Range Resources (ticker: RRC) reported Q2’12 and set new operational highs for the company:
- Quarterly production was 65,456 MMcfe, a 51% increase from Q2’11, adjusting production for the sale of the company’s Barnett Shale assets. While we’re punching in data as companies are reporting Q2 results, we note from EnerCom’s 89-company database of U.S. operators that production growth between Q3’11 and Q1’12 was 3.9%.
- RRC’s Marcellus production reached 500 MMcfe/d. The company guided Marcellus production would reach 600 MMcfe/d by year-end 2012.
- Full-year 2012 production growth was guided to be 35% over 2011.
- The production growth is happening while capital spending of $1.6 billion is essentially flat to 2011. Based on our analysis, Range Resources only uses 27% of its capital expenditure program to keep production levels flat. This is a superior figure when compared to the group’s average of 78%. This suggests that RRC has the scalability with its drilling inventory and operating/financial infrastructure to increase production levels with minimum invested dollars.
- Bottom line: share growth! For the previous three years, RRC has generated debt-adjusted per share growth for shareholders. Reserves have increased 126% while production has grown 50%.
Click here for the conference call script.
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Range Resources following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
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Credit Agricole – July 26, 2012
Continuing its strong operational performance, Range Resources reported another stellar quarter. Range is on pace to grow production 35% this year, which is the high end of guidance. If there is a negative, it is that its un-hedged commodity price realizations are weak. To that point, Range has hedged over 80% of its gas production in 2012 and 60%+ in 2013. Discussions concerning ethane demand continue. An announcement for a third agreement appears imminent. Due to minor adjustments in the model, we expect 2012 EPS/CFPS of $0.84/4.84 from $0.84/4.79. We reiterate our BUY and $77 price target on this best-in-class operator.
Debt/Ebitdax metrics stress test
Our model indicates Range will exit 2012 with a Debt/Ebitdax ratio of 3.5x and 3.2x in 2013. Both are below the credit-facility covenant requirement of no greater than 4.25x. We do not yet include the announced sale of its Ardmore Woodford acreage. We only mention it because Range addressed it on the earnings call. Management indicated 3.0x is the threshold at which it starts to look to take action, hence the decision to market the Ardmore assets. To put it bluntly, there is little likelihood of a breach this year thanks to Range’s hedge profile. For 2013, oil is 90%+ hedged. Only by assuming $50 oil and $2.69 gas would the ratio hit 4.25x. Under our current $95 oil assumption for 2013, it would take gas averaging $1.67/MMBtu to hit the trigger We also surmise, if need be, that the St Louis, Cana or other non-Marcellus, Mississippi Lime or Conger assets could be sold. We stress we don’t expect this to be the case.
Continuing its strong operational performance, Range Resources reported another stellar quarter. Range is on pace to grow production 35% this year, which is the high end of guidance. If there is a negative, it is that its un-hedged commodity price realizations are weak. To that point, Range has hedged over 80% of its gas production in 2012 and 60%+ in 2013. Discussions concerning ethane demand continue. An announcement for a third agreement appears imminent. Due to minor adjustments in the model, we expect 2012 EPS/CFPS of $0.84/4.84 from $0.84/4.79. We reiterate our BUY and $77 price target on this best-in-class operator.
Upper Devonian and Utica tests
After describing cores from the super-rich Upper Devonian on the last call “oozing” condensate, we were eagerly awaiting results from its first well. Results are in and the headline of 1.9 MMcfe/d (70% gas) is lackluster, but provides the opportunity for improvement. By comparison, this well was far better than the first four Marcellus wells Range drilled, so certainly not a bad start. A second well is currently being completed. We also give the company virtually no value for the formation. The first horizontal Utica well is still drilling. A second one is expected to spud in October in NW Pennsylvania.
Mississippian continues to grow
Range Resources added 7,000 net acres to grow its Mississippian position to 152,000 net acres. The wells keep getting better with its first well out of fewer than 15 drilled grossing over 1,000 Boe/d (70% oil). EURs are expected to be about 600 Mboe, or much higher than the original 2009-2011 development plan of 485 Mboe. Infrastructure is being built for the anticipated activity increase by 2013.
Barclays Capital – July 25, 2012
We believe RRC will struggle to deliver the 20-30%+ annual production growth needed to support the premium valuation (3x average group multiple of EV/2013 PICF). If one calculates “clean” earnings after reflecting property amortization costs and employee stock-based compensation, RRC lost money this quarter.
