Energy Prospectus

Comments below are from a new report from Stifel.

Range Resources Corporation (RRC)

3Q19 Recap: RRC reported an in-line quarter relative to Consensus estimates. Lower 2019 capex
guidance (down $20 mm) is a positive, even though it was already anticipated. It is also nice to see
royalty and non-core asset sales crossing the finish line, improving RRC's leverage and liquidity profile at
least temporarily. Cash costs also continue to trend in the right direction. In anticipation of production
guide down in early 2020, we are now modeling only 2% y/y production growth for 2020 and 3% exit-to
exit production decline, assuming total capex spend of $585 mm, slightly below the maintenance level of
$650 mm.

Key Drivers of Stock Performance: RRC is down 57% ytd vs. peer group down 41% despite the
management team delivering on multiple asset sales. While asset sales and leverage profile do matter,
we believe this stock is mainly driven by adj. EBITDA revisions. Weakening NGL and natural gas prices
weighed on price realizations. Downward revisions to production guidance further reduced 2020 earnings
outlook.

Stifel’s Take: The bears note that asset sales fail to meaningfully improve the company’s leverage
profile. These investors also frowned upon share repurchases, noting that they have not worked for any
gas peers. Additionally, RRC continues to enjoy rich valuation, with some investors struggling to add
more to their exposure. The bears also believe that royalty sales negatively impact the cost structure and
should be resorted to only as a last resort. It is interesting to see more companies (GPOR, EQT, and AR)
announcing royalty sales following RRC’s lead. The bulls explore the potential for recovery in NGL prices
and try to see how it impacts RRC’s earnings. Apart from an NGL trade, a leverage trade is another trade
that could be taking place in the stock right now. We believe share repurchases ($100 mm authorization)
should support RRC stock in the near-term.

Key Catalysts: (1) Asset Sales and de-leveraging; (2) Liquids pricing; 3) Re-financing of near-term
maturities.

Valuation and recommendation: We maintain our Buy rating on the stock and decrease our target price
from $9/share to $8/share. Our $8.00 target price is based on a 10% discount to our 4P NAV estimate.
Our target price is based on the long-term Henry Hub price of $2.25/mcf and WTI price of $55.00/bbl.

EARNINGS SCORECARD
•
As a group, natural gas producers delivered a 7.5% adj. EBITDA beat for 3Q19. However, this earnings beat is nothing to be proud of in
our view, as Consensus estimates for the group declined almost 40% over the past 12 months, setting the bar low for 3Q19 earnings.
•
In light of oversupply expected next year, we remain cautious on natural gas equities. Our target prices are down 10% on average since our
last update despite very strong quarterly results. Our target price revisions are mainly driven by lower long-term NGL price assumptions.
Our 2020 and 2021 adj. EBITDA estimates are 14% and 13% below Consensus respectively.

THEMATIC TRADE IDEAS
• While our coverage universe emerged from the fall redetermination season largely unscathed, corporate bonds of natural gas companies
continue to trade at a steep discount, implying that leverage and liquidity remain the topic de jour. April re-determination could be a
much more challenging undertaking for natural gas producers, should natural gas prices remain depressed and banks continue to tighten
their lending requirements. Highly-leveraged companies (AR and RRC) will likely continue to underperform their peers.
• We believe investors’ focus will shift to 2020 guidance early next year. 4Q19 quarterly results could be tricky. On the one hand, we
expect meaningful productions beats, but, on the other hand, we anticipate deeper production cuts. RRC, GPOR, EQT, CRK, and COG
could potentially reduce their production outlooks further. We believe AR, CNX, and SWN will continue to stick to their guns, delivering y/y
production growth. With the exception of a few companies, FCF neutrality remains the governing factor for natural gas producers.
•
Stock picking is nuanced: Generally speaking, we would recommend "safe-haven" stocks, given the macro backdrop - the companies
with strong balance sheets, hedge books, and low breakeven prices. However, there is no clear-cut story in the natural gas space right
now. COG is not hedged for 2020+ at all. EQT is pursuing multiple asset sales and is at risk of losing its investment grade rating. CRK's
potential acquisition of CHK's Haynesville assets could have a binary outcome for the stock performance. Liquids-rich producers RRC,
AR, SWN, and GPOR continue suffer under weak NGL and crude oil prices. High leverage profile remains a deterrent for RRC, AR, and
CRK. CNX and MR had excellent 3Q19 updates, but positive momentum may not carry through. While no stock is perfect, COG, EQT, and
CNX meet at least two of the three criteria we are looking for given the rough waters ahead.