There are few stocks in the energy sector that still attract attention considering the depression that looms over the sector. While I have maintained that industry conditions will remain challenging through 2016, I have also talked about some quality names in the sector. Investors can buy these names in small quantities or keep adding to the shopping wish list and wait for some sustained recovery. In my personal opinion, buying in small quantities makes sense as some stocks will never trade at valuations that are being seen currently.
Range Resources (RRC, Financial) has corrected by 44% in the last six months and currently trades at levels that are attractive from a long-term investment perspective. Range Resources bottomed out at $21.17 on Dec. 17, 2015 and the stock has subsequently trended higher by 22% to current levels of $25.75.Â
On Nov. 3, 2015, Range Resources announced the sale of Nora assets for a total consideration of $876 million and it included approximately 3,500 operated wells and approximately 460,000 net acres in the Nora/Haysi combined fields. On Dec. 30, 2015, the asset sale was completed and I see the following benefits from the transaction:
- As of 3Q15, Range Resources had $3.6 billion in debt and total debt is expected to reduce to $2.7 billion with the transaction being completed. This improves the company’s debt to capitalization from 54% in 3Q15 to 47% post-Nora sale. Therefore, Range Resources has meaningfully improved its credit metrics.
- As a result of the debt reduction, Range Resources expects annualized interest savings of $15 million and the company now has no debt maturity until 2021. This implies no debt refinancing pressure and lower debt servicing burden.
- Range Resources has 1.6 million stacked-pay acreage positions in the Marcellus, Utica and Upper Devonian. The IRR for these assets is attractive as compared to Nora asset and higher financial flexibility allows Range Resources to invest in assets where return on capital is higher.
Range Resources is also actively marketing the Oklahoma stack acreage and this implies that more asset sales are likely in 2016. Therefore, Range Resources is likely to continue improving its credit metrics through 2016, even when energy prices remain sideways.
Besides the upside triggers that come from asset sales, Range Resources is attractive considering the continued decline in unit cost from $2.61 per mcfe in 2011 to $1.72 per mcfe for 2015. The company expects the recent asset sale to further lower unit cost in 2016 and this underscores the management efficiency.
Another factor that is likely to drive Range Resources stock higher in the foreseeable future is the announcement of capital expenditure for 2016 in February. For Range Resources, annual capital budget of $270 million is likely to maintain 4Q15 production range through 2016. However, capital budget of $550 million can translate into 10% production growth and capital expenditure of $890 million can translate into 20% production growth.
With the recent asset sale and another asset sale likely in the foreseeable future, investors can be relatively optimistic on the capital budget for 2016. If the company targets production growth anywhere between 10% and 20%, I see more near-term upside.
Therefore, there are plenty of triggers that can take the stock higher even after a 22% rally in less than one month. For the long-term, a deep drilling inventory in Marcellus, Upper Devonian and Utica will be value creating.
Considering these factors, Range Resources is certainly attractive for both the near and long-term. The company’s focus on keeping the balance sheet robust is encouraging in challenging times, and the company’s continued effort towards cost reduction is also favourable in the current environment. Small exposure can be considered for near-term trading or long-term investment at current levels.
Disclosure: No positions in the stock.
