Management of buy recommended Range Resources (RRC) believes the company has unproven potential of ten times currently proven reserves of 4.4 trillion cubic feet of natural gas equivalent, mostly in Marcellus shale in Pennsylvania. Though that sounds too good to be true, more of it does look real with every billion dollars committed by global large cap companies to joint ventures with, or acquisitions of, independent shale gas innovators.
The company that launched the shale gas boom in the East with the industry’s first commercial Marcellus well in 2004, RRC doubled its Marcellus production in 2010 to 200 million cubic feet equivalent daily (mmcfed) at year-end. Chairman John Pinkerton promises to double that again in 2011 to 400 and grow it further to 600 at year-end 2012.
While rapid growth in shale gas has restrained natural gas price, an eventual uptrend in price seems likely. Not all producers have the lowest cost opportunities and much of the current drilling is economic only because it secures valuable long-term lease rights. Meanwhile, RRC stock is valued in the stock market at a McDep Ratio of 1.0, mostly justified by currently proven reserves. A high unlevered cash flow multiple (PV/Ebitda) restrains us from raising our estimate of present value further until we can include more cash flow in the next twelve months projection.
Mitigating natural gas price risk, RRC has 23% of value concentrated on oil. Financial position will be strengthened with $900 million from a sale of properties in Texas expected to close in late April. Neither the rapid growth in Marcellus volume nor a reduction of 113 mmcfed associated with the sale is explicitly recognized in our cash flow projection. We think the timing is good for patient investors to commit to a powerful long-term resource opportunity in Range stock.
Originally published on March 4, 2011