We have maintained our long-term Neutral recommendation on Range Resources Corporation (RRC) based on its balanced risk-reward profile.
Range Resources is an independent oil and gas company, engaging in the exploration, development and acquisition of oil and gas properties. Its diversified asset portfolio is spread between low-risk/long reserve-life Appalachian assets and large-volume/rapid-payout Gulf Coast properties.
Moreover, 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 an industry leading low-cost structure. Total production volume experienced a 20% improvement from the year-earlier period in the last quarter, mainly on the back of sustained accomplishment from the company’s drilling program.
Range Resources has an impressive inventory in the Marcellus Shale, one of the prominent emerging shale plays in the U.S. lower 48. In the first quarter, Northeast Marcellus rates remained solid. Four wells had an average test rate of 22 million cubic feet equivalent per day (MMcfe/d) each, which is well above the average results clocked by the company in this region.
Range Resources is focused on five liquid-rich plays that include Marcellus, Upper Devonian, wet Utica, Mississippian, and Cline oil shale. Collectively, these plays are estimated to drive its liquids production by more than 40% year over year in 2012. The overall production growth is targeted at 30% to 35% for this year and 15% to 20% for 2013. The company has also reaffirmed its 2012 capex budget of $1.6 billion, 75% of which is apportioned for liquids-rich and oil projects in Marcellus and Mississippian plays with the balance 25% allocated for dry gas projects in Northeast Pennsylvania.
However, the company is susceptible to the weak natural gas price environment as 79% of Range Resources’ reserves are weighed toward natural gas. In the first quarter, natural gas comprised 78% of the total volume.
Besides, lower realized prices that the company experienced in the preceding quarter remain a matter of concern. Total price realization averaged $5.19 per Mcfe, a decrease of 14% year over year. Natural gas liquid as well as natural gas prices decreased 5.0% and 25.7%, respectively. However, its crude oil price was up 5.3%.
Additionally, we believe that risks such as cost inflation for services and equipment, delays in commencing pipeline operations and environmental regulatory rulings are major impediments for the company’s growth momentum.
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