2012 production growth target lifted to 35% YoY (high-end of prior 30-35%) but liquids growth delayed. FY liquids growth rate is expected to be ~27%, below the targeted 40% as infrastructure permitting issues in the Marcellus have kept drilled and completed wells off production. RRC is catching up on hook-ups and expects to catch up with 40% YoY growth target rate in 4Q. On the positive side, oil production growth is ahead of schedule on stronger Mississippian results.
For 2013 RRC believes it can deliver 15-20% YoY production growth while focusing on liquid-rich opportunities and living within cash flow.
Selling liquids-rich Woodford package in the Ardmore Basin to help plug funding gap – 9,300 net acres, 1.1 mbopd plus 5.7 mmcfpd.
Mississippian – EURs raised 20% to 600 Mboe, incl. 70% liquids. Longer laterals improve recoveries to 6-11% of OIP and boost returns to ~120% at $90/bbl.
Utica – 1st well targeting the liquids-rich area in northwest PA is now drilling.
Raymond James & Associates – July 25, 2012
Recommendation: Following last night’s 2Q12 earnings release we are adjusting our 2012 earnings estimates up ~20% and up ~69% in 2013, primarily as a result of updated hedges. Of note, although our earnings are increasing we are still below consensus in 2012 using strip pricing. Year over year production growth continues to underscore management’s superior operational efficiencies and a strong hedge portfolio through 2013 should offer cash flow stability. Our bearish commodity outlook, climbing leverage, and high EBITDA multiple lead us to reiterate our Market Perform rating.
2Q12 earnings mixed versus consensus: Range reported 2Q12 adjusted EPS/CFPS/EBITDA of $0.11/$0.97/$192 million, in-line with our EPS/CFPS estimates of $0.11/$0.96 but below our EBITDA of $218 million. Versus consensus, RRC beat EPS/CFPS of $0.05/$0.95 but fell below EBITDA of $201 million. Management’s 2Q12 ops update on 7/20/12 2Q12 detailed production and preliminary realized pricing for the quarter. Lower operating costs (-20% vs. RJ) were offset by increased G&A (+26 vs. RJ).
Balance sheet still levered as liquids ramp continues: We currently model full year capex of $1.6 billion, which is in-line with guidance. Full year discretionary cash flow of ~$573 million implies a healthy outspend and as a result we project net debt/cap increasing from 52% to 55% by YE12. Net debt/EBITDA is currently 3.3x and we project an increase to 3.6x by year end. Both metrics are above the large cap coverage group average of 35% and 1.7x, which is something that we will keep a close eye on. We believe the company will be able to fund the cash flow gap through the $600 million in long term debt issued in February and a $1.75 billion facility ($235 million currently drawn). Additionally, Range expressed its intention to divest 9,300 net acres in the Ardmore Basin (Woodford); with 1,100 Bbls/d of liquids and 5.7 MMcf/d of gas a sale could fetch ~$90-100 million.
Estimates and valuation: After adjusting our model for production and cost guidance we are increasing our 2012/2013 earnings estimates by 21%/69% to $0.46/$0.66. Additionally, we are adjusting CFPS/EBITDA +5%/-3% to $3.79/$828 million in 2012 and +9%/+2% to $5.25/$1,096 million in 2013. Shares of RRC currently trade at 13x EV/NTM EBITDA. This is a premium to the 5-year historical E&P EV/EBITDA multiple range of 5-7x.
Howard Weil – July 25, 2012
Quick Take: Despite pre-releasing production and pricing for the quarter, RRC has a decent sized beat in quarter driven by costs. As the Marcellus continues to grow as a percentage of the total production, operating costs continue to come down, as evidenced by better-than-expected 3Q12 cost guidance. In 2Q12, the Marcellus accounted for approximately 70% of the total production, which is likely to increase in coming quarters. The Company has also indicated that production growth in 2012 is likely to come in at the high end of prior guidance with liquids comprising a larger portion of the stream than we had expected. This is boosting our estimates for the remainder of the year, as discussed below. Operationally, all areas appear to be performing well, with the liquids portion of the Marcellus taking center stage, followed closely by the Mississippian, where the acreage count has increased yet again. All in all, we continue to be impressed by Range’s ability to manage its cost structure, produce solid well results, and ultimately grow its high-quality inventory. However, we also believe that RRC is priced for perfection at these levels, and that investors have already built in the positive takeaways, leading us to have a hard time finding dramatic near-term upside, despite containing unarguable longer-term value oriented assets.
