Range Resources Corp. (RRC): Why Nat Gas?

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Range Resources Corp. (NYSE:RRC)The advent of the shale gas revolution is the culmination of advances in the methodology used to detect abundant reserves of Natural Gas and technological leaps in the means to extract it, principally through Horizontal Drilling and Hydraulic Fracturing. When it comes to investing in exploration and production companies, especially those that focus on Natural Gas, investors should pay attention to the cost and yield per well, as well as the success rate per well drilled. In August 2012, I wrote an article about three companies leading the American Energy Revolution, one of which was Range Resources Corp. (NYSE:RRC). While the stock has rallied 20% since then, it remains a strong long-term investment, especially after the recent dip.

Range Resources Corp. (NYSE:RRC)’ secret sauce is a combination of prolific assets, rigorous cost-benefit analysis, and efficient execution. Range Resources Corp. (NYSE:RRC) has been able to achieve double digit increases in both production and proven reserves every year for the last 6 years while remaining one of the most effective cost control operators.

Why Nat Gas?

The U.S., and much the world, is undergoing a drastic change in energy policy with greater focus on Natural Gas as a utility, and a transportation fuel. Companies, like Westport Innovations Inc. (USA) (NASDAQ:WPRT), are revolutionizing Natural Gas engine technology for the trucking industry. Large distribution companies like UPS have already made significant moves to diversify their trucking fleet with Westport Innovations Inc. (USA) (NASDAQ:WPRT)’s technology. While adoption is in the early stages, companies like Shell and Clean Energy Fuels Corp (NASDAQ:CLNE) continue to build-out their fueling infrastructure creating the framework for Natural Gas to become a viable alternative fuel for an increasing number of companies with long and short haul trucking fleets. Clean Energy Fuels Corp (NASDAQ:CLNE) expects to build-out 150 stations in the U.S. in 2013 alone in an effort to create a “Natural Gas Super Highway.”

Increased use of Natural Gas has become a global story as American E&P companies export their expertise. EOG Resources Inc (NYSE:EOG), another one of the best domestic E&P companies, focuses on both Nat Gas and Oil Shale plays in the US, as well as significant investments in South America and China. China has a stated goal of doubling their use of Natural Gas by 2020 as a utility as well a transportation fuel. Europe and the UK have made significant investments, and India is in the early stages of Natural Gas adoption. The largest and most cost efficient reserves of Nat Gas are in the U.S.

Consider that a barrel of oil contains the energy equivalent of 6 Mcf (thousand cubic feet) of Nat gas and one MCF is now trading at $4.05 per Mcf versus a barrel of oil at $95 per barrel, the equivalent amount of energy for $24. While liquid natural gas (LNG) and compressed natural gas (CNG) vary from the aforementioned price, by any metric both are significantly cheaper (and cleaner) than oil. As Natural Gas continues to replace coal plants, is increasingly adopted as transport fuel, and becomes an export product from North America to Asia and Europe, the price of Natural Gas will continue to increase. It will eventually reach an equilibrium where the economics will still make sense versus oil, and will also be profitable for E&P companies. An investment in Range is an opportunity to be ahead of the curve.

The Marcellus Shale

Range Resources Corp. (NYSE:RRC) has significant properties in the Horizontal Mississippian Basin, the Utica Shale, West Texas, and Pennsylvania. Range sold their stake in the Barnett shale in 2011 for approximately $900 million, strengthening their balance sheet, and providing the funds to concentrate on their higher return assets, especially the Marcellus Shale. Before the sale, the Barnett represented 20% of Range’s total production. Range replaced that loss in production within 5 month of the sale.

Range Resources Corp. (NYSE:RRC) completed their first well in the Marcellus Shale in Pennsylvania in 2004, and the first horizontal well in 2007. It has proven to be one of the most economic and prolific gas shale plays in the world. Through 2009-2012 Range doubled production, and they expect 25+% growth in 2013.

Proven and Unproven Reserves

Range’s production in 2012 was 79% Natural Gas, 15% NGLs, and 6% Crude Oil. Range’s proved reserves as of December 31, 2012 increased 29% YOY to a record high of 6.5 Tcfe. Range estimates that their unproven reserves (44-60 Tcfe) are almost 10 times their proven reserves. That potential combined with a strong balance sheet and low cost structure positions this company to have a long runway of growth and increased profitability as the Natural Gas price rebounds.

Range Resources Corp. (NYSE:RRC) Reported that its Q4 production increased 35% over the prior-year period, with production volumes reaching a record high of 844 Mmcfe per day. Production for FY 2012 averaged 753 Mmcfe per day, a 36% increase over the previous year and represents the company’s ninth consecutive year of double-digit production growth.

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