Range Resources (RRC, Financial) released impressive results for the first quarter of fiscal 2015. The company posted good numbers on revenue and earnings beating analysts’ estimates. This mainly came in due to slight improvement in the natural gas market. With this growth, Range Resources continues to see impressive drilling results with lower cost and improved capital efficiency. Besides this, there are other bright spots that Range Resources is seeing, which we will see below. However, the company might face crisp margins due to lower price and termination costs. Let us have a detailed look at the overall market.
A closer look at the results and the prospects
In the recently reported quarter, Range Resources posted revenue of $462.6 million beating analysts’ estimates of $438.7 million. It impressed investors on the earnings front as well. Range Resources reported earnings of $27.7 million. The profits in the first quarter also surpassed analysts’ estimates. The company posted $0.16 per share, while the analysts had been modelling a profit of $0.11 per share.
Let us now look at some of the prospects. The company is positive about its performance in the upcoming quarters, as it is anticipating a good growth in the natural gas demand in future. It is expecting this demand to increase about 2bcf per day, which is impressive. The main reason behind this anticipation is that due to the increase in the industrial demand, plant exports of gas and LNG exports are driving conversion of coal-fired power generation to gas.
Bright prospects
Its long term prospects appear bright, as it is projected, that the natural gas demand will increase about 3 bcf to 4 bcf per day. If this happens on track, the company is expecting an increment in the natural gas demand to 20 bcf per day by 2020. But, there is another side of the story as well. Range Resources is expecting the demand for natural gas associated with oil wells to decline further. The production is also expected to decline due to this, which might further hurt its profit margins.
The rig counts for both Marcellus and Utica have already declined by 42% and 44% respectively. The situation might get worse for Range Resources, as many analysts are forecasting the rig counts to decline further, which will surely affect its production in the long term.
Moving ahead, Range Resources is now cautious about its moves and is now having some defensive measures also. As Range is a unique and significant advantage, the company is maintaining some key action plans regarding this. It is largely focusing on maintaining a low cost structure, which will help improve its performance.
In addition, Marcellus shale is also looking promising, as it is showing up tremendous upside potential for the company in the future. It has about 125 million net acres of gambled pay potential in Southwest and Northeast Pennsylvania. It stays committed to explore this potential for its Marcellus, Utica and Upper Devonian plays. This shale has huge acreage with strong staked pays.
This should allow Range to have multiple-development opportunities at 1,000 foot spacing between wells in the future. Also, in the long run it sees enormous potential with 500 foot spacing in the shale with its existing infrastructure. The company plans to selectively drill the dry, wet and super rich portion of the plays. It plans to drill a total of 101 Marcellus well that includes 35 dry, 40 wet and 26 super rich wells.
Conclusion
Now moving to the fundamentals, the stock looks cheap with a trailing P/E of 17.07 and the forward P/E of 132.14, which shows tremendous growth in the earnings in the near term. The profit margin of the stock is also impressive with 31.06%. All these valuation levels show that the stock definitely has some room, and, it can also be a good long term holding. I would like to suggest the investors to definitely pick Range Resources.
