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We have upped our recommendation for Range Resources Corp. (RRC - Analyst Report) to Neutral from Underperform, following the impressive fourth quarter 2011 results.
The company’s better-than-expected fourth quarter 2011 results were mainly aided by a higher production level and realized prices along with lower unit costs. The fourth quarter production volume of 625.1 million cubic feet equivalent per day (MMcfe/d) jumped nearly 16% from the year-earlier level, with a surge in natural gas and natural gas liquids (NGLs) output to 19.8% and 3.8%, respectively. However, oil production dropped 2% year over year.
With a leading acreage position in the Appalachian Basin, Range Resources’ operations remain largely geared towards accelerating production while maintaining a low-cost structure. Its diversified asset portfolio is spread between low-risk/long reserve-life Appalachian assets and large-volume/rapid-payout Gulf Coast properties. The company has an impressive inventory in the Marcellus Shale, one of the prominent emerging shale plays in the U.S. lower 48 region.
The company also disclosed its 2012 capital budget of $1.6 billion with focus on five liquid-rich plays that include Marcellus, Upper Devonian, wet Utica, Mississippian, and Cline oil shale to drive its liquids production by more than 40% year over year in 2012. Of the total budget plan, 75% is assigned for liquids-rich and oil projects in Marcellus and Mississippian plays and the remaining 25% allocated for dry gas projects in Northeast Pennsylvania.
Notably, Range Resources has boosted up its 2012 production forecast at 30% to 35% from the previous expectation of 25% to 30%. For 2013, production is estimated to grow 15% to 20%.
Range Resources has an industry-leading cost structure. The company has a track record of growing production at a double-digit rate while reducing its finding and development (F&D) costs and sustaining a low-cost structure. This is attributable to increased production from the low-cost Marcellus region.
Hence, Range Resources’ increasing focus on liquids and divestiture of higher cost assets, like Ohio properties in 2010 and Barnett in the first half of 2011, will aid the company to further streamline its overall cost structure.
In a weak natural gas price environment, we remain hopeful that the company’s record production and declining unit costs (down 37.5% year over year in the reported quarter on an aggregate), along with its sale of non-core properties, will prove beneficial over time. However, we remain on the sidelines as the company is still exposed to volatile natural gas fundamentals, which accounted for more than 78% of the total production in the fourth quarter of 2011.
The company, which competes with EQT Corporation (EQT - Analyst Report) and SM Energy Company (SM - Analyst Report), holds a Zacks #3 Rank (short-term Hold rating).