jobs to the state over the next 18 months, this is not surprising. Nevertheless, it means that there will likely be none of the government obstruction to drilling or high taxes that could adversely affect Range Resources. The exact opposite result in New York has that state’s government stopping all drilling in the portion of the Marcellus that lies under the Empire State. This reduces competition. Third, the actions by the Obama Administration to stop off shore drilling and remove federal land from drilling availability has reduced oil supplies, contributed to the world price rise and makes the economics of natural gas that much more compelling. If the USA is to move forward with any program for energy independence (and that is a rather big if), it will necessarily have to include a massive increase in the use of natural gas.
Of course, Range Resources also faces some outside problems. There is the ever present issue of hydraulic fracturing which some environmentalists worry may cause contamination of the water supply. While there is scant evidence of any problems arising from the hydraulic fracturing, this is the basis that New York used to stop drilling within its borders. Range has been proactive in dealing with the issue (releasing the composition of its completion fluids), but this is the type of issue that is unlikely to ever go away fully. Nevertheless, the Pennsylvania political climate should insulate Range Resources from all but federal action which is not on the horizon.
On the whole, Range Resources looks like a good value at current prices.
Disclosure: I am a long time investor in Range Resources and am currently long the stock. I have been moving my natural gas investments to a higher concentration in RRC in order to focus on the Marcellus.
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