Range Resources (RRC) Update - May 24

[dan_s]

TPH Morning Notes 5/24/2019

RRC Stock Thoughts
Marketing arrangements offer near term NGL insulation, but leverage keeps us sidelined longer term
Sector: NAm E&P | Ticker: RRC | Recommendation: HOLD | Target: $24 | Close: $7.77
NGLs remain topical with investors as highlighted by the Q1 call. We understand these concerns as Mont Belvieu propane has come under pressure, but RRC sits in an advantaged position as volumes primarily go to Marcus Hook which offers a +10c/gal (+17%) premium today.
In our view, RRC's marketing strategy should protect NGL realizations over the coming quarters. That being said, we remain sidelined on the name as our cautious medium-term view on natural gas is likely to have serious implications for balance sheet leverage without meaningful asset sales.
Looking at 2020 metrics at current strip ($2.69/mcf) / $2.50 / $2.25, we see FCF of $236MM / $139MM / $10MM and leverage of 3.0x / 3.3x / 3.9x.
While we see our modeled 6% production CAGR as ~FCF neutral for the next several years even at $2.25 flat, we believe going to maintenance capex in 2020+ would be preferred by the market. Based on our model, holding Q4'19 volumes of TPHe 2,414mmcfe/d flat for a 3-year period would require average capex of ~$750MM while generating aggregate FCF of $850MM / $450MM at $2.50 / $2.25 HHUB. From an asset sale perspective, we see additional SW PA mineral sales (TPHe up to 2% ORRI = $600MM in proceeds with limited net cash flow impact) as most likely followed by NE PA and eventually Terryville.