Range Resources (RRC) is giving up 113 mcfe a day of natural gas production capacity with its 52k acre Barnett Shale sale. But what Range gets in return far outweighs the short-term production loss of Barnett.
Range has a singular focus on developing its vast Marcellus Shale acreage for good reason. Marcellus production is cheap. Given the expense of Barnett and the attractive margins offered in Marcellus, it makes great sense to monetize Barnett today and use the proceeds to develop Marcellus. The $900 million Range gets for Barnett, coupled with cash flow and another $200-250 million in expected non-core asset sales this year, not only funds 2011 Marcellus development but also carries $400 million forward for 2012 development. And the $900 million Range receives is expected to be cash tax-free given Range’s tax loss carry-forwards.
This year, Range will spend $1.4 billion developing production, with 86% of the spending occurring in Marcellus. Despite losing 113 mcfe/d of Barnett capacity, thanks to Marcellus RRC the company expects production to grow 10% this year. Even better, in 2012, RRC sees production growing 25% to 30%. All-in finding and development costs are expected to run at less than $1.00 per mcfe this year and next year too, meaning solid margins will continue.
Couple in 2011 and 2012’s development and production growth and Range expects 2013’s capex will be funded solely from its own cash flow. This is a great step toward unlocking shareholder value.
And all of this is thanks to Marcellus Shale, where growing natural gas liquids production provides an offset to anemic natural gas prices. In Q3, the percentage of total production coming from natural gas fell to 77%, well below the 84% the prior year, thanks to a 136% jump in NGL production. And in Q4 natural gas production fell to 76% as NGL production rose to 18% of total production, up from 10% a year ago.
Average realized prices for natural gas in 2010 may have dropped 27% at Range last year, but its NGL and oil sales prices were much better, with NGL prices up 35% and oil prices up 11%. With cash margins per mcfe running $3.11 in 2010, down from $4.17 in ‘09, Range has significant upside leverage on any recovery in natural gas prices.
Overall, Range is right to sell Barnett to focus on Marcellus but not just because Marcellus makes sense. Why? Because Marcellus sits on top of the much larger Utica Shale, which runs west into Ohio and North up into Canada and across New York. Range can not only develop its Marcellus stakes, but in the future can dig deeper and access Utica, particularly in its 600k acres in West Pennsylvania, where the Utica is closer to the surface.
Range offers shareholders a future full of cheap production growth. The company is going to generate significant cash flow, which is great news for shareholders. And, Range might just find itself selling more than just non-core assets someday given the desirability of its cheap production, given that all-in finding and development costs were only $0.71 per mcfe last year.
Disclosure: I am long HK, RRC.