Range Resources (RRC) announces a BIG SALE

[dan_s]

Range Announces Asset Sales That Will Total $634 Million

FORT WORTH, Texas, July 19, 2019 (GLOBE NEWSWIRE) -- RANGE RESOURCES CORPORATION (NYSE: RRC) today announced that it has agreed to sell a 2% proportionately reduced overriding royalty interest in 350,000 net surface acres in southwest Appalachia for gross proceeds totaling $600 million. The two separate transactions are effective as of March 1, 2019 and apply to existing and future Marcellus, Utica and Upper Devonian development on the subject leases, while excluding shallower and deeper horizons. The properties produced approximately 1.9 Bcfe net per day in the first quarter of 2019 and annualized cash flow associated with these overriding royalty sales is expected to approximate $48 million, based on first half 2019 pricing.

Range also completed the sale of certain non-producing acreage in Pennsylvania for gross proceeds of $34 million that closed in June 2019. The properties sold included approximately 20,000 acres in northwest Armstrong County. Sale processes to monetize additional non-core assets remain underway.

The royalty interest transactions are scheduled to close during July 2019 with proceeds utilized to repay amounts outstanding under the Company’s revolving credit facility. The combined gross proceeds of $634 million will reduce total debt by approximately 17%. Annual interest expense is expected to decline by approximately $30 million and offset a significant amount of the cash flow reduction associated with the royalty sales.

“Following the expected closing of these transactions, Range will have executed a $1 billion reduction in absolute debt over the past 12 months as the Company strengthens the business through organic free cash flow generation and asset sales”, said Jeff Ventura, CEO and President of Range Resources. “These asset sales once again highlight the significant intrinsic value of our assets. Over the past year, Range will have generated asset sale proceeds that equate to approximately 75% of our current market cap through the divestment of assets with a net impact to annual cash flow of less than 4%. Harvesting value from our asset base through these divestitures coupled with capital efficient operations positions Range for future success through commodity price cycles.”

J.P. Morgan Securities LLC acted as the financial advisor to Range on the overriding royalty sales. Vinson & Elkins LLP acted as legal advisor.

RANGE RESOURCES CORPORATION (NYSE: RRC) is a leading U.S. independent natural gas, NGL and oil producer with operations focused in stacked-pay projects in the Appalachian Basin and North Louisiana. The Company pursues an organic development strategy targeting high return, low-cost projects within its large inventory of low risk development drilling opportunities. The Company is headquartered in Fort Worth, Texas. More information about Range can be found at www.rangeresources.com.
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I will update the RRC forecast/valuation model and post it to the EPG website later today.
> RRC was already generating free cash flow from operations
> RRC's current production (pre-sale) is approximately 2.3 Bcfpd (~380,000) BOE per day.
> ~ 30% of RRC's production is liquids

[dan_s]

From RRC's July presentation (before asset sales above): Proved Reserve Value (PV10), net of debt, equals ~$24/share at year-end strip pricing.

First Call's price target is $11.56. In just the last 3 months, 5 ranked analysts set 12-month price targets for RRC. The average price target among the analysts is $8.81. < Note that NONE of the analysts reports on RRC include the sale announced on July 19th.

RRC closed on July 19 at $5.29.

[bobs]

I think all of the "gassers" have tanked about the same amount in stock price and if NG prices continue to drop which one or two would be the least likey to be at risk of going under in a worst case environment if you could even speculate on that.

[dan_s]

RRC will announce Q2 financial results and revised production guidance on Thursday, July 25. So, I will update my forecast/valuation again next weekend.

My "WAG" at how the big sales they announced on July 19 will impact 2019 cash flow from operations:
> Full-year operating cash flow per share should be approximately $750 million ($3.00/share), which is more than enough to cover this year's capex budget.
> So, 100% of the sales proceeds can be used to pay down debt.
> In Q1 2019 Range's realized commodity prices, including cash settlements on their hedges were $3.09/mcf for ngas, $23.17/bbl for NGLs and $49.61/bbl for crude oil. Crude oil is only ~2.4% of the Company's production mix.
> My 2020 forecast is based on realized prices of $2.40/mcf for natural gas and $22.00/bbl for NGLs. Cash flow from operations should be approximately $670 million ($2.68/share) at those "realized" prices.

The argument can be made that since the company is paying off 17% of their debt, the multiple used to value the common stock should be raised.

My valuation, based on just 4X operating cash flow per share, declines by $0.70 to $13.00/share.

RRC's "Reported Net Income" for Q2 will include a very large mark-to-market adjustment on their hedges, which is not included in my forecast model.

Conclusion: RRC is a profitable "gasser" (even at today's NYMEX strip prices), can fund 100% of a D&C program that should generate ~10% annual production growth AND it will have a much stronger balance sheet at year-end 2019 than it did at year-end 2018. Based on where I think their P1 reserves will be at year-end, RRC's net asset value (PV10) will be more than $20/share at 12-31-2019. This doesn't mean the share price will go up. That will only happen when the Wall Street Gang decides natural gas isn't so bad after all. You have to make your own guess at when that will happen, but sometime in the winter is a good guess.

[dan_s]

bobs:
None of them are in serious financial difficulty now. Even if natural gas goes to $2.00/mcf, which I think is highly unlikely, all four of the gassers in the Sweet 16 will be able to generate a lot of cash flow from operations in 2020.

Here is what you can do to confirm this.
1. Take a look at how much gas they have hedged in 2020. It is shown at the bottom of each company's forecast model or you can find it in our recent profile on each company. There is also a section on Liquidity in each profile.
2. All of my forecast/valuation models assume that ngas will average $2.40/mcf in 2020.
3. For example, Antero Resources (AR) which I just updated yesterday has 100% of their 2019 gas hedged. Therefore, during 2H 2019 the day-to-day moves in the NYMEX gas price has almost no impact on their revenues. In 2020 Antero has ~60% of their ngas hedged at $3.00/MMBtu. So, if nature gas averages $2.00 in 2020, it will only lower Antero's realized ngas price by $0.16/mcf. Why? because ($2.40 - $2.00) X 40% = $0.16/mcf.

The NYMEX strip price for Q1 2020 was $2.61 on Friday. Keep in mind that natural gas demand will go much higher in the winter, so the odds of Henry Hub ngas trading in the physical market for under $2.00 before next summer is highly unlikely.

Another thing to remember. All four of the Sweet 16 "gassers" (AR, GPOR, RRC and SWN) produce most of their natural gas and NGLs in the Marcellus/Utica play. That region had significant takeaway capacity issues a year ago. Those marketing issues have been resolved and realized gas and NGL prices at the wellhead are much better today. In other words, all four of these companies have survived a much tougher market than we have today.