Energy Prospectus

Operating cash flow of $276 million for the quarter compares to my forecast of $287. Lower capex spending kept free cash flow from operations near my forecast.

FORT WORTH, Texas, Oct. 26, 2021 (GLOBE NEWSWIRE) -- RANGE RESOURCES CORPORATION (NYSE: RRC) today announced its third quarter 2021 financial results.

Highlights –

Realizations before index hedges of $4.37 per mcfe, or approximately $0.36 above NYMEX natural gas

Pre-hedge NGL realization of $34.05 per barrel, a $6.14 per barrel increase versus prior quarter < Very good news, compares to my NGL price forecast of $27.00/bbl. Hopefully, AR reports close to the same NGL prices.

Natural gas differentials, including basis hedging, averaged $0.35 per mcf below NYMEX

All-in third quarter capital spending was $96 million, approximately 23% of the annual budget

Production averaged 2.14 Bcfe per day, approximately 30% liquids < Compares to my forecast of 2.17 Bcfepd.

Reduced total debt outstanding by approximately $91 million

All-in 2021 capital budget lowered by $10 million to $415 million

Improved midpoint of 2021 natural gas differential guidance by approximately $0.07 per mcf

Increased midpoint of 2021 NGL differential guidance by $0.25 per barrel

Divestiture contingent consideration fair value increased $12.9 million to $50.2 million

Commenting on the quarter, Jeff Ventura, the Company’s CEO said, “Range remains committed to disciplined capital spending and generating sustainable free cash flow. This was demonstrated in the third quarter, as Range generated $276 million in operating cash flow before changes in working capital, as compared to just $96 million of all-in capital spending. We expect to generate significant free cash flow in the coming quarters and rapidly approach balance sheet targets with leverage trending below 1x by the end of next year at current strip pricing. Additionally, we continue to make progress on other key objectives: improving margins, generating free cash flow, and operating safely while maintaining peer-leading capital efficiency. We believe Range is differentiated as a result of our low sustaining capital, competitive cost structure, liquids optionality, marketing strategies, environmental leadership and importantly, our multi-decade core inventory life, which is an increasingly important competitive advantage.”
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GAAP revenues for third quarter 2021 totaled $303 million, GAAP net cash provided from operating activities (including changes in working capital) was $192 million, and GAAP net earnings was a loss of $350 million ($1.44 per diluted share). Third quarter earnings results include a $652 million derivative fair value loss due to increases in commodity prices.

Non-GAAP revenues for third quarter 2021 totaled $795 million, and cash flow from operations before changes in working capital, a non-GAAP measure, was $276 million. Adjusted net income comparable to analysts’ estimates, a non-GAAP measure, was $130 million ($0.52 per diluted share) in third quarter 2021. < Compares to my net income forecast of $141.3 million ($0.58/share).

As of October 20, 2021, Range had approximately 65% of its fourth quarter 2021 net revenue hedged and less than 50% of its expected calendar 2022 net revenue hedged. Since Range’s July update, the average floor and ceiling prices on incremental 2022 natural gas hedges were $3.76 and $4.19, respectively. < This should raise my forecast realized price of Range's 2022 gas to $3.50/mcf.

This is nice: "Range is entitled to receive contingent consideration from last year’s sale of North Louisiana assets. The remaining contingent consideration of up to $75.0 million is based on future achievement of natural gas and oil prices based on published indexes and realized NGLs prices of the buyer for the years 2021, 2022 and 2023. At the end of third quarter, the fair value of the potential payments was $50.2 million, an increase of $12.9 million compared to last quarter."

I have updated my forecast/valuation model for RRC and it will be posted to the EPG website on Wednesday morning.

The Company's Q3 results came in slightly below my forecast and they lowered Q4 production guidance a bit, but my valuation increases by $1.00 to $30.00. I am now using a multiple of 2021+2022 CFPS that gives equal weight to both years. I have lowered my valuation multiple from 6.0 to 5.5 just because I want to see Range's production forecast for 2022. If they confirm the production growth that I am forecasting for 2022 (~6% YOY growth) then I will raise the multiple.

Range is on pace to generate over $1 Billion of operating cash flow in 2021 and more than half of it is FCF, which has gone a long way to shoring up their balance sheet. With more than 55% of their 2022 natural gas and 100% of their NGLs unhedged, Range should generate over $1.6 Billion of operating cash flow next year.

I believe there has been a significant structural change to the world's natural gas market; $4.50/mcf may be the "new normal" for US gas prices. Range's realized natural gas price (net of cash settlements on their hedges) went from $2.09/mcf in 2020 to $2.70/mcf in 2021 and should go to over $3.50/mcf in 2022. This is a company that produces over 1.5 Bcf per day of natural gas.
Let's do the math. 1,500,000 mcfpd X ($3.50-$2.70) = $1.2 million of additional revenue per day. X365 days = $438 million more in revenues.
Add in the higher prices they will get for all of their liquids in 2022 and Range is looking at a very strong year ahead, with over a $1Billion of free cash flow from operations.

Stifel's take on RRC

Range Resources Corporation (RRC, $26.09, Buy; Target $35.00)
Rapid De-Leveraging Intact Following Modest 3Q Beat - Michael S. Scialla

We view the release as slightly positive. The positives include: i) 3Q21 FCF of $180MM was 7% above consensus as capex was 8% below; ii) RRC reduced debt outstanding by $91MM during the quarter; iii) we are raising our 4Q21 CFPS estimate 10%, 28% above consensus based on updated guidance: The negatives include: i) 3Q21 production was 2% below consensus; ii) implied 4Q21 production/capex guidance was 1% below/6% above consensus despite a 2% reduction to the 2021 capital plan; iii) new hedges caused us to lower our 2022 CFPS estimate 3% although it remains 29% above consensus. In summary, RRC appears well-positioned to initiate a dividend next year as better than expected margin expansion should cause the balance sheet to de-leverage more quickly than Street forecasts.