Terryville IRR of 100%+
Range Resources (ticker: RRC) announced first quarter results yesterday, showing net income of $170 million, or $0.69 per share.
Range produced an average of 1.93 Bcfe/d in Q1 2017, a record for the company. Production in Q2 is expected to be roughly equivalent to that of Q1, but production in the second half of 2017 will continue to rise. In Appalachia, for example, the company brought to sales only 20% of expected wells for the year, so well activation will be backloaded.
Virtually all capital spent in 2017, 93%, will be spent drilling and completing wells. While two thirds of this will go to developing Range’s Marcellus properties, the remaining third will develop Range’s Northern Louisiana assets.
Range Resources acquired its North Louisiana properties in May 2016, when it acquired Memorial Resource Development in a $4.4 billion deal.
Range now owns about 220,000 net acres in Louisiana targeting stacked pay in the Lower Cotton Valley. Well designs have improved since the purchase, meaning well costs have dropped from $8.7 million to $7.4 million. This lower capital cost means that Terryville wells can generate returns that rival the Marcellus. When the property was acquired Terryville wells would yield 64%, but improved well costs mean current returns exceed 100%.
Differentials narrowing
Natural gas differentials are improving, as Range estimates that its 2017 gas price will be about $0.30 less than NYMEX. Based on current spot prices, this equates to $2.81/MMBtu. Several major pipelines are expected to come online soon, the Rayne/Leach Xpress and Rover pipelines, which should improve differentials next year.
Range reports that its NGL pricing in 2017 will be 28% to 30% of WTI. At current oil prices, this equates to a realized price of $13.80/bbl to $14.80/bbl. The company expects that higher demand for ethane and propane from petrochemicals and exports will improve pricing further in 2018.
Condensate pricing this year will average $5.50/bbl less than WTI, which represents a 40% improvement over the company’s 2016 condensate differential.
Source: Range Resources Investor Presentation
Ways to move more gas and liquids out of Appalachia—finally
Transportation opportunities are improving significantly.
Mariner East is a project to transport NGL from the Marcellus to the East Coast of the U.S. where it may be shipped overseas. The Marcus Hook industrial complex has begun exporting ethane and propane, which opens up many international markets to Range NGLs. The company reports that a total of 14 Bcf/d of takeaway projects are planned for the Marcellus, meaning that the perennial infrastructure bottleneck may be finally going away.
Q&A from RRC Q1 2017 conference call
Q: Addressing the Terryville cost reduction, what’s behind the cost reductions to-date? And what drives the reductions going forward here? I’m just trying to get a sense of how much the company’s scale explains the improved capital efficiency in the field versus simply cutting fat that was in the prior operator’s system, if you will.
RRC COO Ray N. Walker, Jr.: Last quarter, we went through a whole litany of examples where they had increased drilling time, employed new downhole mud motors, more aggressive bit designs. We essentially changed out the drilling team. We brought in a gentleman that, Scott Chesebro, who is extremely talented and knows as much about high pressure, high temperature drilling as anybody, around and so he has really reshaped our whole program there. We’ve recently for example drilled a curve in one of these wells in 24 hours, and the average last year was 86 hours.
So it’s just a continual litany of things like that that we’ve been able to do. We went from in the series of wells that we fracked in the first quarter we had planned, because in the past they had averaged about eight stages a day or a little bit less and so we planned for about eight and ended up averaging 12 to 15 stages a day.
So I think it’s been a lot of that. It’s been a lot of using Range’s purchasing power just simply because of the size and scale that we bring to the table. And then I think as we go forward with a more balanced approach and we kind of smooth out the activity levels and we plan where the wells are a little bit better, as we go forward we won’t go through these very variable up and down cycles of activity levels going forward. And I think that will help improve cost as we go forward.
Q: Shifting to Appalachia, Range is historically very early in signing low-cost takeaway contracts to get gas out of the region. And recognizing that the wave of new pipelines are coming on now from what you contracted a couple years ago, wanted to get your view on the strategy for growth in the next decade and whether you think it makes economic sense to be thinking about contracting now or whether your flexibility to shift capital geographically means Range down the road will depend more on local market prices and then Louisiana prices?
RRC CEO Jeffrey L. Ventura: Let me start and others can chime in. I think one thing, if you look at the next decade out, something that’s not real well understood actually was part of internal work we’ve done, and I’ve heard other people talk about it a little bit but not much, is the concept of sweet spot exhaustion. I think if you really look at core areas in Appalachia, but I think it’s true in the Permian, the only two plays I think with more than a decade worth of true sweet spot drilling left is probably Permian and Appalachia.
