Gurus have been activity on Range Resources (RRC, Financial) in 2015 and Ruane Cunniff (Trades, Portfolio) of Ruane, Cunniff & Goldfarb Inc currently holds 4,005,407 shares of the company. Further, Wallace Weitz (Trades, Portfolio) of Weitz Investment Management Inc holds 2,136,130 shares of the company. While investors can track Gurus action in the real time stock picks section, I will discuss in this article why Range Resources is an interesting stock to consider at this point of time.
It is important to note here that Range Resources peaked out at $64.75 on May 1, 2015. The stock has subsequently declined by 28% as lower natural gas prices have depressed sentiments. However, the company has sound fundamentals, strong hedged positions and good hedges to ensure strong cash flows. This article will elaborate on these factors, which might also provide some insight on why Gurus find the stock interesting in the energy sector.
The first point that I want to focus is on the balance sheet strength of the company. As of March 2015, Range Resources had a total debt of $3.3 billion, a debt to capitalization of 49% and a debt to EBITDAX of 2.9. There are few positives to note –
- First, the company’s debt maturity comes only on or after 2020 and an extended debt maturity ensures that there is no near-term debt refinancing pressure.
- Second, a debt to capitalization of 49% implies strong financial flexibility to leverage further for capital investments.
- Third, liquidity of $1.2 billion in the form of revolving credit facility ensures that the company is well funded for near-term capital investments, which will also be funded by internal cash flows. For FY15, the company has a capital budget of $870 million and this can be easily covered by internal cash flows and undrawn credit facility.
The second point of focus is the company’s proved reserves growth and reserves potential. Range Resources has increased its proved reserves from 3.1Tcfe in FY09 to 10.3Tcfe in FY14. Further, the drill bit finding cost as of FY14 was $0.55/Mcfe and reserves have therefore been built at a low cost.
Talking about the cost, the company’s unit cost (including interest, transportation cost, G&A, LOE, reserves replacement and production taxes) has declined from $3.84/Mcfe in FY09 to $2.55/Mcfe in FY14. The company further expects unit cost to decline to $2.46/Mcfe in FY15. Therefore, operational efficiency is strong and this will translate into higher EBITDA once natural gas prices trend higher.
It is important to mention that Range Resources has large acreage position in core of Marcellus, Upper Devonian and Utica. These quality assets currently have unproved reserve potential of 66-87Tcfe. In the last five years 8.8Tcfe of resource potential has been moved into proved reserves and I expect that to continue over the next 3-5 years. This will have positive implications on the company’s valuation. With strong proved reserves growth, the company has a planned production growth target of 20% to 25% and this is also likely to trigger strong stock upside in the coming years.
While I mentioned earlier that Range Resources has declined in the recent past due to decline in natural gas price, it is important to mention that the company has excellent hedges in place for FY15. Therefore, the company’s cash flow is likely to remain relatively robust. To put things into perspective, 85% of gas production for FY15 is hedged at an average floor of $3.77/Mcfe and 85% of oil production is also hedged at $87.44 per barrel.
Besides the above factors, Range Resources is attractive for long-term portfolio investing considering the fact that LNG exports is likely to take-off from the United States in the next 3-5 years. I am of the view that Range Resources will be a major beneficiary of LNG exports. In June 2014, Range Resources signed gas ethane supply and transport deals. I believe that once more deals are inked; the company’s cash flow visibility will increase meaningfully.
Starting from the third quarter of 2015, Range Resources has another cash flow and stock upside trigger. Mariner East I is expected to begin the full commissioning process in 3Q15 and this will allow Range Resources access to export arrangements from Marcus Hook for propane and ethane. The company expects net increase in cash flow of $90 million once Mariner East, Mariner West and ATEX are fully operational.
In conclusion, there are several positive in the near-term as well as in the long-term related to Range Resources. The company’s core Marcellus asset has been a game changer in terms of cost reduction. Further, the company’s financial flexibility allows for strong production growth even in difficult industry conditions.
I also believe that natural gas price has bottomed out and once natural gas trends higher, Range Resources is likely to surge. Investors can therefore consider the recent correction as a good long-term investment opportunity in this portfolio stock. I would however recommend gradual accumulation of any energy stock that investors want to consider exposure.
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