Appalachian shale driller Range Resources Corp.'s cost-cutting measures failed to keep pace with dropping natural gas prices in the third quarter, and analysts are questioning the company's newly announced $100 million stock buyback in light of more than $1.5 billion in debt coming due in the next three years.
Range executives told analysts on an Oct. 24 third-quarter earnings conference call that after cutting spending more than anticipated in the third quarter, the company will cut spending further in the fourth quarter and in 2020 as it heads toward a maintenance spending plan with little production growth in the near future.
"We have the flexibility of doing a maintenance capital [program]," Senior Vice President and CFO Mark Scucchi told analysts. "There is a scenario where you could allow modest production declines and we maintain our unit cost levels. So it is possible to allow production to go into a modest decline."
Range's stock dropped 7% on average volume after the conference call as investors reflected on Range's outspending cash from operations due to a 12% drop in realized gas prices and a 36% drop in revenue from oil, gas and liquids sales when compared to the same period a year ago.
"[Range] continues to pull every lever to improve liquidity and leverage," Guggenheim Securities LLC analyst Subash Chandra told clients before the call. "Asset sales, increased bank commitments, open-market debt purchases, capex and [operational expense] reductions, and better-than-expected NGL realizations have all helped. Leverage remains high, however, and there's no 'silver bullet' considering the weakness in high-yield and [acquisition and divestiture] markets."
"Although [Range] announced a $100 million stock buyback program, they wisely preferred to retire debt at a 4% discount in the open market," Chandra said. "We don't understand the rationale for stock buybacks for levered companies without organic free cash flows."
Range CEO and President Jeffrey Ventura defended the stock buyback plan at a time when debt reduction is a concern. "Range has continued to trade in the fraction of underlying value," Ventura said. "This modest buyback program represents less than 10% of the asset sale proceeds received in the last 12 months, but it represents greater than 10% of Range's market cap. We believe repurchasing shares in such a substantial discount to our net asset value is a very compelling opportunity to create long-term shareholder value."
"Asset sales and lower net debt only temporarily improve leverage metrics," Stifel Nicolaus & Co. gas analyst Jane Trotsenko told clients. "We are projecting the leverage profile to deteriorate in the coming quarters as weak commodity pricing impacts the EBITDA outlook. That said, the company continues to pursue additional asset sales, which could potentially allow [Range] to continue to reduce its net debt."