2Q12 Results: RRC reported 2Q12 recurring EPS of $0.11, beating our estimate of $0.06 and the consensus estimate of $0.05. Quarterly production volumes and realized prices were in line with preannounced levels. RRC’s production volumes consisted of 6% crude oil, 14% NGLs and 80% natural gas. Solid operating cost performance drove the earnings beat versus our expectations. On a per unit of production basis, operating costs were 7% below our estimate, a function of lower LOE, exploration expense and G&A. Transportation expense was slightly higher than our estimate while DD&A was in line. Discretionary cash flow of $0.97/share was $0.01 above our estimate and $0.02 higher than consensus.
Guidance & Revisions to Earnings Estimate: For the third quarter, RRC estimates total daily production volumes of 773-778 MMcfe/d. Oil is expected to grow approximately 11% on a sequential basis, while NGL production increases by ~6% and natural gas by ~8%. For the full year, RRC anticipates achieving production growth of 35% year-over-year, which is the high end of the Company’s guidance, while maintaining its $1.6 billion capital budget. From an operating cost standpoint, RRC continues to deliver impressive results. As such, our 3Q12 EPS and CFPS estimates are increasing from $0.13 and $1.12, respectively to $0.16 and $1.15. Taking into consideration 2Q12 results and updated guidance figures, our FY 2012 EPS is increasing from $0.50 to $0.58 while our CFPS estimate is being raised from $4.30 to $4.34.
Capital One Southcoast – July 25, 2012
RRC already pre-released production and realized prices but still came in with a beat of $0.11 vs our $0.06 and the Street of $0.06 on lower expenses (G&A, LOE, and exploration expenses). RRC is maintaining its CAPEX budget but guiding production growth to 35%, at the high end of its prior range of 30% – 35%. The operations update includes important positives in the Mississippian (recent wells tracking 600 Mboe/well vs 485 Mboe before, incorporating this in the model would add $4 to our NAV) and the Marcellus. RRC’s super-rich Marcellus wells are coming in with a higher percentage of condensate than we were modeling. RRC tested a well with a 24-hour IP of 11.7 MMcfe/d including 546 bopd of condensate, which is 28% condensate vs the 8% in our model. While the condensate percentage for the wells could decline over time, a little higher condensate percentage goes a long way. If RRC’s super-rich area can yield 12% condensate over the life of the well vs our 8% assumption, that would add $4 to our NAV.
UBS – July 25, 2012
2Q EPS beat for the 8th consecutive quarter on lower than expected costs. RRC’s 2Q12 adjusted EPS/CFPS of $0.11/$0.96 beat consensus of $0.05/$0.95 and UBSe of $0.04/$0.89 on lower than expected per-unit costs. Production of 719 MMcfed rose 42% YoY and 9.7% QoQ, in line with the operational update earlier this month. Average realized prices fell 26% YoY to $4.74/Mcfe. Per unit costs fell 10% YoY to $4.26/Mcfe and were 7% below UBSe and 28% below the peer avg.
Raises 2012 production guidance but capex unchanged; raising estimates. RRC raised 2012 production growth guidance to 35%, the high end of its prior range of 30-35%. We increased our estimate to 124.7 MBoed (+35%) from +34%, and note consensus is 123 MBoed (+33%). RRC reiterated its 2012 capex budget of $1.6bn, near our estimate of $1.64bn & consensus’ $1.56bn. We raised ‘12-13 EPS to $0.80 & $1.40 from $0.75 & $1.30 on lower than expected costs.
2Q operational highlights include: 1) Disclosed it will sell 9,300 net acres in the Ardmore Basin Woodford (producing 1.1 MBbld of liquids and 5.7 MMcfd of gas) which we estimate could go for >$100 MM; 2) increased EURs to 600 MBoe (70% liquids) from 400-500 MBoe and acreage to 152,000 net acres in the Horizontal Miss; 3) reported initial pad well EURs in the wet gas and super-rich areas of the SW Marcellus that are better than type curve assumptions; & 4) disclosed lower than expected cost guidance.
Valuation: Material premium to peers on EV/EBITDX and EV/DACF. Our $62 PT assumes ~0.7x NAV of $90/share or 11.7x ‘12E normalized EBITDX.
