As its stock price gets cheaper, Marcellus Shale pioneer Range Resources Corp. is a likely takeout target if the shale gas industry in Appalachia continues to consolidate, Range's CFO said Aug. 2.
Range shares plunged more than 11% to a 12-year low under $18 per share in morning trading after the company turned in a lackluster earnings report that missed analysts' profit expectations by a penny. Already this year, Range shares had lost 38% before Aug. 2's market open and the bloodletting continued at the opening bell as investors fled Range's stock on twice the normal volume of trading.
Range reported adjusted profits of 6 cents per share as gas production undershot company guidance because of permitting problems in southwest Pennsylvania and failed well stimulation experiments at Range's newly purchased leases in Louisiana's Terryville gas play. Analysts surveyed by S&P Global Market Intelligence were expecting 7 cents per share in profits.
But Range, which drilled the first well to target the Marcellus Shale outside of Pittsburgh in 2004, is a tempting target for bargain hunters who could now buy the company's well data, leases and pipelines on Wall Street for less than their book value.
Range's closest competitors, EQT Corp. and Rice Energy Inc., announced a $6.7 billion merger in June. EQT sought Rice, given its roughly adjacent land and pipeline positioning. Range is an obvious target for a buyer or a value investor, CFO Roger Manny told analysts on Range's earnings conference call.
"In terms of Range and the price we're trading at, I think when you look at the quality of our assets, the wells we're posting, the improvements in cash flow per share, I think we're on sale," Manny said. "Our share price is a bargain."
"When you look at where we trade versus some of our peers and then you compare quality of assets on an equivalent basis, it's, I think for investors that ... believe in the gas market long term, Range is a good place to be," Manny said, noting that the fewer the companies drilling holes in Appalachia, the less frantic the boom-and-bust of the shale revolution will become.
"We're talking about [the EQT/Rice] merger," Manny said. "[From] a very high-level, [the] fewer companies ... drilling is probably a positive thing. It's probably a more paced development, a more prudent and more rational development. So I think that's a good thing for the macro."
But in the second quarter micro, analysts thought Range turned in a mixed performance. "Negative as marginal Q2 beat offset by lower FY'17 guidance," analysts at Tudor Pickering Holt & Co. said after the late Aug. 1 earnings release. "Q3 guidance of 1,970 MMcfe/d underwhelms vs TPH estimate [of] 2,079 and Street [estimate of] 2,106 while Q4 guidance of 2,170 MMcfe/d compares to TPH estimate 2,259 and Street [estimate] 2,261. Weak guidance is driven by early 2017 results from Terryville and timing delays in SW Pa."
Range experimented with using less fluid with the same amount of proppant while completing a group of wells it bought with last year's purchase of Memorial Resource Development Corp., Range COO Ray Walker told analysts, and the experiment failed.
"On average, we used approximately 40% less fluid per foot and the resulting production showed similar percent decrease from what was expected," Walker said. "In these six wells, we pumped larger volumes, but not as large as the original completions, as we were in the middle of analyzing the data and beginning to determine that frack volume and not proppant volume was the key."
"Volumes were in-line with expectations, but lower realizations against our model and a mixed bag in costs led to a cash flow from operations miss," Guggenheim Securities LLC analyst Subash Chandra told his clients Aug. 2. "The 3Q guide is 5% [below] our previous below-consensus estimate. The 4Q guide is also well below our consensus estimates. Our price target is down to $37 from $43, attributable to a lower oil price assumption at $53.50 from $60 and a lower production growth outlook."