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Current RRC Stock Info

Optionality in Capital Spending and Marketing a Key Benefit of Memorial Merger

In its 3Q 2016 earnings call, Range Resources (ticker: RRC) CEO Jeff Ventura discussed the positive outlook for Range following the closing of its merger with Memorial Resources in September and the integration of  the Terryville complex of Northern Louisiana.

Ventura highlighted five key positive attributes that the post-merger company offers, including “a high quality, low cost asset base in two complementary basins, improved capital efficiency, and a strong marketing effort able to sell products in multiple markets.”

Ventura also cited “top tier operational execution” and “a strengthened balance sheet with strong liquidity and a strong hedge position for the remainder of 2016 and 2017.”

The company expects natural gas pricing to improve through the end of the year and into 2017 on the back of declining U.S. production and increasing demand from Mexican exports, power generation, and LNG exports, and petrochemicals.

~34% Production Growth in 2017 with Louisiana Assets

Production and capex for the remainder of 2016 was unchanged, with 4Q production guidance at 1,850 Mmcfe/d. Although a capital plan for next year has not been announced, the company is expecting organic production growth of ~12% (2,100 MMcfe/d) in 2017 and 20% (2,300 MMcfe/d) in 2018 at current strip prices. In response to analyst questions, Ventura stated that capex spending would be “at or near cash flow levels.”

Range Resources Increases Flexibility with Integration of North Louisiana Assets

Source: Range Resources October Investor presentation

The company expects to average nine rigs running in 4Q 2016, with five in the Southern Marcellus Division and four in the newly formed Northern Louisiana Division. In the Marcellus, 23 wells were turned on line in 3Q with 99 expected to be completed by year-end, 13 lower than prior guidance. Sixteen wells were turned online in Terryville with 3 completions expected by year-end.

Louisiana Assets and Gulf Coast Proximity Improve Marketing Options

On the infrastructure front, all gas pipelines the company is contracted on are expected to be completed on schedule. The completion of the Gulf Markets Expansion pipeline in early October will allow an additional 150 MMcf/d of Marcellus production to go to the Gulf Coast. The company has also secured capacity on Colombia’s Lee Train Express and ETP’s Rover Phase II, which have received their first final EIS approvals and are expected to be operational in 4Q 2017.

Pricing differentials improved across the board due to increased access and opportunities in Northeast, Midwest, and Gulf Coast markets as well as growing Northern Louisiana production. Corporate gas differentials are expected to improve to $0.46 in 4Q 2016 and $0.33 in 2017.

NGL realizations are expected to increase to over 26% of WTI in 4Q 2016 and 2017. Condensate differentials to WTI are expected to improve to $6 – $7 per bbl below NYMEX in the same period, driven by long-term agreements with Midwest refineries and Gulf Coast proximity.

The company has currently hedged 80% of its expected 4Q16 natural gas production at a weighted average price of $3.32/Mcf and 50% of expected 2017 gas production at a weighted average price of $3.21/Mcf.

Operational Efficiencies Continue, Terryville Assets Show Promise

On the operational front, gains in drilling and completions efficiencies continued to drive peer-leading EURs and well costs in the Marcellus. Year over year, lateral feet per day per rig increased 22% while drilling cost per foot decreased 5%. Significant cost savings were realized by drilling from existing pads

In North Louisiana, the company twice recorded the fastest spud to rig release times in the field to date, while a recent well registered a peer-leading IP30 of 27 Mmcfe/d. Ventura credited “early success refining the targeting and landing in the lower Cotton Valley” as well as “very encouraging” results from three vertical pilot holes in extension areas south of the Terryville field that would provide “additional data that will be rolled into our planning for 2017 and 2018.”

Range Resources Increases Flexibility with Integration of North Louisiana Assets

Source: Range Resources October Investor presentation

Service Costs Expected be Steady in 2017

COO Ray Walker commented on service costs inflation for 2017. “The way prices on the service and supply side move is going to be very regional. In areas like West Texas and maybe the SCOOP/STACK areas where activity has ramped up more, you could see prices moving up. In the Marcellus per se we don’t see it.” “We focus in what we term long-term relationships, not necessarily contracts, and we don’t see any important or significant price increases going into 2017.”

Range’s Q3 2016 earnings release, presentation, and a recording of the conference call are provided.

Analyst Commentary

From SunTrust:
Range not only reported a strong 3Q16, but laid out plans for solid 2017
and 2018 production growth all while likely spending within projected cash
flow. Two key changes that should drive 2017 and 2018 include the much
more developmental nature of upcoming Marcellus operations as only ~5%
of acreage remains at risk of holding versus ~50% a few years ago and the
addition of the Terryville asset that provides diversification and supply to higher
priced natural gas end markets. Our main concern of Range remains its current
valuation versus the Appalachian peer group.

