RRC's $634 million asset sale this morning is a big deal...
Simply put, there's a massive disconnect between the value of the company's reserve base and the enterprise value based on its current share price. Asset sales are the first step towards closing that gap. If nothing else, this debt reduction sets the stage to lower its leverage profile - the first step before the company can begin using free cash flow towards share buybacks.
Yes, I realize there is no free cash flow today. But should the company decide to stop growing, and should the market balance (yes, two big IFs), it could free up a free cash flow yield well in excess of 10% assuming gas prices of $2.80 or higher.
With management showing a focus on cleaning up the balance sheet, I firmly believe shareholder returns come next. I would not be surprised to see the company cut production completely in order to focus 100% on shareholder returns going forward. I want exposure to this stock before the market begins bidding up prices anywhere close to fair value.
That's why today, I'm complementing our short put sale position with a long options position. I'm going way out to January 2021 and buying the $10 options, for two reasons:
A) The nat gas market will take time to balance and it will take time for RRC to begin generating meaningful free cash flow.
B) Even at $10 per share, the company would remain wildly undervalued in a scenario of a tightening gas market and focus on shareholder returns above growth.
So here's the trade I'm making this morning:
APS Trade 10: Buy 5 RRC January 2021 $10 Calls for $0.64
Thanks for reading and good trading!
Disclosure: I am/we are long rrc through stock and options.