Range Resources (RRC) Update - Oct 4

[dan_s]

Notes below are from RBC Capital, which IMO has one of the best energy sector teams.
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October 3, 2023
Range Resources Corporation
Quarterly Check-Up: 3Q23
RBC rates RRC a BUY with a $38.00 price target

Our view: RRC's operational and financial results continue to be solid, and
we expect a similar performance into YE23. During 3Q23 Appalachian basis
differentials widened but the impact to RRC was negligible. The company
should deliver its 11th consecutive quarter of FCF, which demonstrates the
consistency of its business. Production is 50% hedged in 2024, providing
downside protection. We expect FCF to focus on debt reduction/cash build
with buybacks occurring when there are larger stock price dislocations.
Key investor debates are pace of stock buybacks and debt reduction, NGL
market strength, and plans for growth/DUC inventory.

Key points:
• We lower our 3Q23 EPS/CFPS estimates by $0.02 to $0.33/$0.88, mostly
reflecting modestly lower natural gas price realizations and production.
We expect a slight beat to consensus cash flow estimates where EPS/
CFPS is currently at $0.33/$0.84. < Compares to my operating CFPS forecast of $0.87
• We model 3Q23 production at 2,121 MMcfe/d (111 Mb/d liquids),
which is up 2% sequentially and near the midpoint of the 2,110-2,130
MMcfe/d guidance. Weaker pricing in Appalachia likely resulted in RRC
intentionally managing production levels, but we expect volumes to be
inline. Our estimates are similar to the consensus outlook.
• We expect 3Q23 capital spending of $165 million, matching the
consensus estimates. RRC guidance was for spending similar to last
quarter ($174 million). We calculate FCF generation of $48 million. < Compares to my forecast of $44 million FCF.
• RRC hedged 53% of natural gas and 70% of its oil production, resulting in
a $60 million cash settled gain.

Channel checks and investor topics:
• The 3Q23 update should reflect another consistent operational
performance, which has been a staple for RRC. FCF should grow steadily
into YE23 with spending falling and volumes rising. 4Q23 production
should grow sequentially to the annual high point. We think RRC delayed
the timing of some well completions during 3Q23 to optimize pricing.
• Appalachian natural gas basis pricing was soft in both 2Q23 and 3Q23,
but we believe management is confident in the FY23 ($0.35)–(0.45)/
Mcf guidance. Management remains constructive on the propane market
and thinks balances should tighten from current normal levels when
evaluated on a days-of-supply.
• We expect early 2024 plans to be consistent with a maintenance
activity level, but there is optionality for growth. RRC's DUC inventory
provide flexibility in late 2024/2025. There is an excess backlog of 11
wells entering 2023, which allow a quick pivot to modest growth, if
market fundamentals warrant. We expect maintenance production can
be accomplished with ~$600 million in spending and a flat YoY rig count.
• FCF is focused on debt reduction and building a cash balance. RRC should
near its $1.5 billion debt target by early 2024, which would pivot more
focus on stock repurchases and a growing base dividend. Similar to 2Q23,
we do not anticipate stock repurchases in 3Q23.
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My Q4 2023 forecast is based on HH ngas averaging $2.75/mcf, so there is upside risk to my forecast if ngas averages over $3.00.
If HH ngas does average $3.25 in 2024, Range's operating cash flow could increase by close to $400 million, to ~$1,430 million.
My current valuation of RRC is $35.00.
If natural gas prices move over $4.00 in 2H 2024 (my current WAG), Range's assets in Appalachia (Marcellus/Utica) will be extremely valuable. At that gas price, their PV10 net asset value will exceed $50/share.