We downgraded our recommendation on Range Resources Corporation (RRC - Analyst Report) to Neutral from Outperform on Oct 4, 2013. The company’s strategy of selling its higher cost assets further reduced its overall cost on the one hand, and resulted in reduced yield on the other.
Further, Range Resources remains susceptible to volatile natural gas prices, an imbalance between supply and demand for products, and rising interest rates.Range Resources carries a Zacks Rank #3 (Hold).
Why the Downgrade?
Range Resources’ diversified asset portfolio is spread between low-risk/long reserve-life Appalachian assets and large-volume/rapid-payout Gulf Coast properties.
The company’s focus is on five liquid-rich plays that include the super-rich Marcellus, the super-rich Upper Devonian, the wet Utica, the horizontal Mississippian and the Cline Oil shale play to drive its liquids production. Its primary activity is centered on the super-rich area of southwestern Pennsylvania. Given its dominant position in these plays, especially Marcellus, and its continuous endeavor to control costs, we believe that Range Resources will be capable of long-term shareholder value creation.
For 2013, Range Resources expects to deliver 20–25% annualized production growth with its focus on liquid-rich opportunities mostly in the Marcellus Shale and Horizontal Mississippian plays that have a combined acreage of about 500,000.
Range Resources has a track record of growing production at a double-digit rate while reducing its finding and development (F&D) costs and sustaining an industry leading low-cost structure. This is due to increased production from the low-cost Marcellus region. Additionally, the sale of higher cost related assets further reduced the company’s overall costs. The company recently disclosed that it aims to sell its acreage in the Permian Basin properties in southeast New Mexico and West Texas. The properties currently produce 18 million cubic feet equivalent million cubic feet equivalent per day of oil and gas.
However, the company’s prospects are closely linked to the successful completion of its growth projects, which in turn, might be affected by operational hindrances, cost inflations and overruns and delays in completion. Further, a failure on the part of management to form beneficial partnerships or dispose low-profit generating assets will likely impair the company’s growth rate and capital expenditure programs.
Other Stocks to Consider
While we prefer to remain on the sidelines forRange Resources, Zacks Ranked #1 (Strong Buy) stocks – China Petroleum & Chemical Corp. (SNP - Analyst Report), Stone Energy Corp. (SGY - Analyst Report) and TransGlobe Energy Corp. (TGA - Snapshot Report) – could be good buying options for the short term.