Range Resources (RRC, Financial) reported mixed numbers for the first quarter with marginal growth in revenue, while profits declined. But it cheered the street as the results were better than analyst’s consensus. Moreover its shares have shown quite a strong resilience in the past few days as it rose more than 40% after touching its 52-week low in March this year. Let’s see whether it will be able to maintain this upside momentum in the days ahead.
Moving in the right area
During the quarter its revenue rose 1.16% from a year ago period to $462.6 million. Although its revenue got a boost from 26% growth in production, profits were severely affected by weak commodity prices, which more than halved on a year over year basis. In view of these challenging times, the company has slashed its capital spending for 2015 to $870 million and has implemented other cost cutting measures as well. Further in this direction, the company will decrease its 2015 capital spending plans for the profitable Marcellus and Utica plays as well by about 40% to 50% compared to last year.
Going forward, natural gas demand in the U.S is expected to increase significantly. These higher expectations stems from a number of factors such as, the conversion of coal fired power plants to gas fired, increased industrial demand, plant exports of gas to Mexico and LNG exports from the Gulf Coast coming online. Additionally, as most of the companies in the industry have reduced their rig count supply would decrease, which will further boost demand.
In addition, its product diversity is yet another important factor that differentiates Range from its peers. The company has large positions in both liquids rich and dry gas, which coupled with its low-cost transportation and favorable sales contract gives Range a unique and significant competitive advantage. In fact, Range is already one of the low cost operators, and its cost metrics continues to improve further.
However its numbers are not very supportive as the company has a forward P/E multiple of 132.29 compared to a trailing P/E of 17.04 indicating some near term weakness in its earnings. Even during the quarter there was a steep decline in its earnings, which was mainly on account of weak commodity prices. But as we anticipate improvement in gas prices in the coming years Range Resources will be well prepared to tap this potential.
Conclusion
Additionally, there are positive cues coming, in regard to the lifting of export ban on oil and gas in the U.S, which will be an added advantage for the industry. Therefore, in spite of weak numbers in the near term, the above mentioned factors support the view that the stock would be a good long term bet.
