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Analysts support shale gas driller Range's $300M royalty sale, ask for more

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Analysts support shale gas driller Range's $300M royalty sale, ask for more

Wall Street analysts liked Appalachian shale gas producer Range Resources Corp.'s $300 million sale of a 1% royalty interest in the bulk of its gas production for its ability to help Range pay down debt but pushed for more sales.

Range said the sale affects $25 million of its cash flow, which was negative $23 million in the second quarter, but will reduce its interest payments by $15 million for a net $10 million annual cash flow reduction.

The company sold the 1% interest on 1.7 Bcfe of production coming from its 300,000-acre leasehold in Washington County, Pa., south of Pittsburgh. Range retains 82% of the revenue from those wells.

Paying down $300 million of the company's reported $4.2 billion debt would help Range hit a 3.0x debt/EBITDA ratio by the end of 2018, CEO Jeff Ventura said in the deal announcement, but analysts are pushing for the sale of larger company assets such as its dry gas acreage in northeast Pennsylvania.

"The company still has an open data room for [northeast Pennsylvania] assets and could potentially announce additional asset sales in the near future," Stifel Nicolaus & Co. oil and gas analyst Jane Trotsenko told clients after the deal's announcement. "We view the announcement as positive as the transaction improves debt metrics and strengthens the balance sheet."

Investors shrugged at the news. Range's shares were down 1% in late trading Oct. 16 at $17.48, after the deal was announced following the Oct. 15 market close.

Paying down debt will pay off for Range's executives, SunTrust Robinson Humphrey Inc. analyst Welles Fitzpatrick said.

"Management bonuses are partially based on getting below 2.9-3.3x debt/EBITDAX by YE:18," Fitzpatrick said Oct. 16. "Debt/EBITDAX is worth 20% of the weighting of management bonuses with 3.3x as 'target' and 2.9x as 'excellent,' with 'target' being worth 120% of base salary in YE bonus and 'excellent' being worth 240%."

"The timing was simply a function of the sales process run by an independent bank and the customary documentation," Range spokesman Mike Mackin said. "Compensation did not play a factor in the decision making process. Achieving a particular metric does not necessarily mean that a bonus gets paid, as it is ultimately the decision of the board."

The Oct. 6 opening of Williams Cos. Inc.'s 1.7-Bcf/d Atlantic Sunrise gas pipeline has Range thinking its dry gas wells in Lycoming County are more marketable, Jefferies LLC upstream analyst Mark Lear told clients Oct. 16, but he would like to see Range carve up more of its liquids-rich southwestern Pennsylvania acreage for sale.

"With Atlantic Sunrise now online and basis tightening in [northeast Pennsylvania], the company believes the asset could become more attractive to potential buyers," Lear said. "We believe that further transactions to bring the value of [Range's] deep [southwestern Pennsylvania] inventory forward will be viewed positively."

Analysts at energy investment bank Tudor Pickering Holt & Co. pegged the value of the northeast Marcellus leases at $350 million to $400 million in their Oct. 16 note but think the bigger fish to fry is Range's operations in Louisiana's Terryville field, which Tudor Pickering Holt said is worth roughly $1 billion. Terryville results have been disappointing, with Range admitting its money is better spent in Appalachia these days.

"We expect the company to continue pursuing incremental monetizations given commentary around a potential sale of its Northeast position," Tudor Pickering Holt analysts said in an Oct. 16 note. "Longer term, we think the Terryville fits in the same bucket as we don't believe it can compete with [Range's] Marcellus position from a returns standpoint."

Selling Terryville, which Range purchased in 2016 for $4.2 billion, would involve swallowing a big loss, although Ventura would not rule it out on Range's July 31 earnings call. "If you look at our history, and there's plenty of history to look at — basically, $4 billion in asset sales really over roughly the last decade — when projects are [not] competitive, then we tend to sell them."

Range did not respond to several requests to comment on future sales.