Summary
Range Resources (RRC) second quarter production volumes averaged 434 million cubic feet equivalent (cfe)/day. RRC has now posted 26 consecutive quarters of sequential production growth. Even with a lower capital budget RRC expects double-digit growth again this year. RRC drilled 95.8 net wells with 100% success. RRC drilled 46 horizontal Marcellus wells. finding and development costs average $1.00/thousand cfe. With Nymex gas at $5.00/million btu, Marcellus wells have a 50% rate of return.
Analysis
RRC is 31 year old company that has gone through several ups and downs. After a series of mergers and acquisitions the present name was adopted in 1998. The most serious economic threats to RRC occurred in the decade of the 1980s and again in 1998-2001. In 2000, RRC changed its strategy from growth by acquisition to growth by drilling.The technical staff was enlarged and in 2006, the company entered the Barnett shale gas play. Soon it was prospecting in the Woodford and now the Marcellus and Huron. Growth has been unprecedented in the last five years with reserves tripling. The Marcellus is now considered to be the company's high growth region. RRC has 900,000 acres leased there, more than all other regions combined. Still, RRC is leveraged with a long term debt of $1.790 billion on the books. This comes at a time when natural gas prices have plummeted over the last nine months and are now in the $4/million btu range. These low prices are further threatened by an expected increase of imported liquefied natural gas (LNG) sponsored by and financed by the major international oil and gas companies, notably ExxonMobil and Royal Dutch Shell(NYSE:RDS/A). To strengthen the balance sheet, RRC sold in May $300 million in 8.0% notes priced to yield 8.75% at maturity in 2019. The ability to raise funds in today's capital markets is a tribute to the confidence the banks have in RRC. The high interest rate is a recognition of the difficult times. RRC is one of a few companies that can actually borrow money. To raise additional cash, RRC sold off West Texas properties with higher maintenance costs for $182 million. RRC has reduced capital expenses and is closely keeping its eye on the balance sheet expecting to maintain leverage at about 40%. The company has hedged 80% of second half 2009 production at $7.49/million btu. With no debt maturity until 2012, assuming the world financial crisis does not deepen, RRC should be able to weather the downturn and prosper when natural gas prices rise.
Michael Lynch consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
