THE HEDGEYE EDGE
Range Resources Corp (RRC) is a ~$3.5B market cap natural gas levered E&P operating primarily in the Marcellus Shale. Range Resources retains some of the most economic and productive acreage in the U.S. E&P space and has decades of drilling runway.
Yet, within a sector that has earned a reputation for value destruction, Range has been one of the worst offenders. In the past 5 years, RRC checked the usual boxes of E&P value destructive behavior such as excessive debt and equity issuance to fund production and reserve growth. But what separates RRC from its peer group was the $4.4B equity financed acquisition of Memorial Resource Development (MRD) in 2016. The transaction gave MRD holders 31% of the proforma company and eviscerated ~$4.2B of RRC’s market value. The company is taking concrete steps in order to repair its reputation in the public equity markets by spending within cash flow, using FCF to pay down debt, and reconstituting its Board of Directors.
Factors outside of Range’s control have further weighed on the market’s perception of the company. These include low benchmark natural gas prices and insufficient midstream takeaway capacity in Appalachia, resulting in wide basis differentials; both of which have improved markedly since the trough of the commodity down cycle. Lastly, fears of Permian associated gas production, driven by oil, not gas economics, continues to be the monster under the bed.
With the stock off 80% from the 2014 highs and short interest hovering around ~17%, the market is punitively discounting the corporate governance and macro risks while overlooking the opportunity. At the current price of $13/share, we believe that RRC is pricing in ~$2.50 Henry Hub and ~$50 WTI versus the 12-month strips at $3.20 Henry Hub and $52 WTI.
Even if commodity prices fall from the current strip, we estimate that RRC will generate $1.50 - $2.00 per share of FCF in 2020, equating to a FCF yield of ~10%. By 2022, FCF / share could be closer to ~$4.00, a ~25% FCF yield at the current share price.
We estimate Fair Value for RRC to be $25 /share, ~100% upside from the current price of ~$13.