Range Resources Has Substantial Value

| About: Range Resources (RRC)

Summary

Range Resources has a substantial portion of assets in the Marcellus Shale.

Its new marketing initiatives will lead to higher netbacks and earnings.

The asset sale has reduced debt by 24 percent.

Overview:

Range Resources (NYSE:RRC) is a natural gas and oil exploration and production company that operates in the United States. Range Resources has a strategy of increasing the reserves that are below ground, increasing production through internally generated drilling projects and synergistic acquisitions. The competitive advantage that distinguishes Range Resources from the plethora of competitors is the low cost that it can extract natural gas and oil from the ground. This low cost has benefited the company during the significant downturn in the natural gas and oil market.

Natural Gas Market:

Baker Hughes: A leading oil field services company provides a weekly look at how many natural gas rigs are operating. For the week ending January 8th, 2016, the United States had a decrease of 14 natural gas rigs. The natural gas rigs are down 181 since last year.

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Source: Weather.com

Weather is significant catalyst in determining demand for natural gas during the cold months of the year. As consumers turn their thermostat up, more natural gas is used and demand increases. When an El Nino occurs, the norm for temperatures is disrupted and demand is disrupted. In the graphic above, you can see how the temperatures across the United States have been disrupted.

Essentially, the demand for natural gas will be below average in the North and Northeast United States, which are typically large users of natural gas during the winter months. While this is a temporary bear for the natural gas market, companies in the industry are feeling the hurt.

Oil Market:

OPEC (Organization for Petroleum Exporting Countries) has abandoned its policy of supporting prices by acting as the swing producer. The reason for the abandonment is an array of theories including, wanting to curb the increase in American oil production, negatively impact Shi'ite countries such as Iran. While the most believable reason is to curb American production, it cannot be forgotten that Saudi Arabia and Iran are engaged in two proxy wars in Yemen and Syria.

The U.S. Energy Information Administration releases a weekly U.S. Petroleum Inventory that details the inventory of the various stock levels of crude oil. As January 1st, 2016 the United States had crude oil stock that excludes the strategic petroleum reserve of 482.3 million barrels. Per the EIA report, "at 487.4 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years." The significant increase in crude stocks has led the price of crude oil to significantly decline.

The number of oil rigs decreased by 20 compared with last week and are down 905 compared with last year, according to Baker Hughes. The potential for the number of rigs being brought back online when the price of oil does start to increase is a risk for the crude market.

The substantial increase in supply and the lackluster demand has led to a significant decrease in West Texas Intermediate and Brent prices. Below is a chart of West Texas Intermediate that shows the breakdown in the price over the past year. The recent decision by OPEC to not cut production and to not set a production limit has led to decrease in the price. Additionally, the nuclear agreement has led to Iran having its sanctions removed in the near future and allowing it to sell its crude oil. As illustrated in the red circle, the price of crude is broken down to multi-year lows.
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Source: CNBC

Range Resource's Divisions:

Range Resources operates in three exploration and production divisions: Marcellus Division, Midcontinent Division, and Southern Appalachia Division.

Marcellus Division: The core of Range Resource's potential is located in the Marcellus Shale. Range Resources has allocated 95 percent of its capital budget to the Marcellus Division. The company's proven reserves as of year-end 2014 is proof of the dedication with 86 percent of proven reserves located in the Marcellus Shale. The Marcellus Division has 54-71 Tcfe in resource potential and will continue to be company's largest revenue source for the foreseeable future. In 3rd quarter, the company produced on average 1.27 Bcfe per day.

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Source: Company Presentation

As per Woods Mackenzie, Range Resources has the lowest breakeven price in the Marcellus Shale. A key reason Range Resources has pivoted their focus to the Marcellus is not only due to the Marcellus being the largest natural gas field in the United States but the low-cost nature of operating in the field. Currently, Range Resources has a breakeven of $2.62 per mcf. While Range Resources is the lowest cost producer this either means they are the least underwater of the companies operating in the Marcellus or they are the best positioned for the eventual rebound in natural gas prices.

Midcontinent Division: The Midcontinent Division is the second largest division for the company. The Midcontinent has resource potential of approximately 7-10 Tcfe, net acreage of 360,000 and in the 3rd quarter produced approximately 58 Mmcfe per day.

Southern Appalachia Division: The Southern Appalachia Division is located in Virginia and borders Kentucky and West Virginia. The resource potential of the division is approximately 5-6 Tcfe and has a net acreage of 465,000. In the 3rd quarter the net production was approximately 109 Mmcfe per day.

Asset Sale:

On November 3, 2015, Range Resources announced that the Nora assets were being sold for $876 million. The Nora assets represent 7.5 percent of total production. The value in this transaction is that 24 percent of total debt will be paid off. The interest savings will be approximately $15 million per year. The asset sale was expected due to the company having the long-standing policy of seeking asset sales when debt/EBITDAX exceeds 3. If the EBITDAX does reach the point again where it is north of 3 then future asset sales will likely be pursued.

Marketing:

On Sept. 1, 2015, the Spectra Uniontown to Gas City pipeline started transporting 200 Mmcf/day from the Appalachia M2 to Midwest markets. The pipeline that stretches from Uniontown, PA to Gas City, IN will allow the company to achieve a higher price in other markets. Per the company, the pipeline added $5.5 million in additional revenue net transportation cost ($1.13 per mcf).

The Mariner East I pipeline with Sunoco Logistics will allow Range to transport 20,000 barrels of ethane per day and 20,000 barrels per day of propane. The true value of this pipeline agreement is that Range has access to 80% of the 1 million barrels of cavern storage at Marcus Hook. This will allow the company to store excess production for higher prices in the future. Mariner East I is expected to be completed in the fourth quarter. It is projected that there will be a $90 million uptick in cash flows from Mariner East I, Mariner West, and ATEX once all reach operational capacity.

Thesis:

Range Resources is situated primarily in the Marcellus Shale and this position is the major advantage of the company. The overall costs of operations are significantly lower than any of their competitors and is represented in the breakeven costs. The new and upcoming marketing initiatives will further lead to higher netbacks and higher earnings. The company has a solid balance sheet and is being improved substantially by the debt reduction. I would recommend investors seriously consider Range Resources for an energy play in their portfolio.

Disclosure: I am/we are long RRC.

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.