From BMO:
We viewed the recent acquisition of MRD as both accretive and deleveraging, the latter addressing the balance sheet overhang. The acquisition created a new core area outside the Appalachian Basin that could enhance margins and returns at the field and corporate levels. We see it in greater compression of the multiple as our model yields pro forma for the deal.
Beyond the company's making good on the margin narrative we believe defines the RRC story today, we're closely watching results from the extension-area wells in the recently acquired CV assets in northern LA. The three wells are located in the south/ southeastern portion of the company's 220k net acre leasehold. Company statements such as "encouraged" and "cause for optimism" based on logs, cores, and early shows have us equally encouraged and optimistic. Potentially playing into the results are the company's adjustments to more accurately target the over-pressured zone and to stay within the zone while drilling

From Capital One:
Management's conference call commentary was positive if not illuminating as the dual asset optionality and capital efficiencies going forward were highlighted. In the Marcellus, over the past two years only about 10% of wells were drilled on pre-existing pads. Over that time period, HBP efforts trumped incremental cost efficiency gains. Now that all Marcellus HBP concerns have been addressed, roughly 33% of next year's wells will be drilled on pre-existing pads. That number climbs to 50% in 2018. Cost savings associated with wells drilled on the pre-existing pads could average between $200K and $500K per well.
Limited information is available for North Louisiana but RRC has already drilled two wells with spud to rig release times reduced by 25% to 30 days. The company has begun leveraging its scale and casing costs have dropped by 7%. Terryville results should continue to get better over time as the Range machine goes to work, but the biggest question in North LA is the viability of the extension area. Data from the vertical portions of the three extension area wells is encouraging. The average gas in place per vertical foot is on par with that seen in the upper red sands of the best part of Terryville.

From Wells Fargo:
2017 and 2018 production framework better than us and Street; only thing which could temper that is higher forward capex than expected (lack of associated capex guidance keeps us from getting more positive). 3Q production beat and activity up to 9 rigs in 4Q16 versus expectations of 7, with Marcellus getting the 2 additional rigs. More color on recently acquired Memorial Resources acreage, including Upper Red type curve (slightly below MRD's prior EUR) and calculated returns exceeding any Marcellus development areas.

From Johnson Rice:
While the integration of the North Louisiana assets remains underway, preliminary data provided on the acquired assets point to the combination improving the depth and quality of its already impressive Marcellus asset base. With the vast majority of its Marcellus leasehold now held by production, the operational focus is moving to the most core portions of the play, highlighted by recent 4-well pads in each of the dry gas and wet gas areas exceeding its EUR/1000’ lateral type curve by 20%-35%. In North Louisiana, a recent completion achieved an IP30 rate above the type curve used to evaluate the merger, despite the well not benefiting from Range’s plan to focus on improved lateral targeting. In addition, Range provided a cross-section showing the Cotton Valley sands getting both deeper and thicker south of the Terryville field, which could lead to even better recoverabilities despite being perceived as lower quality acreage. With three wells already completing (2 wells) or drilling (1 well) on the southern extension acreage, possible well results by late 2016 can provide a significant catalyst. Range also provided its initial 2017/2018 outlook including the North Louisiana assets, which calls for 33%-35% growth in 2017 (vs our estimate of 29% and consensus of 31%) and ~20% in 2018 (vs our estimate of 14% and consensus of 16%) at a level of capex at or near its anticipated cash flows. Lastly, the start-up of additional gas takeaway to the Gulf Coast, the addition of North Louisiana production and a new condensate sales agreement should result in improved pre-hedge price differentials despite the recent widening in Appalachian price differentials. We believe the better than expected 3Q results and increased visibility into an improved longer-term outlook should lead to stock price outperformance.

From KLR:
We are increasing our RRC target price due to higher liquids price realizations and slightly lower capital intensity. Our ’17 production growth expectation of ~33% is at the low end of company guidance (33%-35%). Range is conducting a five-rig program in the southwest Marcellus and four-rig program in the Terryville field prospective in Lower Cotton Valley. In early ’17, the company plans to complete 25 Terryville DUC wells, predominately in the Upper Red.
Low capital intensity drives top-tier capital yield (cash recycle ratio); Inclusive of the Memorial Resources acquisition, Range’s mid-cycle capital yield of ~185% is significantly above the gas-dominant median cash recycle ratio of ~140%. Structurally, Range anticipates allocating approximately two-thirds of capital spending to the Marcellus and one-third to the Lower Cotton Valley. Cotton Valley assets generate industry competitive returns though are modestly lower than Range’s southwest Pennsylvania Marcellus wet gas returns; outstanding southwest Marcellus half-cycle returns. Range has drilled and is completing two horizontal pilots in eastern Lincoln and is drilling the third pilot’s lateral section in northern Jackson Parish. Petrophysical analysis suggests the Upper Red gas-in-place is comparable to the Terryville field though is twice as thick, while the Lower Red has three times the gas-in-place with comparable thickness. In development mode, Range anticipates southern expansion wells should cost $0.5-$1 million more than Terryville wells.  


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