Energy Prospectus

Comments below are from our friends at Stifel

Range Resources Corporation (RRC, $23.98, Buy; Target $32.00) - Raising Rating to Buy - Michael S. Scialla
We are raising our rating to Buy from Hold and our target to $32 from $18 due to strong natural gas and NGL prices and diminished near-term liquidity risk. Based on recent NYMEX strip prices, our projected FCF estimate is more than double the $750MM of debt that matures through 2023 and debt/TTM EBITDA declines below 1.0x by YE22 from 5.2x at YE20. The stock recently hit a 2-year high, reflects much of the improved outlook, and trades at premium to Appalachian gas peers. However, our estimates could prove conservative if U.S. natural gas prices elevate toward international benchmarks in order to discourage LNG exports when domestic demand peaks this winter. Longer-term, the company's cost structure is expected to improve as GP&T fees contract. In short, commodity prices have meaningfully improved the risk/reward for a company with outsized near-term financial and operational leverage.
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My current valuation of RRC is $29 and likely to go higher if their Q3 results and guidance match or exceed my forecast. Each passing day makes the oil, gas and NGL price assumptions I am using for 2022 look too low. Even based on HH gas price averaging $3.50 in 2022, RRC should generate over $6.00 of operating cash flow per share. That would totally eliminate any near-term liquidity or debt problems for RRC because they should generate over $1Billion of free cash flow (FCF) in 2022. RRC is going to generate over $500 million of FCF in 2021.

RRC was trading at $24.54 at the time of this post.
I expect them to report Q3 results on October 26.

Dan any worries that raw materials/supply chain bottlenecks will eat into margin's and/or production forecasts?

My take is that rebuilding the supply chain will take a lot more energy than Wall Street realizes.

Yes, lack of materials for completing new wells like casing and tubing could slow down production growth, but that would cause energy prices to go higher.

At the current active rig count, I don't think upstream companies will have trouble getting what they need. However, the supply chain problems might be worse than any of us realize. A shortage of truck drivers might be a problem. I am more worried about the FOOD supply chain.

Hi Dan ... I am reverse-engineering the NGL pricing for RRC using the data from their July powerpoint and comparing it with the Bloomberg pricing on a component-by-component basis. Looks to me like RRC is getting about 17% below what Bloomberg (Mount Belvieu) gives. So basically I get $54/bbl for NGLs if they get 100% of the Mount Belvieu price and then I knock off something for the discount.

That said ... RRC says they are the BEST in pricing for NGLs in the Marcellus -- but Antero is also in the Marcellus and they are getting astronomical figures. They are currently getting $64/bbl. -- both domestically and overseas. In Q1 and Q2, Antero got $40/bbl on NGLs while RRC got sub-$30.

Anyway just using like $39/bbl. for Range in 2023 gives a nice boost to earnings. Mike

Thanks for that very good post. I do expect all of the upstream companies that I follow to report much higher NGL price realizations than the prices in my forecast models for Q4 and Q1. My hope is that they provide guidance on this during their Q3 conference calls next week.

AR, EQT and RRC all have the ability to move gas and NGLs out of the Appalachian Basin to markets that will be forced to pay much higher prices than NYMEX futures prices.

See propane prices here: https://www.barchart.com/futures/quotes ... res-prices

Propane is priced in gallons, so multiply the prices at the link above by 42 to get the price per barrel.

As I mentioned in the podcast, propane is already being rationed in some areas, including Texas.

Ah interesting thanks. Looks (to me) like AR just has better NGLs than RRC: AR has more propane whereas RRC has more ethane.

Note received from an EPG member who is also a financial analyst.

Natural Gas Liquids (NGLs) are becoming an increasingly big deal for gas-focused E&Ps, and I am raising my estimates for Range Resources to better reflect prevailing NGL prices. Range is 70% gas by production – but only 55% gas by sales (as of 2022-23). This is because oil and NGLs fetch 1.5-3x the price of gas by energy content. . I have boosted my NGL price forecasts by $5-6/bbl. for 2022 and 2023.

The new price target for RRC of $27.55/share (was $22.71) is based on a 6x multiple to expected 2023 earnings (same as before). I guess one could justify a higher target P/E now that debt is declining relative to market cap. If this process continues, investors may start to affix a forward P/E closer to 8x here. But we’re really not there yet and this is still a high-debt company with a lot of money-losing hedges in place.

“Natural Gas Liquid” is really just an umbrella term for byproducts of oil and gas drilling. The key ones are propane, ethane, butane, isobutene and natural gasoline. The modeling challenge is that the composition of NGLs is different in every play. For instance, Range offers a breakdown of its theoretical barrel in a recent presentation. From there, I have applied the prevailing Mont Belvieu benchmark pricing to arrive at a theoretical per-barrel price.

In theory I come up with $41.14/bbl for Range’s NGL sales. Reverse engineering the results against prior quarters suggests Range does in fact get right around the implied benchmark. (Lately the firm says it is getting $1-2/bbl. above the benchmark.)
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This kind of discussion is why I created the EPG Forum. A discuss like this is valuable for our members.