Range Resources: Over Priced And Technically Vulnerable

May. 7.12 | About: Range Resources (RRC)

Range Resources (NYSE:RRC) is primarily a natural gas company. Production is approximately 78% natural gas, 16% natural gas liquids (NYSE:NGLS), and 6% oil. Range Resources has some great natural gas resources, which are primarily in the Marcellus Shale. Unfortunately for Range Resources US natural gas prices have fallen from a high last summer of approximately $4.98 /mmBTU to today's $2.28/mmBTU. It is not hard to envision what this has done to profits. RRC managed to post an adjusted EPS of $0.15 for Q1 2012, but its financial statement (with the GAAP numbers) gives a more sanguine picture of what has been happening at the company. The net income for RRC by quarter is below:

  1. Q2 2011 was $51,293,000.
  2. Q3 2011 was $34,755,000.
  3. Q4 2011 was a loss of -$2,989,000.
  4. Q1 2012 was a loss of -$41,800,000.

The Q1 2012 result was with an Income Tax Benefit of +$27,843,000. The Income Before Tax was actually a bigger loss of -$69,643,000. The trend above is self-evident. US natural gas prices may have recently stabilized, or they may still be headed further downward. However, they are not likely to rise substantial under the current circumstances without external stimuli such a natural gas for transportation bill from Congress. This bill, advocated by Obama, died in Congress recently. The first LNG export terminal in the US is not due to go online until sometime in 2015 at the earliest. Natural gas for transportation will make some progress without Congress, but that progress will be painstakingly slow. Party politics seem to preclude a breakthrough on the Congressional impasse until after the election at the earliest.

How exposed is RRC to natural gas price fluctuations? It produced 655.5 MMcfe/d in Q1 2012. One cubic foot of natural gas equals 1027 Btu. Hence one MMcfe equals one Bbtu. RRC 's production is therefore 655.5 Bbtu/d. RRC or 655,500 million BTUs/day. 78% of this 511,290 MMbuts/day of production is natural gas production. RRC has hedged 189,641 MMbtu/d at an average of $5.32/Mmbtu -- about 37% of its production -- through Q2 2012. For Q1 2012 natural gas prices including hedges averaged $4.01/Mmbtu -- down 25.7% year over year. For Q3 and Q4 2012 RRC has hedged 279,641 MMbtu/day at $4.76/Mmbtu.

This means the other 63% of natural gas production is unhedged for Q1 and Q2 2012. It means about 55% is hedged in Q3 and Q4 2012, but at a lower price. RRC will almost certainly earn a lot less in 2012 than in 2011. From the financial statement, it looks likely that RRC will lose money overall in 2012. Its current PE is 251.70. Its FPE is 39.55. Its FY2012 average analysts' earnings estimates have been trending downward from $1.19 per share three months ago to $0.92 per share currently. The FY 2013 estimates have moves from $1.96 to $1.61 during the same time. I note here that these figures are adjusted EPS figures not GAAP figures. I am always amazed at the creative accounting of these companies. However, creative accounting does not change the trend. It does not change the likelihood that RRC will lose money in 2012 (and possibly in 2013). It does not change the fact that RRC has a nearly 50% debt to capital ratio, and its debt is growing. It does not change the fact that RRC has a Price/Book ratio (mrq) of 4.29, which for a good sized oil and gas E&P company is unimpressive. For instance ConocoPhillips (NYSE:COP) Price/Book ratio (mrq) is 1.03, and Chevron's (NYSE:CVX) is 1.73. Even Devon Energy (NYSE:DVN), a big natural gas producer, has a Price/Book ratio of 1.22, and Ultra Petroleum's (UPL) Price/Book is 1.74. In other words RRC is over valued on a Price/Book basis versus comparable investments. Plus the majors like CVX and COP are not likely to lose money, and they pay a good dividend. COP's dividend is 5.00%, and CVX's dividend is 3.50%. RRC's dividend is only 0.30%. You won't get paid to wait on this one, so there is no point in doing so. Much of the above fundamental fiscal data is from Yahoo Finance.

Yes, RRC's natural gas production did increase 19% year over year, and this would have been approximately 50% if RRC had not sold its 52,000 net acres of Barnett Shale holdings. However, this seems more likely to ensure that US natural gas prices will stay low for the next two or more years. A company that is growing production, but losing earnings is troubled in the short term at least. Other companies are growing natural gas production in much the same way as RRC. Yet the demand is not growing apace, and this situation does not seem likely to improve for at least a couple of years into the future. Given this, it seems like a good idea to sell RRC for the near term. You can always buy it back when natural gas prices start to trend demonstrably upward. With the coming EU recession about to be officially declared. This does not seem likely to be anytime very soon. A cold winter next winter seems the earliest possible stimulus, and that is questionable. We could have another warm winter. Global warming is more fact than fiction. Further the US natural gas storage capacity is beginning to fill up. According to the EIA, stocks stood at 2,576 Bcf on April 27, 2012. This was up 28 Bcf from the prior week, and it was 840 Bcf above last year at this time. At this rate US natural gas storage will fill up sometime this summer. At that point (or near that point) many analysts are predicting a further drop in US natural gas prices to $1.34/MMbtu or even to $1.00/MMbtu. Such a drop would be devastating for RRC. You would not want to own RRC at that time. Aggressive traders may want to sell RRC short.

The two year chart of RRC may provide some technical direction for this trade.


Click to enlarge

The slow stochastic sub chart shows that RRC is currently near over bought levels. This is technically a good time to initiate a short position. The chart also shows that RRC is near its top Bollinger Band after a strong run up on the recent rally in natural gas prices. With the even more recent fall in oil prices, the natural gas price mini-rally is probably over. The on going EU elections are showing the instability of the power structure in the EU. The market does not like instability. Plus about mid-May the official announcement of the EU recession is likely going to come out. This by itself should depress all commodities prices. The chart shows that the overriding trend in RRC stock price has been down since last October. Recent news such as the disappointing US NonFarm Payrolls data for April (last Friday) and news that is has yet to come such as the official EU recession declaration and other news virtually ensure that RRC's down trend will continue. David Kostin, Chief Forecaster for Goldman Sachs (NYSE:GS), issued a three month target of the S&P500 of 1275 a few weeks ago. This should help RRC move downward too. GS is by no means the only major brokerage that has a troubled outlook for the S&P500 for the rest of 2012. To be able to catch that down trend on an up blip is a big bonus for a short seller. A setup doesn't seem to get much better than this one. It appears there should be easy money to be made shorting RRC from its current $63.68 down to $55 or even to $50. It is possible that RRC will fall much further than that, but that money will probably not be nearly as easy or as relatively risk free to acquire.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in RRC over the next 72 hours.