EUR 850.00 For Business Accounts Only

Morningstar | Improved NGL Pricing Boosts Range Resources' 2Q

We're leaving our fair value estimate for Range Resources unchanged at $22 per share following the release of second-quarter results. Our no-moat rating is also intact. Range's production jumped to 2.2 billion cubic feet per day, a touch above management's guidance and up 13% year over year. Production from the company's core southwestern Pennsylvania operations in the Marcellus was up 30% year over year. Companywide production was essentially flat quarter over quarter.

We expect Range will continue to focus on its Marcellus assets and look to sell noncore assets to improve its balance sheet. As we've said previously, we think the underperforming Louisiana assets acquired in the merger with Memorial Resource Development are up for sale.

Pricing in the quarter was helped by a nearly $20 barrel year-over-year increase in oil prices, which pushed Range's realized NGL prices up more than 50% compared with the prior-year quarter. A full 46% of Range's prehedge second-quarter revenue came from liquids production. Natural gas basis differentials also improved during the quarter due to new infrastructure coming on line in the Marcellus. Even with our view that oil and NGL prices will retreat in the next few years, we think Range is set up to generate significant free cash flow in the quarters to come.

At just above $15 per share and up 5% on the day, Range still trades considerably below our unchanged fair value estimate of $22 per share. Still, we'd urge caution. Range still has high financial leverage, leading to a wide discrepancy between our bull- and bear-case fair value scenarios, $38/share and $8/share, respectively. The resulting extreme uncertainty rating means we'd label shares as fairly valued despite the yawning gap between our fair value estimate and the current trading price.

For more on our NGL forecast, please see our July Energy Observer "The Natural Gas Liquids Rubik's Cube Solved."