Range Resources stock (RRC) is cratering. Range Resources stock has suffered in recent months due to the oversupply of natural gas prices weighing on the commodity. Today, Range Resources stock is getting hit after being downgraded by Morgan Stanley following its 2018 budget plan release.
So what is going on with the plan? The 2018 capital budget for Range Resources was announced at $941 million, which is below anticipated 2018 cash flow at current strip prices and generates annual production growth of approximately 11%. Additionally, Range announced a five-year outlook from 2018 through 2022 that generates cumulative free cash flow of approximately $1 billion and reduces leverage to below 2x net debt to EBITDAX by year-end 2022, assuming no asset sales.
So what are the major highlights here?
1. 2018 capital budget of $941 million generates expected annual production growth of ~11% within cash flow
2. ~$1 billion of cumulative free cash flow through 2022
3. Debt to EBITDAX ratio reduced to 2.7x in 2020 and below 2x by 2022, even without asset sales
4. Free cash flow yield at end of five-year outlook of ~33%
5. Annual production CAGR of approximately 13% per debt-adjusted share in five-year outlook
Capital Spending details
Range resources is going to reduce capital spending to approximately $941 million for 2018, which is expected to generate production growth of approximately 11% year-over-year, while spending within cash flow at current strip pricing. Additional cash flow generated from asset sales or an increase in commodity prices would be expected to be used to pay down debt in 2018. Approximately 80% of 2018 capital is projected to be spent in the Marcellus, generating greater than 25% growth from Range’s southwest Marcellus assets and full utilization of transportation capacity out of Appalachia by the end of the year. To support the 2018 capital program, the Company has also increased its hedge position, with approximately 70% of expected 2018 natural gas production currently hedged at an average price of $3.09. Detailed hedging information can be found in the updated Company presentation.
Capital spending for 2017 was approximately $1.27 billion, approximately 10% above the planned $1.15 billion budget. In North Louisiana, the increase was primarily driven by higher capital spending in the expansion area, higher than expected costs on wells completed in the second half of 2017 and on wells drilled but not completed in 2017. The increase was also driven by higher spending in the Marcellus, where well results have been very strong and new transportation capacity agreements are on line or expected to be on line in early 2018. Please refer to the latest Company presentation to see updated well economics for planned 2018 activity in the Marcellus and Lower Cotton Valley.
Range’s current five-year outlook would deliver an annual production CAGR of approximately 13% on a debt-adjusted per share basis while generating approximately $1 billion of cumulative free cash flow, at strip pricing. Leverage is expected to improve significantly under this outlook with a net debt to EBITDAX ratio below 2x by 2022, even without asset sales. Any proceeds from assets sales are expected to be used for debt reduction. Margin improvement is expected due to improved access to better markets and a continued improvement in the Company’s cost structure through utilization of existing infrastructure and lower interest expense. The five-year outlook assumes all production growth is from Range’s Marcellus inventory, while North Louisiana production is held roughly flat from year-end 2018 through the remainder of the plan. At the end of the five-year outlook, Range would still have over 3,200 locations in the core of the Marcellus alone. Additional details, underlying assumptions and defined terms can be found in the latest Company presentation posted on Range’s website, entitled “Company Presentation January 2018”.
Commenting, Jeff Ventura, the Company’s CEO said:
“We have entered a new era of shale development where companies that captured the most prolific resources have the ability to generate better returns for shareholders. For Range, the flagship asset and growth driver of the Company will continue to be our large, high-quality, de-risked inventory in southwest Pennsylvania. As demonstrated in our five-year outlook, the quality of our assets allows Range to improve corporate returns and our leverage profile in the near-term, while generating competitive growth of production and reserves on a debt-adjusted per share basis. Looking beyond the five-year outlook, as the industry exhausts its core inventory, we believe Range will be well-positioned with a long runway of high-quality drilling locations from which we can drive long-term value.”
Quad 7 Capital takes a contrarian view on this stock, and sees it and its peers at levels attractive to begin accumulating for a long-term position.
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