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In the U.S., 2010 will be remembered as the year of natural gas production. Nat gas prices marched lower as independent oil and gas producers furiously spent capital on bringing shale acreage to held by production, a provision in leases perpetuating a company's ability to operate acreage.
In 2011, producers are going to be more selective in how and where they spend. They've laid the foundation by locking up acreage and will be able to pick and choose development based on pricing. This will help bring production a bit more inline with demand and provide a tailwind to natural gas.
One player to benefit from improving natural gas prices is low cost producer Range Resources (NYSE:RRC). In 2010, Range’s unit costs fell to $3.14 per Mcfe, down from $3.53 in 2009.
RRC’s cheap Marcellus Shale production accounts for 35% of its total production. In 2010, RRC spent over 80% of its capex on Marcellus (production as a result doubled there) and in 2011, Range expects production to double yet again to 400 million to 420 million CFE. Why is Marcellus so important to Range? Because it holds a great deal of wet gas (propane, butane and ethane), where prices have trended higher.
Also, 77% of Q3 production was natural gas versus 84% year over year thanks to greater NGL production, which rose 136% year over year last quarter. For the nine months ending Q3, sales rose to $663.1mn from $597.8mn year over year on higher production against lower realized natural gas prices. Averaged realized prices for natural gas dropped to $4.33 from $4.65 per mcf in the first 9 months, however, NGL realized prices rose to $37.49 from $24.43 per bbl.
By design or luck, however, RRC’s fortunes aren’t solely tied to Marcellus. Its future production could be significantly boosted by the Utica Shale, which runs underneath RRC’s 1.3 million Marcellus Shale acres in Pennsylvania and beyond into Ohio and up into New York. While it makes no economic sense to develop the deeper Utica on land where Marcellus is easier to reach, it could make plenty of sense in RRC’s South and West Pennsylvania acreage - which accounts for 600k of the 1.3 million acres - particularly if supply gets a bit more inline with demand.
Overall, Range expects total production to move up 25% this year and 84% of its nat gas production entering 2011 was hedged at a floor price of $5.56. While Range is divesting its Barnett Shale properties, it owns 105k acres in the Permian Basin, Texas, and 42k acres in Granite Wash, Texas, where four test wells will be drilled this year.
Natural gas investors will continue to root for cold weather, providing the seasonal drop to supply, but RRC is poised to see EPS growth regardless thanks to volume production growth. Q1 has been kind to Range investors historically, with the stock returning an average 12.6% in the quarter over the past five years (see table).
Symbol
Q1
Q1
Q1
Q1
Q1
Q1
(of 5)
2006
2007
2008
2009
2010
Average
RRC
80%
4
3.78%
21.74%
23.62%
19.82%
-5.91%
12.61%
In the most recent reported week, U.S. natural gas consumption was up 19% from the prior week. The Henry Hub price rose 33% from November 1 and in the Northeast, where Marcellus lies, price increases were second highest in the U.S. East Coast natural gas in storage is -2.3% below the five-year average, despite U.S. supplies remaining above average. Also, 2011 EPS estimates for RRC have moved up to $0.96 from $0.88 60 days ago. RRC has beaten the street in three of the past four quarters and has six days to cover short.
Disclosure: I am long RRC, HK, UNG.
Source: Range Resources Poised to Benefit From Improving Natural Gas Prices