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.
The most expensive but the least profitable
At $82 per share, Range Resources Corp. (NYSE:RRC) is worth around $13.4 billion on the market. The market values the company quite expensively at 20.3 times EV/EBITDA. Range Resources has a much higher valuation than those of its larger peers, including Chesapeake Energy (NYSE:CHK) and ExxonMobil Corporation. Chesapeake is trading at around $22 per share, with a total market cap of more than $14 billion. It is valued at a much cheaper valuation of only 6.26 times EV/EBITDA. ExxonMobil is the largest company among the three and has the lowest valuation as well. At $89 per share, ExxonMobil is worth around $400 billion on the market. It has an EV multiple of only 5.48.
Interestingly, although Range Resources has a significantly higher valuation, it is the least profitable among the three. It generated only 11.4% operating margin, while the operating margins of Chesapeake and ExxonMobil were 13.5% and 13.4%, respectively. Range Resources also pays the lowest dividend yield at only 0.2%. While the dividend yield of Chesapeake is 1.6%, ExxonMobil pays its shareholders the highest dividend with a yield of 2.5%.
My Foolish take
With a significantly high valuation, low dividend yield, not-so-strong balance sheet, and fluctuating operating performance, I personally do not think Range Resources Corp. (NYSE:RRC) should be in the portfolio of any value investors. Among the three, I would prefer Chesapeake due to its highest profitability, decent dividend yield, and low valuation.
The article Should We Follow T. Boone Pickens Into This Oil And Gas Stock? originally appeared on Fool.com and is written by Anh HOANG.
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