Range Resources (NYSE:RRC) operates as an independent natural gas, natural gas liquids and oil company in the United States. This article discusses the reasons why the stock is a long-term value creator.
About Range Resources
Range Resources is an independent oil & gas company. The company owns 6,136 net producing wells; and approximately 1.6 million gross acres under lease in the Appalachian region. It also owns 1,538 net producing wells; and approximately 710,000 gross acres under lease in the Southwestern region. In addition, the company owns gas gathering and transportation pipelines.
Further, for the year ended December 2013, the company had a production of 343,022mmcfe as compared to 275,465mmcfe in 2012.
Big Reserves Base
Range Resources has increased its production from 189,077 mmcfe in 2011 to 275,465 mmcfe in 2012 and further to 343,022 mmcfe in 2013. A strong increase in production has primarily been due to strong exploration activities and a big reserves base.
- Warning! GuruFocus has detected 4 Warning Signs with RRC. Click here to check it out.
- RRC 15-Year Financial Data
- The intrinsic value of RRC
- Peter Lynch Chart of RRC
For the year ended December 2013, the company had 8.2Tcfe of proved reserves with 69% natural gas. Of the company’s total reserves, 51% was proved and developed and the company had a high reserves life index of 22 years.
These numbers indicate big potential ahead and Range Resources will continue to increase its production with the big reserves base. Besides increase in production, the company reserves growth has also been strong in the last few years and this is indicative of strong operational success.
The company’s reserves have increased from 3.1 Tcfe in 2009 to 8.2Tcfe in 2013. For 2013, the company’s reserves increased by 26% from 6.5 Tcfe in 2012. Therefore, the company’s production and reserves growth have been robust.
In addition, the company potential resources have also been growing over the years and this will translate into proved reserves in the years to come. The company’s potential resources have increased from 24-32 Tcfe in 2009 to 65-86 Tcfe in 2013.
Low Unit Cost Boosts Margins
Serving as a good example of the company’s operational efficiency, the company’s unit cost including reserve replacement, interest and transportation & gathering has declined over the last few years. This has helped the company boost its overall margins.
The company’s cost in $/Mcfe has declined from $4.3 in 2008 to $2.84 in 2013. During this period, the company’s reserve replacement cost has declined significantly from $1.64 in 2008 to $0.66 in 2013. Range Resources has therefore been successful in adding reserves at a much lower cost due to its operational expertise and efficiency. Even for 2014, the company expects the total cost per unit to decline to $2.67 as compared to $2.84 in 2013.
As of the second quarter, Range Resources had strong fundamentals to back the other positives related to the company. As of the second quarter, the company had a debt to capitalization of 48%, a debt to EBITDAX of 2.4 and liquidity of $1.1 billion. Therefore, the company’s financial flexibility is high for future growth.
What I also like about the company is the debt maturity profile. As of the second quarter, the company had a credit facility of $480 million with maturity in 2016. All the other debt of the company is scheduled for maturity after 2020. Range Resources therefore faces no immediate debt refinancing.
Debt and financial flexibility are points of focus as Range Resources has a total capital expenditure of $1.5 billion for 2014. The company’s fundamentals need to support this level of investment and this holds true for Range Resources.
Range Resources also generated $442 million in operating cash flow in the first half of 2014 as compared to $280 million in the first half of 2013. Therefore, strong operating cash flows will also support the high capital expenditure program.
The key risk factor for the company and its growth is the trend in natural gas prices. In 2011, the natural gas price per mcf was $4.02 and it declined to $2.82 in 2012. Natural gas prices recovered again in 2013 to $3.67/mcf.
I believe that natural gas prices have bottomed out and natural gas prices are likely to move higher or remain stable. Increase in exports to emerging markets should also support natural gas prices. However, investors need to keep a close eye on prices as it has been relatively volatile.
Range Resources is a great long-term investment considering the company’s strong position in rich assets. The company has a strong reserves base along with a big capital expenditure program. This will help increase the proved reserves and also help in increasing the production on a consistent basis.
Range Resources is likely to correct as the broad market sentiment is negative. I will therefore suggest that investors wait for any relatively steep market correction to consider exposure to this stock for the long-term.