Ranger Oil Corp (ROCC) Update - Oct 19

[dan_s]

RBC Capital Report dated October 18, 2021. ROCC is in our Small-Cap Growth Portfolio.

Ranger Oil Corporation (ROCC)
There is a New Ranger in Town; Upgrade to Out Perform

Our view: We are upgrading ROCC shares to Outperform from Sector
Perform. The company recently completed its rebranding to Ranger Oil
from Penn Virginia (PVAC) and began trading under the ticker ROCC. Our upgrade
is based on the positive combined impact from its merger with LONE
and our increased commodity price outlook. ROCC has one of the highest
margin barrels and highest FCF yields in our coverage universe. The recent
LONE merger accretively built scale and improves its ability to enhance
economics on adjoining acreage.

Key points:
Upgrading ROCC to Outperform from Sector Perform. Our target increased
$16/share to $44/share related to accretion from the Lonestar Resources < My valuation is $46/share.
(LONE) acquisition and our new commodity price outlook. We now expect
$71-81/bbl (WTI) and $3.50-3.85/Mcf (HH) through 2023, on average.
Merger added scale and enhances economics. ROCC closed its merger
with LONE on October 6. The $370 million transaction (announced on July
12) included 5.9 million shares of equity issues to LONE shareholders and
assumption of $236 million in net debt. The benefits of the combination
include adding operating scale and core inventory, allowing longer lateral
development, and increasing FCF generation. We see synergy opportunities
from the larger operating scale and adjoining acreage that should go
beyond the $20 million estimate. The merger background highlights
a couple of interested partners, but it appears ROCC was the most
complimentary partner and that allowed a merger at an accretive price.

Debt reduction first FCF priority, but M&A still strategic focus. Reducing
debt toward management's sub-1.0x leverage target remains the first
call on near-term FCF. Once achieved, which we think occurs by 1Q22,
ROCC will evaluate how to deploy incremental FCF with further debt
reduction, shareholder returns or future M&A all considerations. We think
the bias is towards M&A as ROCC recognizes the importance of further
building accretive scale both to benefit size of operations and increase
investor relevancy. Any deal would need to be accretive to the FCF outlook
and not overly stress the balance sheet. Management sees a number of
opportunities to accomplish this objective in the Eagleford Basin.

Thoughts into 3Q21 and beyond. Our 3Q21 EPS/CFPS of $1.18/$2.03 are
a touch below Consensus at $1.22/$2.06; however, we expect estimates
bias slightly lower when updated for preannounced results. We expect
management to discuss early 2022 plans on the earnings call, yet it's likely
too early for formal guidance. ROCC plans to run at a two-and-half rig
pace next year; however, with capital efficiencies on the combined asset
base, the company believes this can be accomplished with just two rigs.
This should drive a proforma growth rate of 8-10% that we think can be
sustained for a few years. ROCC also restructured its hedge book, mostly
given inherited positions from the merger, and now has more exposure to
bullish 2022 oil prices. Operationally, there are increases to average lateral
lengths (from 8k feet to 10+k), working interest (to 90+%), and pad sizes.
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ROCC is at the top of my list for promotion to our Sweet 16 for 2022.