And, but when you look in Appalachia, there is only a couple of companies that have more than a decade worth of really high quality wells. Not that a lot of people won’t claim that, but when you look at the data and you look at the EURs per thousand and cost per thousand. So I think again, I think there are only two plays that have more than a decade worth of true sweet spot drilling. A lot of the other plays will be exhausted quicker than that. So if you look in Appalachia, even early on, our thoughts were when you look at all these plays, infrastructure tends to get overbuilt with time. I mean that’s true historically.
We assumed that we would get what we thought was right-size transportation early on to allow us that flexibility to grow. So, I think given the position we’re in, we’re in great shape as we look forward. Again, we don’t think the pipes fill early on, but particularly if you look out over the next decade, there will be that optionality probably to sell gas in-basin or we’ll have the ability to probably move it out, whatever is more optimum. And with that, I think that will continue to drive down unit costs with time. Again the advantage we have is just a huge inventory of high quality prospects plus we have now the optionality of drilling in Northern Louisiana or in Appalachia. So I think we’re well positioned for the future.
Analyst Commentary
From KLR Group:
Differentially lower capital intensity drives top-tier capital yield
Range’s mid-cycle capital yield of ~200% is significantly above the gas-dominant median cash recycle ratio of 140%-150%, and largely explained by lower capital intensity. Range is allocating approximately two-thirds of capital spending to the Marcellus and one-third to the Lower Cotton Valley.
Highest Southwest Marcellus well returns
Range is conducting a five-rig program (includes two top-hole rigs) in the southwest Marcellus. The company plans to drill 116 Marcellus wells (45 wet gas, 39 super rich, 32 dry gas) this year including two dry gas wells in the northeast Marcellus. Range expects to increase average Marcellus well lateral length by over 30% to ~8,400’
In southwest Pennsylvania, Wet gas Marcellus wells (~8,300’ laterals, ~40 frac stages, ~2,000 lbs/ft proppant) should recover ~25 Bcfe (~50% gas, ~50% NGLs; ~3 Bcfe/1,000’ lateral) for a cost of ~$6.8 million. Super-rich Marcellus wells (~8,500’ laterals, 40-45 frac stages, ~2,000 lbs/ft proppant) should recover ~20 Bcfe (~45% gas, ~45% NGLs, ~10% oil; ~2.4 Bcfe/1,000’ lateral) for a cost of ~$7.3 million. Dry gas Marcellus wells (~8,850’ lateral, ~45 frac stages, ~2,000 lbs/ft proppant) should recover ~22 Bcfe (~2.5 Bcfe/1,000’ lateral) for a cost of ~$6.1 million.
Terryville field generates industry competitive return though is less than Range’s Marcellus well returns
Range is conducting a four-rig program in the Terryville field. The company plans to drill 56 Northern Louisiana wells (34 Upper Red, 13 Lower Red, six Pink, three extensional tests) this year.
Terryville wells (~7,500’ laterals) should cost ~$7.4 million. Upper Red wells average 20-30 Mmcfepd the first 30 days and should recover ~17.5 Bcfe (~25% liquids, 2-2.5 Bcfe/1,000’ lateral). Lower Red wells average 15-20 Mmcfepd the first 30 days and should recover approximately 12 Bcfe (~20% liquids, 1.5-2 Bcfe/1,000’ lateral).
From Capital One:
• Our take: 1Q results beat or matched on all fronts for RRC. We are buyers of the intraday weakness and maintain our Overweight rating. Now that the pre-acquisition backlog of Terryville wells have been completed, future completion plans will be more balanced and limit the impact to offset wells. Terryville well costs continue to drop as RRC utilizes its purchasing power and operational expertise. The company has shaved over $1.3MM in well costs since the acquisition. Recent savings have not been built into 2017's $1.15B budget, and we expect them to be spent on Terryville science ahead of schedule. In the Marcellus, RRC highlighted the 2 wells drilled near the Harmon Creek processing facility which produced over 1,000 bbls/d of condensate in addition to gas and NGLs for a total 24-hr rate of 5,200 boe/d (69% liquids). That oil cut is more than double our modeled expectation of 8% for the Super-Rich window.
• Our view on stock: Maintain Overweight. RRC has 88% upside to our $51 NAV estimate. We think the 10 - 15 wells worth of remaining capacity on each of over 200 existing pads offers a unique advantage for RRC. The gathering infrastructure and facilities are largely in place to drill over 2,000 more wells on already de-risked and HBP'd acreage in the future.
