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Morningstar | Range Suffering From Lower Medium-Term Gas Prices

As primarily a Marcellus operator (roughly 85% of total production), Range Resources is a gas-heavy exploration and production firm, with more than 95% of proved reserves consisting of natural gas or natural gas liquids. The company has diversified its asset base somewhat after its merger with Memorial Resource Development in 2016. Memorial gave Range exposure to gas- and NGL-heavy assets in northern Louisiana, and the transaction helped shore up Range’s shaky balance sheet. But the acerage has not performed as hoped.With natural gas prices on a fairly steady downward trajectory over the last few years, Range has focused on cost-cutting, seeking to be one of the lower-cost producers in the Marcellus. It has been fairly successful in this regard, with break-evens that stack up favorably against other operators in the Marcellus, one of the lowest-cost gas basins in the United States. The company has a healthy inventory of future drilling opportunities--roughly 4,500 available locations--which should last at least a couple of decades at current activity levels. It’s worth noting that much of the company’s inventory is liquids-rich, which can boost returns, but it also exposes Range to fluctuations in NGL pricing. Also on the pricing front, we expect an improvement in commodity differentials for Range as takeaway capacity in the Marcellus continues to come on line.We expect Range will generate healthy incremental returns, but a shaky balance sheet could prevent it from drilling at an optimum pace. Although the company has revolver capacity available, we expect management will focus on strengthening the balance sheet, and thus we don’t expect capital spending to outpace operating cash flow by much.Despite Range’s solid cost position in the Marcellus and its high-return opportunities there, returns on invested capital are likely to remain subdued. Range is unlikely to generate returns on capital that would exceed costs of capital at our midcycle oil and gas prices of $55 per barrel of West Texas Intermediate and $3 per thousand cubic feet Henry Hub.