Range Resources (RRC) is an oil and natural gas E&P company. Its strategy is to drive up production and reserves, while maintaining one of the lowest cost structures in the industry in order to increase shareholder value. With about one million net acres in the Marcellus Shale Play (as well as other low cost, low risk plays), it has the potential to grow its proven reserves of 8.2 Tcfe to 64 Tcfe-85 Tcfe (7 to 10 times), which is its proven and unproven resource potential.
Q3 2013 production was 960 mmcfe/d with 23% liquids. This was slightly ahead of estimates, which were 940-950 mmcfe/d with 22% liquids. This bodes well for the Q4 2013 report coming up February 25, 2014. Of the Q3 production, 756 mmcfe/d were from the Marcellus. Approximately 739 mmcfe/d of the company's total production in Q3 2014 were natural gas. This number will go up by approximately 20%-25% in 2014; and the number has been going up at approximately that rate consistently since 2003 (see chart below).
This should translate into production of approximately 1150 mmcfe/d for 2014. Let us approximate natural gas as 75% of that production or approximately production of 863 mcf/d of natural gas.
In recent weeks natural gas prices have gone up dramatically. They were at a low of $3.379/mmbtu on November 15, 2013. US Nymex natural gas prices closed February 21, 2014 at $6.135/mmbtu. The recent high was $6.40/mmbtu; and natural gas prices may be headed still higher in the near term. More cold weather is being predicted for the next few weeks. Also the Great Lakes are mostly iced over. This is preventing warmer water from the lakes from evaporating to effectively warm the air temperatures in the surrounding area. Experts believe this is will lead to lower temperatures in that area for the rest of the winter.
The colder than normal weather expected for the rest of the winter should lead to further draw downs in natural gas stores. The draw down in the week ending February 14, 2014 was another -250 bcf. This left 1,443 bcf in storage. This is -40.3% below a year ago; and it is -33.9% below the five year average. The chart below shows just how dire the situation is becoming.
There will probably be another roughly -200 Bcf draw for the week of February 15-21, 2014. If the draw downs continue at that pace for very long after that, the amount of natural gas in storage could rapidly approach zero. As it does that US natural gas prices are likely to skyrocket. One expert energy trader, Rob Raymond (founder and principal of RCH Energy), is now suggesting that natural gas prices could reach $7-$8/mmbtu by the end of this winter. That is more than double the November 15, 2013 price; and it should bring much bigger profits to primarily natural gas producers such as Range Resources. RRC's Q3 2013 production was 77% natural gas.
Exactly how much of a difference will there be? A look at the hedges should help decide that (see table below).
There are 228,548 mmbtu/d in swaps at $4.17/mmbtu for FY2014. There are 447,500 in Collars for FY2014 with a bottom of $3.84/mmbtu/d and a ceiling of $4.48/mmbtu/d. This leaves approximately 863,000 - 676,000 = 187,000 mmbtu/d of unhedged natural gas production for FY2014. In the 365 days of a year that translates into 68,255,000 mmbtu/year. In other words if the price of natural gas averages about $1/mmbtu more in FY2014, that will translate into approximately $68 million more in revenues with little or no extra effort. It could average much more than that.
Additionally RRC should get some extra revenue from the collars that pay out at the top of the range. This could mean as much as $0.64/mmbtu for 447,500 mmbtu/d of production. This could mean as much as another $105 million more in revenues. Together these two items come to possibly $173 million more in revenues if natural gas prices are about $1/mmbtu higher on average over FY2014. With 159.86 million shares outstanding, this would amount to an extra $1.08/share in revenues. If you ballpark 35% taxes, it would mean approximately another $0.70/share in EPS. This would mean a big boost for the stock. This is a perfectly reasonable scenario as the realized natural gas price (including hedges) for Q3 2013 was $3.88/mcf (per mmbtu). Remember the current natural gas price is $6.135/mmbtu.
The EPS forecast for FY2013 is $1.39 per share. The EPS forecast for FY2014 is $1.87 per share (+$0.48/share or about +34.5% year over year). Probably no more than 25% of the extra $0.70 talked about above is baked into the FY2014 estimates. That means that about $0.52 per share could easily be added to RRC's FY2014 earnings. That would yield about $2.39 per share in EPS for FY2014. This would be a big jump from the currently predicted $1.39 of EPS for FY2013. It would be a big jump from the currently predicted $1.87 for FY2014. This would surely make investors happy.
When you consider that the natural gas price rise in 2014 might extend into 2015 and beyond, you have to really like the prospects for RRC's stock. It might bring the PE for the end of 2014 down from 45.81 to approximately 35.84 (or even lower). Such a PE might be considered low for a company that grew its EPS by 72%+ in FY2014.
RRC has an average analysts' next 5 years EPS growth estimate per annum of 33.86%. It is possible that profits will be much higher than I suggested above. Natural gas prices could continue to go up; and they could remain much stronger than expected due to the almost zero amount of natural gas in storage for some time after this winter's draw downs.
If there is extended winter weather and/or a very hot summer, the above situation could persist for quite some time. On top of that there are many reasons to expect natural gas prices to move up on expected increased demand over the next few years. We may see some of this demand in 2014. Plus the expectation of the coming extra demand in 2015 and beyond could keep US natural gas prices up. The article, "The Cold Weather Is Making Natural Gas The Hottest Commodity In The Market", covers much of these demand issues. Further as of December 31, 2013, RRC had only 174,966 mmbtu/d of swaps for 2015 and 145,000 mmbtu/d of collars for 2015. With approximately 20% growth in natural gas production expected in FY2015, FY2015 natural gas production would be in the ballpark of 1000 mmbtu/d. With only 319,966 mmbtu/d currently hedged for FY2015, RRC might see roughly 700,000 mmbtu/d of natural gas production that could earn $5.50+/mmbtu in the 365 days of FY2015. This would amount to another $1.62/mmbtu over the current realized price (for Q3 2013). It could even amount to more than $2/mmbtu over that price. The first figure would yield an extra $414 million in revenues. The +$2/mmbtu figure would yield another $511 million in revenues. Both of these figures would be significantly above current predictions.
In sum RRC is a buy. With the possibility of doubling or tripling EPS within two years a very real possibility, the price of the stock should move up considerably. RRC has only a two star CAPS rating (a sell); but I think I have shown that recent rises in US natural gas prices may make for a much rosier scenario. Plus the average analyst recommendation on RRC is 2.4 (a buy). The technicals bear this last out. The two year chart of RRC is below.
The slow stochastic sub chart shows that RRC is neither overbought nor oversold. The main chart shows that RRC has been in an uptrend for the last two years. The five year chart (not shown) indicates that the uptrend has been in effect since the late summer of 2010. RRC's production is still growing by 20%+ per year. With the recent move up in natural gas prices (and the very low amount in US storage), the uptrend in RRC should continue. This is even more true when you consider the many sources of increased demand that are expected over the next several years. RRC is a buy.
NOTE: Some of the above fundamental financial information is from Yahoo Finance.
Good Luck Trading.