Range Resources (RRC) UPGRADE - Jan 12

[dan_s]

TPH: Upgrading RRC to Buy From Hold
Name is set up well for a constructive gas environment
Sector: NAm E&P | Ticker: RRC | Recommendation: BUY | Target: $11 | Close: $7.97 < My valuation is $14.50.
With name +9% since the end of November, we see room for continued outperformance in Energy if our commodities thesis plays out given lack of hedges in the 2022+ timeframe. At strip, we expect name to generate an average ~3% FCF/EV ’22-’23, but our increased conviction in a $3.25/mcf environment and sensitizing for $55/bbl WTI has us looking at an upside scenario wherein RRC moves to an average ~19% FCF/EV over that time frame as low maintenance capital in the ~$400MM-$425MM per year range leads to significant FCF generation. Balance sheet is likely to remain a key concern for investors, as elevated 3.0x Net Debt / EBITDA in 2021 remains a headwind at strip, however, sensitizing to our higher commodity price deck would drop leverage to 1.6x YE’22 and 1x YE’23. On valuation under our improved commodity outlook, marking-to-market FY’22 to 10% FCF/EV could improve valuation north of $17-18/shr.

TPH: Upgrading SWN to Buy From Hold < Southwestern Energy (SWN) is on my Watch List and now likely to move into our Small-Cap Growth Portfolio.
Hedge coverage leaves exposure to gas price upside near-term
Sector: NAm E&P | Ticker: SWN | Recommendation: BUY | Target: $5 | Close: $3.28
While the equity has outperformed over the past quarter, we’re moving off the sidelines on torque to commodity price upside relative to peers. At strip, the equity trades more cheaply than peers at a FY’22-FY’23 average FCF/EV of 5%, with balance sheet metrics at a better starting point over the near-term (ND/EBITDA 2x YE’21-YE’23), but what stands out is the magnitude to which metrics improve, relative to peers, when baking in what we think is an increasingly likely scenario of $3.25/mcf HH FY’22-FY’23. Given the company’s hedge protection is lighter vs. peers (~60% FY’21 dropping to ~20%) sensitizing our model for 3.25/mcf HH plus $55/bbl WTI would improve average FCF/EV to 22%, while compressing ND/EBITDA down to 1.2x YE’22 and 0.6x YE’23. On valuation, marking-to-market FY’22 (when majority of hedges roll off) to 10% FCF/EV could improve valuation to ~$8/shr. For FY’21, we continue to model a ~$923MM capital program (incl. CIE) to keep volumes flat (TPHe FY’21 3,015mmcfe/d), which generates ~$220MM of FCF at current strip in our model.