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Summary

  • Range Resources possesses one of the highest quality acreage and has huge resource potential in the Marcellus shale that will ensure many years of production growth.
  • The company has allocated approximately 87 percent of its capital budget to further develop the Marcellus shale with 78 percent of the budget allocated for drilling purposes.
  • The continuously declining per unit cost from $4.34 per mcfe in 2008 to just $2.84 per mcfe in 2013 will ensure better top line growth.
  • Similarly, the controlled debt position lessens the pressure on the bottom due to lower interest expenses.

Range Resources Corporation (NYSE:RRC) is a Texas-based independent natural gas, natural gas liquids and oil company. The company is primarily engaged in the exploration and development of mainly gas. The company operates in the Appalachians as well the central and southwestern US. It has been operating a lucrative position in the Marcellus shale play. It has access to one of the best acreage positions in the play.

Range Resources possesses nearly 1 million net acres in the Marcellus shale out of which approximately 530,000 net acres are in the southern portion of the play. Due to higher volumes of natural gas liquids the southern part is more profitable than the northern part.

The company has been able to generate an internal rate of return of almost 105% from the wells in the southern part primarily due to lower well costs that range between $6.1 million to $6.8 million per well. Currently, Range Resources has nearly 7,000 net undrilled well locations in the southern part. Going forward, the company is determined to drill more as it has allocated 87 percent of 2014's capital budget in the Marcellus shale. Similarly, 78 percent of the budget is allocated to drilling activities.

Moreover, the company has also been able to grow its reserves in the shale. During 2013, Range Resources boosted its proven reserves by 26% to 8.2 trillion cubic feet. Moreover, during the last four years the company has converted 6.4 trillion cubic feet of unproven to proven reserves reflecting a compounded annual growth rate of 27%. Going forward, given the technical improvements, Range Resources expects that the resource potential in the Marcellus shale could be as much as 8 to 10 times its proven reserves.

(click to enlarge)

Source: Investor Presentation

In addition to the increased reserves, Range Resources has also been able to increase its production by a double digit growth rate. It has grown its production with a CAGR of 20 percent during the last decade. Going forward, with the lower cost of exploiting additional reserves ($0.6 per mcfe) the company will be able to deliver strong production growth for years to come. The figure below demonstrates the declining trend of the unit costs.

Source: Investor Presentation

The company has successfully reduced its per unit cost from $4.30 per mcfe in 2008 to $2.84 per mcfe in 2013 reflecting a decline of 34%. The reduction was primarily driven by the lower reserve replacement cost that equaled $0.66, down from $1.64 in 2008.

Controlled Debt Position Strengthens Investor Confidence

Range Resources has continued to maintain a strong balance sheet. For the fourth quarter of 2013 the debt to EBITDA ratio was 2.8 times reflecting a decrease from 3.2 times by year-end 2012. Moreover, the company maintained an orderly debt maturity schedule with no maturity until $500 million payable in 2016 and then in 2019 (see graph below).

Source: Investor Presentation

The minimal debt level allows the company to raise more debt to fund the ongoing projects at comparatively lower rates. In addition, it releases the pressure on the company's bottom line due to a smaller interest expense.

Concluding Remarks

For Range Resources, 2013 was another year of improved unit costs and capital efficiency that helped the company to post strong double digit growth in reserves and production. Similarly, for 2014, by allocating 87 percent of the capital budget for the Marcellus shale play the company has taken the appropriate steps to yield desired results.

The company has been pursuing an organic growth strategy that targets high returns due to low cost projects. During 2013, it replaced 612% of production representing an addition of 1,733 Bcf in the proved reserves primarily driven by the Marcellus shale. If the Marcellus shale continues to perform well, I believe that Range Resources will be well positioned to capitalize on the available growth opportunities. Therefore, I recommend buying the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Range Resources: Lucrative Position In Marcellus Shale Continues