Johnson Rice & Company – July 25, 2012
Range maintains one of the more attractive asset bases which provides flexibility in liquids vs gas spending to target its highest returning projects. With its SW PA liquids-rich and MS Lime results improving, Range remains on track to meet its 15-20% growth target in 2013 while living within its cash flows. Based on today’s stock action, the Street appeared focused on Range’s lower NGL production, initial Upper Devonian results and leverage ratio, though none of those items seem to have a material impact on its long-term value proposition.
Resolution of Marcellus permitting issues to drive NGL growth – Pipeline stream crossing permits delayed the connection of numerous wells during the first half of 2012, which resulted in lower than expected NGL production. The Company has worked through the issues and is starting the process of working through its back log of wells (56) awaiting pipelines with the expectation of only minimal delays if any going forward. NGLs are expected to ramp up sharply in the second half of the year allowing its 4Q:12 liquids to come in 40% higher than in 4Q:11.
Marcellus/Utica activity focused on liquids; maintains deep gas inventory – While Range plans to focus a majority of its Pennsylvania activity in its liquids-rich areas (SW PA, NW PA), it continued to highlight its attractive dry gas inventory. In addition to its NE PA acreage, Range mentioned that roughly 40% of its SW PA acreage is also located in the dry gas portion of the play. With little attention paid to that acreage, it is worth noting recent drilling results on the gassy acreage generated strong results (7-8 Bcfe, similar to its wet gas area), as it looked to define the dry-gas/wet-gas boundary. In NW PA, Range is currently drilling its initial liquids-rich Utica well.
Mississippian – Range has built out the infrastructure needed in the Mississippian (SWD wells, processing plants, pipelines) to stay ahead of needs and allow wells to come online once completed. Two rigs are operating currently as its drilling/completion process is being refined. The Company plans to ramp up its program to 5 rigs by early 2013 with initial plans calling for an additional 5 rigs added per year in 2014. Its most recent 6 wells cost approximately 10% higher than its previous 8 wells, but are expected to recover ~25% more reserves showing its progress in the play. Going forward its wells are expected to cost ~$3.4 million (including $0.2 million for SWD) with laterals approaching 4,000 feet and a 17 stage completion, which is expected to recover 600 boe (up from 485 boe).
Upper Devonian still in the learning stage – While the initial production data from the Upper Devonian tests have been disappointing to-date, Range remains encouraged by the technical data coming out of the play. With the formation being 300′ thick (~3x the Marcellus thickness), Range is hard at work identifying the optimum lateral placement, which should lead to dramatically better results. The Company even highlighted the science-project nature of the play, as the initial Upper Devonian test results (~1.9 mmcfe/d) were still better than its initial four horizontal Marcellus wells drilled in 2006/2007. Given its extensive Marcellus drilling inventory, we believe the negative response to the Upper Devonian commentary was overdone, as the timing of full-scale development of the Upper Devonian seems to be longer-term (ie, holds a lower PV).
Asset sales to keep leverage ratio in check – Range is expected to open a data room in the coming weeks to begin the sale process on its 9,300 net acres in the Ardmore Basin, with closing likely in 4Q:12. The properties have current production of 12.3 mmcfe/d (54% liquids) and numerous infill opportunities. The Company plans to divest the properties to concentrate its efforts on higher return liquids-rich opportunities in the Mississippian and Marcellus while also managing its level of financial leverage. With a current debt-to-EBITDAX ratio of 3.0x, Range is at the top if its internal leverage comfort level, though it remains well within its covenants (4.25x leverage ratio) and less-levered than a number of its peers (owing to its more conservative nature).
Capex and Guidance – Management raised production guidance to 35% (top-end of its prior range) while maintaining its $1.6 billion capex. Range is refining its capex for the second half of 2012 as dry gas rigs will be dropped and additional capital will be spent on more effective “RCS” completions in the super-rich Marcellus. While its overall liquids growth for 2012 will be short of the 40% guidance issued earlier in the year due to completion delays, the Company believes that 4Q:12 will be up 40% over 4Q:11. Looking ahead to 2013, Range management still expects to generate organic growth of 15-20% while maintaining a capital budget equal to its cash flows (our model assumes cash flow of ~$822 million and capex of $1,250 million in 2013).
Adjusting estimates – We have adjusted our model to account for 2Q actual results, updated cost and production guidance. In addition, we are assuming wider differentials on NGL pricing during 2H:12 and a widening gas price differential as its MS Lime activity grows gas volumes. We are changing our 2012 and 2013 CFPS estimates to $4.15 and $5.13 (vs. $4.08 $ and $5.50, respectively).
