Range Resources: Clearly Impacted By Pricing, But Equipped To Weather It – Range Resources Corporation (NYSE:RRC)

On Thursday, February 27, 2020, Appalachian natural gas producer Range Resources Corporation (RRC) announced its fourth-quarter 2019 earnings results. At first glance, these results appeared to be rather disappointing, as the company failed to meet the expectations of its analysts in terms of top line revenues and posted a fairly large bottom line loss. A closer look at the actual earnings report shows that there were certainly a few things to like here as the company works to adapt to the current environment affecting the industry. Range Resources has been struggling over most of the past year, as very low natural gas prices have made it difficult to turn a profit, particularly in the Appalachian basins, where the majority of the company’s operations are located. It does not seem that this situation will change anytime soon, but Range Resources is perhaps better equipped to weather the current climate than some of its peers.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article, as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Range Resources’ fourth-quarter 2019 earnings results:

  • Range Resources brought in total revenues of $605.604 million in the fourth quarter of 2019. This represents a substantial 43.54% decline over the $1,072.637 million that the company brought in during the prior-year quarter.
  • The company reported an operating cash flow of $132.412 million in the most recent quarter. This represents a 38.63% decline over the $215.743 million that it reported in the prior-year quarter.
  • It produced 2,283,162 thousand cubic feet of natural gas equivalents in the current quarter.
  • The company sold a total of $785 million in assets over the course of 2019 and used the proceeds to reduce its debt.
  • Range Resources reported a net loss of $1.805320 billion in the fourth quarter of 2019. This compares rather unfavorably to the $1.764422 billion net loss that it reported in the fourth quarter of 2018.

One of the biggest things that weighed on Range Resources’ performance in the fourth quarter of 2019 was the low natural gas prices in the United States. As we can see here, despite a few bounces over the course of the year, the overall trend in natural gas prices was decidedly negative over the course of the year:

Source: Nasdaq.com

As of the time of writing, natural gas trades at $1.729 per thousand cubic feet, but the company was able to do somewhat better than that in 2019. The company realized a price of $2.62 per thousand cubic feet over the course of the year. Clearly though, given the price action so far this year due to a continuing oversupply of the compound and fears of an impending recession, it looks unlikely that things will improve anytime soon. In response to this, Range Resources has been working to reduce its costs. We can see in the chart below that the company plans to continue doing that:

Source: Range Resources

In 2019, Range Resources had average costs of $2.69 per cubic foot equivalent compared to an average of $2.86 per cubic foot equivalent in 2018. These lower costs helped to offset some of the impact of the lower energy prices. When we consider the trend in prices that we have seen this year though, we can see that the company has not gotten its costs down as much as it needs to. This will likely drag on its results over the course of this year.

Range Resources has done a much better job than most of its peers in maintaining spending discipline. As I discussed in a recent article, many North American shale operators have been having difficulty remaining cash flow positive. While that article specifically referred to shale oil operators, the same is true of shale gas companies like Range Resources. This is due to the fact that they need to keep drilling in order to maintain their production levels. Range Resources has not had this problem though. In fact, it is one of the only shale gas operators that has been able to maintain a positive free cash flow:

Source: Range Resources

This gives the company a marked advantage over its peers because free cash flow is what allows a company to do things like pay down debt or pay a dividend to shareholders. The peers that have a negative free cash flow have to keep borrowing an ever-growing amount of money simply to pay their bills and maintain their production. When we consider the current conditions in the industry, energy companies should not be piling on more debt and committing themselves to growing levels of interest payments. It might be challenging for Range Resources to maintain its free cash flow as energy prices continue to fall, however.

Range Resources did an excellent job at reducing its debt over the course of the year. As already mentioned, the company sold off some of its underperforming assets during the year, which resulted in it realizing $785 million that it used to pay down debt. As of December 31, 2019, Range Resources had a total of $3.172987 billion in total debt compared to $3.836861 billion at the same time last year. This gives the company a debt-to-equity ratio of 1.35. This number is admittedly a lot higher than I really want to see (I would prefer that it be under 1.0), but it is also better than what some peers have.

Range Resources does maintain a sizable amount of liquidity, however. We can see that here:

Source: Range Resources

Despite the decline in energy prices, Range Resources managed to increase the size of its revolving credit facility by $400 million to $2.4 billion. This is a testament to the company’s financial strength, as it seems unlikely that bank underwriters would take a risk on a shale gas producer if they thought there was any significant risk that they would not be able to carry the debt. At the moment though, the company only has $477 million outstanding, as the overwhelming majority of its debt consists of bond notes. This, therefore, gives the company a significant amount of liquidity to help it weather the low-cost environment, but I would certainly prefer to see it finance its commitments using cash instead of tapping this revolving facility.

The long-term future of Range Resources continues to appear bring once it manages to weather the current crisis. As I have discussed in many recent articles, the future of natural gas is quite strong. According to the International Energy Agency, the demand for natural gas globally will increase by 36% over the next thirty years as governments around the world work to reduce their nations’ carbon emissions by switching to clean-burning sources of fuel like natural gas and away from coal and, to a lesser extent, oil:

Source: International Energy Agency, Kinder Morgan

The United States is one of the few areas in the world that can significantly increase its production due to its sizable reserves in areas like the Marcellus basin in Appalachia, where Range Resources has most of its reserves. Indeed, we are already beginning to see energy companies move to take advantage of this by constructing liquefied natural gas production facilities to allow the resources to be exported. In a recent article, I pointed out that a record amount of new liquefied natural gas production capacity received the green light from corporate managers in 2019. This trend is expected to continue, and we should see the production capacity of the United States climb over the next few years as shown here:

Source: Energy Information Administration, Range Resources

These facilities cannot produce any liquefied natural gas without having the regular natural gas to feed them. This should result in a growing demand for Range Resources’ products.

There has also been growing demand for natural gas from the utilities sector, particularly for electricity generation. As we can see here, back in 2008, only 21% of the electricity produced in the United States came from natural gas-fired power plants. That figure increased to 35% by 2018:

Source: Energy Information Administration, Range Resources

This is something that is likely to continue going forward, as utilities have already announced the retirement of a number of coal- and nuclear-powered plants representing a total of 40 gigawatts of capacity between now and 2025.

Source: Energy Information Administration, Range Resources

It is reasonable to assume that natural gas-fired plants will replace at least some of this capacity, as renewables do not yet have the reliability to completely replace all of it. This will prove to be beneficial for natural gas demand.

With that said though, the United States still remains oversupplied with natural gas, and until that situation is resolved, prices are likely to remain suppressed. This is likely to weigh on Range Resources’ results going forward. The company does appear to be doing an adequate job positioning itself to weather the current conditions in the industry, so it will likely emerge as a survivor. Unfortunately though, I can see no near-term catalyst for the company.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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