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Range Resources Corp. (NYSE: RRC) North America United States Energy Oil and Gas- E&P 14 April 2011 Current Statistics Range Resources Corp. Buy Exchange NYSE Ticker RRC Price at 13 April 2011 (USD) 53.83 Price Target 95.01 Initiating Coverage 52-week range 32.25 - 59.64 Tarek El Gammal-Ortiz Christopher Dowd Senior Analyst Junior Analyst Key Changes (LTM) [email protected] [email protected] Diluted EPS (USD) L $1.18 Oriana Fuentes Jonathan Sutton Revenue K 8.4% Junior Analyst Junior Analyst [email protected] [email protected] Price/ price relative Idea Generation 40.00 30.00 We have a positive outlook for RRC’s reserve growth and its poten- 20.00 tial to sustain high cost efficiency in 2011 and beyond.The availabil- 10.00 ity of technology to access untapped gas reservoirs and the growing 0.00 demand for this resource make natural gas an attractive commodity -10.00 Equity Research Report Equity Research within the energy industry. RRC’s exposure to non-conventional gas -20.00 plays that grant them access to 1,762,766 Mmcf of proved devel- -30.00 oped reserves will permit the company to capture sudden increases -40.00 in demand – increasing their cash flow from operations which they -50.00 can use to further develop organically. We believe that RRC’s above-average growth, low risk profile, and leadership position in the Marcellus merits a higher valuation than what it is currently Range Resources Corp.(RRC) trading at. We are neutral on our near-term outlook on natural gas, S&P 500 INDEX but we believe prices will increase once secular demand picks up S&P 500 Energy INDEX and the transition from coal to natural gas increases. Russel 2000 Index Performance (%) 3M 6M 12M 3Yr Investment Positives RRC 11.8 46.6 7.2 -19.5 S&P 2.4 11.6 9.8 -1.1 RRC displays a high-quality asset base across the low-cost/ higher S&P Energy 8.5 27.9 26.3 -5.0 return Appalachian region and the large volume/ rapid payout of the Russel 2000 2.9 16.6 16.5 20.1 Gulf Coast properties. We appreciate RRC’s focus on developing their core properties, as Selected Financial Data it represents the company’s long-term strategic vision of maximizing Market Cap (USDm) 8679.4 shareholder value. Shares Outstanding (m) 160.6 Net Income (USDm) (239.3) RRC’s dominant presence in the Marcellus Shale and the large EBITDA (USDm) 600.0 acreage holdings will enable them to increase reserve quantities EV (USDm) 10,637.1 and production for several years to come. EV/ EBITDA 17.8x Near term, RRC will benefit from low natural gas prices, as they NAV (USDm) 15,212 NAV per Share 95.01 have a much better cost basis than their peer group. Their margins will be higher than those of their competitors. We believe RRC is a possible takeover target, as their presence in the Marcellus shale along with their upbeat production outlook, gives them a clear advantage over any other company in the industry. Orange Value Fund, LLC All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via CapitalIQ, Bloomberg and other vendors. April 14, 2011 Range Resources Corp. (NYSE: RRC) Changes in U.S. Energy Industry The United States energy industry has dramatically changed throughout the last decade; two main drivers serve as catalysts for these changes: technology and regulation. Sophisticated natural gas producers have developed technologies that have untapped new energy sources while significantly lowering costs and improving efficiency. By combining horizontal drilling, hydraulic fracturing and advanced geoscience techniques to their production practices, operators have reduced the marginal cost of production, increasing reserve recovery on a per unit basis. This has given way to a shift in the supply curve, which will eventually be rebalanced once demand increases and prices normalize. Simultaneously, the public and government alike have questioned the safety of energy sources. Regulations on energy consumption and drilling practices are continuously being reviewed - even more so recently given the influx of catastrophic events that have shadowed the energy industry. For example, the nuclear meltdown of the Fukushima power plant in Japan, which is second only to the 1986 Chernobyl disaster in severity, has led us to question the future of nuclear power. Although dismissing nuclear power may not seem viable for China and India given their rampant development and lack of energy sources, the U.S. has other options. Here, the abundance of natural gas can certainly sustain a shift in energy consumption. The events occurred in Japan are a result of design flaws that can be addressed through engineering and structural changes. Nuclear energy remains relevant; however, the environmental and safety implications of the leak lead us to question the future of this source. Types of Natural Gas Natural gas production is divided in two categories: conventional and