Range Resources (RRC, Financial) is among the few oil and gas stocks that I like in the current market condition for the energy industry. This article discusses the reasons for liking the company and the reasons to be bullish on the stock with a long-term investment horizon.
The first bullish point related to Range Resources is the company’s balance sheet and financial strength. On March 23, the company released its annual borrowing base approval under which the company’s $3 billion borrowing base and $2 billion committed amount under the $4 billion bank credit facility has been approved by lenders through May 2016.
The borrowing base approval underscores the company’s financial strength and the press release also provides some key credit ratios related to the company. As of December 2014, Range Resources had an EBITDAX to interest expense of 7.4 and PV9 proved reserves value to debt was 2.2. Therefore, the company’s interest coverage is strong and the company’s reserves also provide a strong cushion to the debt holders.
The second important point that I want to mention related to Range Resources is the company’s declining unit cost. I believe this is a major positive and will show its impact on the company’s EBITDA margin once gas prices recover. From a unit cost of $4.3/MCFE in 2008 the company’s unit cost has declined to $2.55/MCFE in 2014. Further, the unit cost is likely to decline to $2.46/MCFE in 2015. I believe this is a big positive and underscores the company’s efficiency.
While the above point is with a long-term view, even in the near-term, I expect Range Resources do perform well with an $870 million capital expenditure program for 2015. Considering the company’s credit facility availability, the capital expenditure is fully funded and should drive robust production in 2015.
The positive factor for Range Resources in the near-term is the fact that nearly 75% of the company’s gas production for 2015 is hedged at an average floor price of $3.77. Further, 75% of the company’s oil production is also hedged at an average floor price of $90.57. I am providing these data to underscore the point that the company’s operating cash flow for 2015 is likely to remain robust even with depressed oil and gas prices. Over the long-term, higher oil and gas prices will translate into significantly higher EBITDA margin and cash flows. Therefore, Range Resources, with declining production cost is well positioned to outperform.
Also, from a long-term perspective, it is important to point out here that the company’s proved reserves was 10.3Tcfe as of FY14. The important point to note is that the company currently has 66-87Tcfe of net unproved resource potential. Even if 50% of the resource potential translates into reserves, the company’s production and cash flow upside visibility is significant.
I mentioned strong balance sheet fundamentals earlier and I want to add that the company’s debt maturity profile is excellent with no debt maturities until 2020. Therefore there is no immediate term debt-refinancing pressure and considering the company’s investment plans and financial flexibility, debt servicing will not be a concern in the coming years.
All these points combine to make Range Resources an excellent investment with a investment horizon of 3-5 years. I must emphasize here that investors should wait for the Iran nuclear deal outcome before considering fresh exposure to the stock. A successful nuclear deal can result in oil moving lower and this is likely to impact energy stocks.
