Range Resources (RRC) Update

[dan_s]

In the last 3 months, 7 ranked analysts set 12-month price targets for RRC. The average price target among the analysts is $22.50. The price forecasts range is $19 to $25.

To say that Wall Street is negative on the "gassers" is an understatement. RRC is in much better shape today than it was a year ago when the stock was trading at $35. Just remember that the Wall Street Herd can change directions very quickly.

I have updated my forecast/valuation model for RRC, extending it through 2019. My valuation increases by $1 to $34.00.

Things to remember about RRC:
> My valuation assumes that Henry Hub natural gas prices will average $3.00 for 2018 and 2019.
> RRC's current production is approximately 2.2 Bcfe per day (68.5% natural gas, 27.4% NGLs and 4.1% crude oil)
> ~65% of their Q1 2018 natural gas is hedged with SWAPs at $3.43, so Q1 results will be quite good.
> NGL prices are ramping up and will probably be much higher than what I am using in my forecast model.
> RRC's production increased YOY in 2017 by 30% and they plan to increase production by 20% YOY in 2018 and in 2019; production will be over 3 Bcfe per day by the end of 2019.
> RRC has very low cash expenses. LOE, transportation, processing and production taxes are approximately $1.30/mcfe, so they have solid cash margins, even at today's low gas price.
> Reported earnings will get a big boost from the lower income tax rates.
> RRC holds over a million acres of leasehold in the Marcellus/Utica shale plays, the most important natural gas reserves on this planet. They have over 100 TCFE of 3P recoverable gas and NGLs. Most of their leasehold is now HBP. This fact makes RRC a Prime Takeover Target, especially at today's depressed stock price.

RRC and our other two gassers (AR and GPOR) closed on 12/29/2017 with market caps below book value. For those of you that understand how conservative GAAP accounting rules are for upstream companies, you should know that it is ridiculous for any profitable upstream company to trade below book value. My valuations are break-up valuations and IMO they are conservative, especially for RRC.

Just remember that eventually the mood on Wall Street will change when it comes to the gassers. All it will take is an extended cold spell. OH MY, THAT IS WHAT IS HAPPENING RIGHT NOW!

[cmm3rd]

Dan,

Do you have access to the Morgan Stanley note/report giving its rationale for today's downgrade of RRC?

Separately, what is your view of what is continuing to drive negative gasser equity sentiment in the face of current HH = $3.44 and ngas storage levels 300 bcf below the 5 year average and further cold weather in the forecast? And what is your view of what it would take to change sentiment?

Thanks.

[dan_s]

As I said in the newsletter .... "The Sweet 16 is probably range bound until Q4 2017 results start pouring in. The share prices will just move up and down with commodity prices until mid-February. Pioneer Natural Resources (PXD) will be the first Sweet 16 company to announce Q4 results on February 6th." < This is when the real fun should begin.

I do not have the MS report on RRC.

The Wall Street Gang is still negative on the gassers. The front month NYMEX contract for ngas is up, but the March contract closed at $3.06 today (the March contract closed at $2.54 on December 21). The BIG COLD WAVE coming February should FINALLY convince the WS Gang that the gas price will hold up this year. I personally think the U.S. gas market is much tighter than WS realizes it is, but I could be wrong.

Go to the bottom of my forecast/valuation model for RRC and you will see that my valuation of $33.00 assumes a big drop in RRC's realized gas price from $3.00 in Q1 to $2.70 in Q2. Keep in mind that 45% of RRC's Q2 to Q4 2018 gas is already hedged at $3.01 and the Marcellus/Utica differentials are shrinking.

STAY HEAVILY WEIGHTED TO LIQUIDS. Investing in the "gassers" is a contrarian bet because Wall Street has totally bought into the paradigm that we have an abundant supply of natural gas. We do have a lot of gas reserves, but reserves in the ground and production capacity are totally different. If I am right about this, the Wall Street Gang will eventually come around to like the gassers, but "eventually" can take a long time.

