On Sep 29, 2016, we issued an updated research report on Texas-based Range Resources Corporation (RRC - Analyst Report) .
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 has an impressive inventory in the Marcellus Shale, one of the prominent emerging shale plays in the U.S. Lower 48. The company is advantageously positioned to benefit in the long run from these projects. Given its dominant position in the Marcellus Shale play and its continuous endeavor to control costs, we believe that Range Resources is capable of long-term shareholder value creation.
The recent merger of Range Resources with Memorial Resource Development Corp. is expected to substantially boost its position as a premier independent natural gas, oil and NGL producer in the United States. Range Resources already boasts remarkable core acreage positions in both the Appalachian Basin and Northern Louisiana and we are further impressed by its access to Terryville field in Louisiana and Cotton Valley following the aforesaid merger.
For the third quarter, Range Resources estimates production of 1.430 billion cubic feet equivalent (Bcfe) per day. Of this, approximately 32–35% is expected to be liquids. We are optimistic about the guidance, given the encouraging results from Cotton Valley that stretches from East Texas all the way to the Florida panhandle and Terryville in Louisiana. Moreover, the merger is expected to be immediately accretive to its cash flow.
The company has been expanding its drilling activity to Northeast Pennsylvania, which has been witnessing a pickup in industry activity. Range Resources indicated that returns in the Northeast could be as good as in the Southwest. The company is encouraged by the Mississippian results and intends to ramp up activity in the area, going forward.
However, Range Resources expects direct operating expenses during the third quarter of this year between 18 cents per thousand cubic feet equivalent (Mcfe) and 19 cents per Mcfe. The revised estimation is higher than 15 cents per Mcfe in second-quarter 2016. The increase in sequential expenses might dent the company’s profits.
Though Range Resources is a leader in unlocking adequate Marcellus infrastructure, more effort is required on the company’s part to be at par with industry standards. Inability of the company to acquire or construct adequate additional capacity could hinder volume growth ahead.
In our opinion, the Marcellus Shale properties are primarily over pressured, with some areas containing rich gas that needs to be processed further. As such, Range Resources requires more capital and new high-pressured lines to gather Marcellus gas.
Zacks Rank and Stocks to Consider
Range Resources currently carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector include Chevron Corporation (CVX - Analyst Report) , NGL Energy Partners LP (NGL - Snapshot Report) and Evolution Petroleum Corp. (EPM - Snapshot Report) . All these stocks sport a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Chevron posted a positive earnings surprise of 54.84% in the preceding quarter.
NGL Energy Partners has a mixed earnings surprise history. The partnership posted positive earnings surprise in two of the last four quarters. It reported a positive earnings surprise of 1480.0% in the preceding quarter.
In the last reported quarter, Evolution Petroleum Corp. delivered a positive earnings surprise of 350.00%. Coming to the earnings surprise history, the company beat estimates in two of the last four quarters.
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