Natural gas continues to disappoint the bulls, and is thereby providing some interesting value opportunities. While speculative long positions in natural gas futures have dropped to their lowest level of the year as traders are forced to abandon losing bets, some stocks are trading at an increasing discount to their intrinsic value.
One we’ve recently been buying is Range Resources (NYSE:RRC). They have the biggest position in the Marcellus Shale, and having negotiated their leases earlier than most they paid less and obtained longer terms. As a result they produce natural gas at less than $1 per MCF, and their production volume is growing at over 30% (though not revenues since gas prices have been falling).
RRC has around 3,000 BCFE of proven reserves which, after deducting production costs, G&A and taxes, is worth around $16 per share on a DCF basis, roughly half the current stock price. But its potential reserves amount to as much as ten times this amount. To put this in perspective, the U.S. consumes 22-23 TCF of natural gas annually, and RRC’s potential reserves could meet an entire year’s worth of consumption. RRC’s market cap is just under $6BN, around 7% of the $85-90BN the U.S. spends annually at current prices. Of course, their reserves need to be proved, extracted, processed, taxes paid and so on, but the math shows that there’s some considerable margin of safety at current prices. As one of the lowest cost producers with a strong balance sheet, they’re better able than most to continue operating without draining cash while natural gas prices remain under pressure.
There’s admittedly no visible catalyst for gas prices on the horizon, but sentiment and valuation are so attractive that as I said on cable TV this morning (see video), we believe it’s worth being invested here.
Disclosure: Long RRC, SWN, HK