Morningstar | Range Resources Continues Focus on Debt Reduction in 3Q; $22 FVE Unchanged
We're leaving our fair value estimate for Range Resources unchanged at $22 per share following the release of third-quarter results. Our no-moat rating is also intact. Range's production grew to 2.27 billion cubic feet per day, a touch above management's guidance and up 14% year over year. Production from the company's core southwestern Pennsylvania operations in the Marcellus was up 29% year over year. Companywide production was up 3% 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. Notably in the quarter, the company closed a royalty sale related to assets in Washington County, Pennsylvania, for $300 million, allowing for debt reduction. Management expects cash flow associated with the transaction to be approximately $25 million in 2019. We see the transaction as value neutral, but it does allow Range to accelerate its deleveraging process. As we've said previously, we think the underperforming Louisiana assets acquired in the merger with Memorial Resource Development are up for sale.
Natural gas basis differentials should continue to improve with infrastructure coming on line in the Marcellus. New transportation projects should also send the firm's unit costs lower over time. Even with our view that oil and natural gas liquids prices will retreat in the next few years, we think Range is set up to generate significant free cash flow in 2019 and beyond.
At about $16 per share, Range trades considerably below our fair value estimate of $22 per share. However, we'd urge caution. Range still has high financial leverage, leading to a wide discrepancy between our bull- and bear-case fair value scenarios of $38 and $8 per 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.
Range Resources is a holding company. Through its subsidiaries, the company is an independent natural gas, natural gas liquids and oil company, engaged in the exploration, development and acquisition of natural gas and oil properties, located in the Appalachian and North Louisiana regions of the United States, primarily in the Marcellus Shale in Pennsylvania and the Lower Cotton Valley formation in Louisiana.
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