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Range Resources Corp question

September 21, 2012 | About:

I'm a value investor and very rarely short stocks. Occassionally I find something absurd and dream of the day I find accounting irregularities (ie, Einhorn). Anyway, I’ve been bargain hunting in the oil and gas industry recently, to date with no luck as the catalyst of higher prices makes valuation difficult. However, I did come across RRC and some of its financial metrics intrigued me. I am the first to admit I know little about this industry. I ask gurufocus members to take a look at the below and see what they think.

Current market cap is about $11B. RRC claims about $7.5B of property assets (operating and unproven). Debt has increased to about $2.4B with $600M of 10 year notes and $500M of notes issued in the past year or so, offset in part by retiring a couple hundred million of existing debt. Interest expenses is listed at $43M for the most recent quarter.

Here is my concern. RRC has $127M cash flow from operating activities for the last 3 months. However, derivative fair value income (hedges) was $148M in the last 3 months. Thus, they appear to be losing money on unhedged sales. To put it another way, they are only able to pay bills because of hedge contracts.

Having studied this market and company, a few things are clear. The production of gas has exploded (volumes up 30-50% per annum recently with RRCs Nat gas production being up 59% yoy). I do not see how this capacity can be quickly consumed given the need for pipelines and distribution facilities. It seems that prices are unlikely to recover in the next year or two.

Does anybody understand the term of these hedges well? If they are typically short (ie, 6 months to a year), it is hard to figure how RRC keeps funding its debt from operations as the hedges roll and become less profitable. Now, they can clearly sell assets as the balance sheet is not in distress (I question their asset valuations but do not have enough information), but this will limit future earning. Why does this company deserve a price/earnings ratio of about 100? It is not in immediate trouble but I see little reason to believe earnings will alter soon and a liquidity crisis is possible.

Watching this to see if I should short. Comments and critiques welcome.

Rating: 2.5/5 (6 votes)


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