unconventional. These are differentiated by the depth of the gas, the type of geological formation and the technology required for its extraction. In conventional reservoirs, gas contained in interconnected pore spaces can readily flow to a wellbore. In contrast, wells in unconventional reservoirs produce from tight, low permeability formations including shales (fine- grained sedimentary rock), tight sands, and coal beds. A technique called horizontal drilling, as opposed to conventional vertical drilling, has been developed to extract gas from shales, which has allowed shale gas to become an economically viable and profitable resource for operators. The development of shale gas is one of the fastest growing trends in onshore domestic oil and gas production. Unconventional production now accounts for 46% of the total US production.1 Advantages of Natural Gas Inexpensive relative to other energy sources: The cost to extract natural gas has rapidly declined. This is due to the technological developments the industry has experienced throughout the last decade. Today, natural gas is least expensive fuel: 30% cheaper than crude oil. Cleaner source of energy: The EPA credited natural gas as a key contributor to meeting our nation¶s energy goals, as it is the cleanest of all fossil fuels. Natural gas combustion produces virtually no sulfur dioxide (SO2), and emits lower levels of nitrogen oxides (NOX) and carbon dioxide (CO2). Recent concerns have been raised over the amount of methane released by the production of natural gas, as explained in a report by Cornell Professor Robert Howarth, 1 Energy Information Administration, Modern Shale Gas, Development in the US. Page 7. Page 1 The Orange Value FunD, LLC April 14, 2011 Range Resources Corp. (NYSE: RRC) Range Resources immediately dismissed this study as inaccurate. The reality is that little is known about this potential hazard; WKHVWXG\¶VSUHOLPLQDry results suggest that further research must be conducted in order to reach definitive conclusions. It is important to closely follow these developments in order to appropriately forecast the demand for this commodity. Water usage: The amount of water needed to stimulate natural gas production is small in comparison to other volumes of water required to produce other forms of energy. Natural gas uses 56%, 71% and 73% less water than coal, nuclear and solar generation, respectively. 2 Liquefied Natural Gas: Cooling natural gas to about -260 degrees Fahrenheit results in the condensation of the gas 2 into its liquid form. LNG eases the transportation of natural gas, as it takes up one six hundredth the volume of traditional dry gas. Also, LNG vapor is less volatile in an unconfined environment, which means that in the unlikely event of a spill, it is safer than other energy sources. Companies with exposure to LNG will greatly benefit from its unique attributes as an alternative energy source. The Marcellus Shale There are several gas shale basins spread across the U.S., amongst them the Marcellus Shale. The Marcellus is the most extended shale territory in America; it spans six states (New York, Pennsylvania, Ohio, West Virginia, Virginia, and Maryland) and covers approximately 95,000 square miles. The Marcellus is projected to become the largest natural gas extraction field in the U.S. and the second largest in the world, with approximately 500 Tcf of natural gas reserves.3 Natural Gas: Prices Natural gas prices declined approximately 20% in 2010. Improvements in well efficiency and non-conventional shale discoveries have increased the supply of natural JDVGHIODWLQJSULFHV55&¶V&(2ZKHQLQWHUYLHZHGRQ CNBC believes natural gas has hit its floor and that the near-term outlook for prices is favorable. A colder than expected winter has increased gas consumption, therefore increasing prices in the near term. Natural gas prices are expected to remain low until secular demand catches up with excess supply. The gap between supply and demand is unlikely to fully narrow until 2014, at which point natural gas prices will begin to rise. Prices for 2011 are estimated to be between $4.25 and $5.00 per mcf. By 2014, natural gas is projected to reach a mid-cycle prLFH RI 0RVW ( 3 FRPSDQLHV¶ performance is very sensitive to natural gas prices (5-7% for a $.10/Mcf change) 3 and should benefit from upside in price movements. Natural Gas: Demand Outlook Natural gas plays a key role in meeting U.S. energy demand, currently supplying about 22% of total energy consumption. Most new electricity generation planned for the U.S. over the next five years is expected to be natural gas-fired, as new technologies make it cost efficient.4 The latest projections from the Energy Information Administration speculate that natural gas consumption will grow at approximately 16% year over year through the course of the next 25 years.
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