[davidc257]

What was so bad about today’s guidance that leads to such a substantial drop? (1/24/18)

[dan_s]

Prior to this, RRC was expected to increase production by 20% annually. The Wall Street Gang is sending mixed signals to the upstream companies. On one hand they tell companies that they want "free cash flow" used to shore up the balance sheet instead of an aggressive growth focus, but they get pissed when production guidance is lowered. I will adjust my forecast model for RRC and post it to the EPG website late today. RRC is a rock solid company and they hold over a million acres of leasehold in the Marcellus/Utica, the most valuable natural gas resource play on earth. - Dan
-------------------------------------------------------
FORT WORTH, Texas, Jan. 24, 2018 (GLOBE NEWSWIRE) -- RANGE RESOURCES CORPORATION (NYSE:RRC) today announced a 2018 capital budget of $941 million, which is below anticipated 2018 cash flow at current strip prices and generates annual production growth of approximately 11%. Additionally, Range announced a five-year outlook from 2018 through 2022 that generates cumulative free cash flow of approximately $1 billion and reduces leverage to below 2x net debt to EBITDAX by year-end 2022, assuming no asset sales.

Highlights –
•2018 capital budget of $941 million generates expected annual production growth of ~11% within cash flow
•~$1 billion of cumulative free cash flow through 2022
•Debt to EBITDAX ratio reduced to 2.7x in 2020 and below 2x by 2022, even without asset sales
•Free cash flow yield at end of five-year outlook of ~33%
•Annual production CAGR of approximately 13% per debt-adjusted share in five-year

[dan_s]

The Wall Street Gang seems to have missed this. Finding costs of $0.31/mcfe is incredibly low.

Range Announces 26% Increase in Proved Reserves

FORT WORTH, Texas, Jan. 24, 2018 (GLOBE NEWSWIRE) -- RANGE RESOURCES CORPORATION (NYSE:RRC) announced today that proved reserves at December 31, 2017 increased by 26% from the prior-year to 15.3 Tcfe.


Highlights –
•SEC PV10 reserve value increased by 119% to $8.1 billion
•Proved reserves increased by 3.2 Tcfe, or 26%
•Reserve extensions, discoveries and additions were a record 3.5 Tcfe
•Proved developed reserves increased 1.6 Tcfe, or 23%
•Drill-bit finding cost of $0.31 per mcfe
•Future development costs for proved undeveloped reserves are estimated to be $0.38 per mcfe
•Unhedged recycle ratio over 3x based on future development costs of $0.38 per mcfe
•Core undrilled inventory of over 3,800 Marcellus locations, assuming 10,000 foot laterals

Commenting on Range’s 2017 proved reserves, Jeff Ventura, Range’s CEO, said, “Range had another solid year of reserve growth, with impressive drill-bit finding costs of only $0.31 per mcfe. Performance revisions are included, but revisions from increased prices are excluded. Positive performance revisions continued in 2017 as we extended laterals, improved targeting and drove efficiencies throughout our developed leasehold and infrastructure. Future development costs for proven undeveloped locations are estimated to be $0.38 per mcfe, which is outstanding and should improve our top tier unhedged recycle ratio to over 3x. Importantly, Range added a record 3.5 Tcfe to proved reserves from extensions, discoveries and additions, driven primarily by our large inventory of low-risk, high-return projects in the Marcellus Shale.”

“Looking forward, we see capital efficiency gains continuing as we drive down normalized well costs with longer laterals and drilling on existing pads, while enhancing recoveries with improved targeting and completions. Similar to previous years, this strong reserve growth reflects high quality acreage, as less than one third of our offset proven undeveloped locations are currently recorded for each horizontal producing well. We believe this will provide consistent SEC reserve growth over time as additional acreage is classified as proven and capital is allocated to offset locations. Our economic resilience is further demonstrated in the year-end PV10 reserve value of $9.5 billion using futures strip pricing from year-end and current sales contracts. With 55% of SEC reserves being proved developed (PD), our PD reserve life and debt per PD reserve ratios remain exceptionally strong.”