T. Boone Pickens is quite a focused hedge fund manager. He mainly invests in the energy market, especially in the oil and gas industry. Recently, he increased his stake by more than 60% in Range Resources Corp. (NYSE:RRC). As of December 2012, Range Resources accounted for nearly 8.5% of his total portfolio. Let’s take a closer look into Range Resources to see whether or not we should follow T. Boone Pickens into this company.
Range Resources Corp. (NYSE:RRC), incorporated in 1980, is a Texas-based independent oil and gas company involved in the exploration, development, and acquisition of oil and gas fields in the Appalachian and Southwest regions of the U.S. As of December 2012, Range Resources had around 6.5 trillion cubic feet in proved reserves, with around 74% of that natural gas. Its reserves had a life index of around 21 years, with a total pre-tax PV of $4 billion at a 10% discount on future net cash flows. The majority of its proved reserves and production — 88% of the total proved reserves and 83% of the total production — were from the Appalachian region. The Southwestern region only accounted for 12% of the total proved reserves and 17% of the total 2012 production. At the end of 2012, around 68% of its 2013 production was hedged.
Fluctuating performance with negative free cash flow
In the past five years, Range Resources Corp. (NYSE:RRC) had quite a fluctuating performance. Revenue dropped from $1.32 billion in 2008 to $907 million in 2009, and then it consistently increased to nearly $1.46 billion in 2012. In 2012, it only generated $13 million, or $0.08 per share, in profit. The small profit in 2012 was due to huge operating expenses, interest expense and depletion, depreciation and amortization expenses.
Like other oil and gas companies, Range Resources generated consistently positive operating cash flow but small and negative free cash flow. In 2012, the operating cash flow was $647 million, while the free cash flow was -$1 billion. The negative free cash flow was due to the increasing capital expenditure, especially on drilling activities. In 2013, the company intended to spend another $1.1 billion on drilling activities.
What makes me worry is its financial strength. As of Dec. 2012, Range Resources had nearly $2.6 billion in total stockholders’ equity, only $252 million in cash, and nearly $2.9 billion in long term debt. Thus, in order to fund its 2013 capital expenditure and repay borrowings, Range Resources has to issue either more debt or more equity. Indeed, in the beginning of March the company announced that it would offer $500 million senior subordinated notes due 2023 in a private placement to repay borrowings under its senior credit facility.