We are maintaining our Neutral recommendation on Range Resources Corporation (RRC - Analyst Report) – a Fort Worth, Texas based independent oil and gas company, engaged in the exploration, development and acquisition of oil and gas properties primarily in the southwestern, Appalachian and Gulf Coast regions of the U.S.
The company’s solid production trend, an impressive inventory in the Marcellus Shale along with industry leading low-cost structure is partly tempered by its natural gas weighted reserve profile.
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. During the second quarter, the company’s production averaged 719.3 million cubic feet equivalent per day (MMcfe/d), comprising 80% natural gas, 14% natural gas liquids (NGLs) and 6% oil. Total production volume experienced a 41.6% improvement from the year-earlier period, mainly on the back of sustained accomplishments from the company’s drilling program.
The company has an impressive inventory in the Marcellus Shale, one of the prominent emerging shale plays in the U.S. lower 48. In the second quarter, Marcellus Shale well results continued to show improvement from both production and a cost perspective. Marcellus production reached 500 MMcfe/d at the end of the quarter. It is on track to meet the 600 MMcfe/d target by 2012 year-end.
Given its dominant position in the Marcellus Shale play and its continuous endeavor to control costs, we believe that Range Resources will be capable of long-term shareholder value creation. It has also increased its overall 2012 production growth rate to 35%, which is at the high end of the previous 30%–35% range.
The company also reaffirmed its 2012 capex budget of $1.6 billion, 75% of which is apportioned for liquids-rich and oil projects in the Marcellus and Mississippian plays. We appreciate its initiative of deploying more funds toward liquids, a trend common even among its peer, ConocoPhillips (COP - Analyst Report).
However, with 79% of Range Resources’ reserves tilted toward natural gas, the company’s results are vulnerable to fluctuations in natural gas markets. Hence, we remain on the sidelines as the company is still exposed to a low natural gas price environment, interest rate risks and an uncertain macro backdrop.
Additionally, Range Resources is governed by several stringent regulations, especially in the Marcellus Shale, the Appalachian Basin and the southwestern U.S., where it has a robust asset base.
The company retains a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.