Range Resources - Making Lemonade In A Down Natural Gas Market

| About: Range Resources (RRC)

Summary

The collapse in petroleum product prices hit this natural gas producer as hard as any.

Range completed a $4.4B strategic merger during this down market.

The company is set to outperform in the next cycle for natural gas as it has established a very low cost structure from production to delivery.

While a strong dividend-paying stock is a nice thing to hold on to, other great money-making opportunities that don't pay a substantial dividend sometimes appear in the market. Range Resources Corp. (NYSE:RRC) carries the distinction of the first company to drill a well in the Marcellus Shale formation back in 2004. Since then, the company has grown substantially.

Reminiscent of Pioneer Natural Resources' (NYSE:PXD) acquisition earlier this year, Range has gone on to make lemonade out of lemons during the down market for its natural gas product with a transformative, all-stock merger gaining the company high-quality acreage in Northern Louisiana.

This article covers the advantageous cost structure the company enjoys, thanks to a confluence of factors, including its long-established operations in the Marcellus and the newly acquired property in Northern Louisiana.

Core Acreage in the Marcellus and North Louisiana

Range carries the title of the first company to drill a successful vertical well in the Marcellus Shale. The company's early activity in the Marcellus has positioned it to drill more high production wells without all of the costs associated with setting up new field operations. This is part of the company's low-cost structure, an advantage of this entrenched player.

Management estimates its portfolio of land assets to contain over 15 years of natural gas production.

RRC Acreage

Source: RRC 2016 Presentation at Barclays Energy Conference

The company produces out of two regions. First, the Appalachian (where the famous Marcellus Shale formation is). The gases produced there are presently being sold in four different domestic markets. Because of the market access, the company will always have options as to how to get the best realized price for the products on new product.

The second region Range produces in, Northern Louisiana, is actually less expensive to drill in than the famed Marcellus. The Louisiana location also helps the company by minimizing transportation cost as the product is delivered to the major infrastructure zone and important pricing point, the Henry Hub.

From the company's two major production zones, it has access to many domestic markets. The Louisiana production can be delivered to natural gas liquefaction plants in close proximity. If export pricing is advantageous, liquefied natural gas may be transported internationally from nearby shipping hubs.

The combination of advantageous geographical location and cost benefits associated with more or less established infrastructure positions in both producing regions have made Range one of the lowest-cost producers in its industry.

All things considered, the company will receive the most favorable pricing, have the lowest transportation costs, and earn the best margins on product produced in Northern Louisiana.

Range's management is projecting a shift from the 43% of production being deliverable to favorable markets to 69% being deliverable to favorable markets by the end of 2017.

barclay presentation by RRC, market exposure shift

Source: RRC 2016 Presentation at Barclays Energy Conference

The transformational market exposure shift is a key component in why this company is positioned to outperform in future periods.

Summary Financial Information

In a deal swapping equity for an acquisition during this down petroleum market, akin to the one I spotlighted PXD accomplishing back in June, Range completed a merger with Memorial Resource Development Corp. this past September. Since my spotlight article on PXD, the company's shares have rallied by more than 10%.

This article's spotlight acquisition, valued at $4.4 billion, brought the company into the favorable Northern Louisiana markets discussed above. The benefits to the company will be substantial.

Range doesn't have a fortress balance sheet, and during this down market, it has largely skated by on its bank credit line, which when coupled with the cash generated through operations, gives the firm more than sufficient liquidity to provide for its capital needs in the coming year.

RRC Price and net incomes for 2011-2016 Click to enlarge

Source: Faloh Investment

The company is engaged in a cyclical business and it's taken a beating since the broad price collapse in petroleum products. It wasn't until the major changes the Memorial Resources acquisition brought to the company's asset base that it became attractive as an investment.

The Northern Louisiana acreage it acquired is not only typically cheaper to drill and produce from, but it also enjoys lower transportation costs from the well to the processing infrastructure and market.

With all that said, the total natural gas and byproduct production of the company going forward is going to take a huge leap in the coming quarters as the newly acquired property comes to be reported in the figures.

Management estimates all-in cash costs for the fourth-quarter 2016 to be just $1.50 per Mcfe, and with 50% of 2017's expected production hedged at prices over $3.25 per Mcfe, Range is all lined up to survive quite comfortably until natural gas prices increase and this profits machine comes alive.

Takeaway

Whether or not natural gas enjoys a rally during 2017, the market is rapidly recognizing the kind of long-term, cost effective power player this company is establishing itself as in the natural gas production sector. Hop on the Range train before it leaves the station. I rate RRC a buy.

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Disclaimer: This article represents the opinion of the author as of the date of this article. This article is based upon information reasonably available to the author and obtained from public sources that the author believes are reliable. However, the author does not guarantee the accuracy or completeness of this article. It is merely the author's interpretation of the information contained in the article. The author may close his investment position at any point in time without providing notice. The author encourages all readers to do their own due diligence. This is not a recommendation to buy or sell a security.

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.