Evgenii Mitroshin
Ranger Oil (NASDAQ:ROCC) expects to continue its solid production growth in Q4 2022 and into 2023. Ranger’s guidance for Q4 2022 suggests 7% to 8% production growth from Q3 2022 levels, while commentary around 2023 suggests another 6% production growth compared to Q4 2022.
At current strip prices Ranger may be able to deliver that production growth along with $233 million in positive cash flow (before dividend payments) over the next five quarters.
I now estimate Ranger’s value at the end of 2023 at approximately $45 to $46 per share in a long-term (after 2023) $70 WTI oil environment. This is up a bit from what I had previously estimated for Ranger as its production growth into 2023 looks good, while it has been repurchasing shares at a reasonable price.
Q4 2022 Outlook
Ranger did well in Q3 2022, exceeding the high end of its total production guidance for the quarter. It expects to continue to grow production in Q4 2022 and into 2023 as it is running a third rig for now and also has increased non-operated activity as well. Ranger now expects around 46,100 BOEPD in total production and 32,900 barrels per day in oil production in Q4 2022. This is 8% total production growth and 7% oil production growth compared to Q3 2022.
At current strip prices (including low-$80s WTI oil for Q4 2022), Ranger is projected to generate $275 million in revenues after hedges during the quarter. Ranger’s hedges are estimated to have negative $8 million in value for Q4 2022. Most of its WTI oil hedges have a ceiling of $89.05 for Q4 2022 and thus have neutral value.
| Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million | |
| Oil | 3,026,800 | $82.00 | $248 |
| NGLs | 607,200 | $28.00 | $17 |
| Natural Gas | 3,643,200 | $5.00 | $18 |
| Hedge Value | -$8 | ||
| Total Revenue | $275 |
Ranger’s capital expenditures for Q4 2022 are increasing to around $160 million, with $30 million attributable to the third rig and $25 million attributable to additional working interest that it acquired as well as increased non-operated activity. Ranger’s bonds pay interest in Q1 and Q3, so its actual cash interest is fairly low in Q4.
| $ Million | |
| Lease Operating Expense | $22 |
| Gathering, Processing and Transportation | $11 |
| Production and Ad Valorem Taxes | $16 |
| Cash G&A | $11 |
| Cash Interest | $3 |
| Capital Expenditures |
$160 |
| Total Expenses |
$223 |
This results in a projection that Ranger can generate $52 million in positive cash flow in Q4 2022, before dividends. Ranger’s current $0.075 per share quarterly dividend adds up to around $3 million per quarter.
2023 Outlook
For 2023, Ranger expects high-teens production growth if it goes with three rigs. As well, it anticipates hitting 50,000 BOEPD in production during 2023, although its average production during the year may be lower.
I am modeling Ranger’s 2023 production at 48,700 BOEPD, including 34,800 barrels per day of oil production. This is approximately 18% production growth compared to the midpoint of Ranger’s current full-year 2022 guidance, and approximately 6% production growth compared to Ranger’s Q4 2022 guidance.
At current 2023 strip of mid-$70s WTI oil, Ranger is projected to generate $1.068 billion in revenues, inclusive of $28 million in negative hedge value.
| Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million | |
| Oil | 12,702,000 | $75.50 | $959 |
| NGLs | 2,536,750 | $25.75 | $65 |
| Natural Gas | 15,220,500 | $4.70 | $72 |
| Hedge Value | -$28 | ||
| Total Revenue | $1,068 |
I’ve assumed that Ranger’s 2023 capex is around $600 million with a three-rig program, which results in a projection that it can generate $181 million in positive cash flow in 2023 at current strip while growing production. This is before Ranger’s current $12 million per year in dividend payments.
| $ Million | |
| Lease Operating Expense | $94 |
| Gathering, Processing and Transportation | $46 |
| Production and Ad Valorem Taxes | $60 |
| Cash G&A | $44 |
| Cash Interest | $43 |
| Capital Expenditures |
$600 |
| Total Expenses |
$887 |
Ranger’s Debt Situation
Ranger had $595 million in net debt at the end of Q3 2022. As noted above, it is projected to end 2022 with $546 million in net debt based on its projected Q4 2022 cash flow. Ranger could also reduce its net debt to around $377 million by the end of 2023 based on current strip prices. This would give it leverage of 0.5x at the end of 2023.
The above numbers assume that Ranger maintains its quarterly dividend at $0.075 per share, and doesn’t include potential spending on share repurchases or acquisitions.
During its Q3 2022 earnings report, Ranger noted that it made Eagle Ford acquisitions totaling $139 million during 2022. This added around 2,000 BOEPD of production along with over 60 identified gross drilling locations.
As well, Ranger noted that it had repurchased 2.1 million shares during 2022 at an average repurchase price of $34.73 per share. This leaves it with $67 million left under its current $140 million repurchase authorization.
Notes On Valuation
I now estimate Ranger’s value at $45 to $46 per share at the end of 2023 in a long-term (after 2023) $70 WTI oil environment. This is based on a 3.0x EV to unhedged EBITDAX multiple using Ranger’s projected 2023 production levels and year-end 2023 net debt. I am also using Ranger’s current outstanding share count of 41.6 million, and it may be able to increase its value a bit by repurchasing shares at lower prices.
Conclusion
Ranger Oil expects to continue its production growth in Q4 2022 and into 2023, with average 2023 production that may be around 14% higher than Q3 2022 levels. Ranger should also be able to generate around $233 million in positive cash flow between Q4 2022 and the end of 2023 at current strip prices.
The combination of production growth and debt reduction gives Ranger an estimated value of $45 to $46 per share in a long-term (after 2023) $70 WTI oil scenario.
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