Range Resources Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Range Resources Corporation is an independent natural gas, NGL, and oil company engaged in the exploration, development, and acquisition of oil and gas properties, primarily in the Appalachian region of the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview & Recent Developments

Range Resources is a major player in the Appalachian Basin, primarily focusing on natural gas extraction but also has some exposure to oil and NGL. Its operations are concentrated in southwestern Pennsylvania.

  • Revenues: Range Resources primarily generates its revenue through the sale of natural gas, NGLs, and crude oil. In recent years, natural gas has constituted the bulk of revenues. Notably, oil and NGL sales have increased substantially compared to previous year, reflecting the company’s shift to focus on more profitable hydrocarbons as nat gas prices have crashed.

As of Q1 2023 results, Range has shifted their attention to increasing oil and NGL production. This resulted in 10% increase in production and NGL sales made up 25% of the revenues compared to prior year at 15%. This shows good agility and strategic understanding to pursue profitable areas.

  • Industry Trends: The oil and gas industry is heavily influenced by global supply and demand dynamics, commodity prices, and regulatory changes. The recent volatility of natural gas prices, coupled with the desire for energy independence and ESG pressures, makes strategic decision making increasingly important.

The price of natural gas has dropped massively recently and that has hurt the company as they are more reliant on natural gas compared to other players, as per their earning calls. This means they have to diversify towards oil and NGL to stay profitable.

  • Margins: Historically, Range Resources has maintained average margins. However, margins fluctuate depending on gas prices. Operating expenses remain stable due to hedging in transportation, processing and gathering.

The company has noted high cost in production in Q1 2023, the effect of which will be evident in the upcoming quarters.

  • Competitive Landscape: The oil and gas industry is highly competitive, with numerous players. Consolidation among major players in the industry occurs quite frequently. However, as per the latest calls, Range has a good competitive position due to its cost structure and operations in the Appalachian region.

Range maintains a competitive advantage by managing its costs, improving operational efficiency and utilizing technologically sound methods for extraction, like multi-well pad drilling. But the industry is still highly competitive.

  • What Makes Range Different?
  • Geographical focus: Range primarily operates in the Marcellus Shale in southwestern Pennsylvania, an area with significant natural gas reserves. This regional expertise makes them more efficient and lowers their operating expenses compared to competitors that have operations spread across different basins.

Range states to have the lowest carbon emissions due to their operations which is a key advantage as environmental policies are being imposed. * Focus on natural gas: While many companies are exploring for oil and NGL, Range focuses on natural gas, which can be used to produce low carbon energy, like hydrogen. * Multi-well pad drilling: Range has pioneered horizontal drilling and pad drilling, which dramatically reduces development costs and environmental impact.

Financial Analysis

  • Income Statement:
    • Range’s revenue for 2022 increased substantially to $4.8 billion compared to $3.1 billion in 2021, mainly due to higher commodity prices.
    • For the nine months ended September 30, 2023, Range reported total revenues of approximately $3.3 billion, compared to $4.55 billion in the prior-year period, showing a decline in their overall revenues. A major portion of the decline has come from natural gas, which has reduced in value.
    • The company has seen great improvement in oil and NGL sales as nat gas price plummeted.
    • Despite a drop in net income and revenue, adjusted cash flow from operations came at $1.2 billion due to low prices of natural gas and high volatility.
    • The major reason for decline in revenue is the drop in natural gas prices from record high to low, over a short period.
    • Net income is highly sensitive to natural gas price, and thus is volatile over time.
    • Range’s margins are good, but also volatile due to price volatility. The company states it has managed to reduce its cost of extraction but that benefit is yet to manifest.

  • Balance Sheet Health: 3 / 5

    • Range carries a significant amount of debt. The company has $2.4 billion in debt as of September 30, 2023. This is one of the major risk factors for the company.

According to the last report, they are in process of retiring this debt which should reduce the high risk associated with debt burden. * The company has a reasonable amount of current assets ($658 million) which is greater than current liabilities ($487 million).

Though this is a positive, it has been declining over time and should be watched for any further deterioration. * Range has a significant amount of property, plant and equipment which amounts to $11 billion.

  • Cash Flow: * Cash flows from operations decreased from $1.4 billion to $1 billion from 2021 to 2022, and as a result, free cash flow also declined from $1.18 billion to $976 million. * For the nine months ended September 30, 2023, the net cash provided by operating activities were $1.1 billion while the capital expenditure for the year was $439 million, resulting in free cash flows of about $660 million. This also shows a significant decline compared to prior year as operations were heavily affected by low gas prices.

Moat Analysis: Rating 2/5

Range Resources has some advantages in its specific operations, but they don’t lead to a wide moat as this industry is highly competitive. The rating for the company’s moat will be 2/5 with justification as follows:

  • Switching Costs: Though companies might prefer to stick with the same vendor, as switching vendors in the industry is tough, there are very limited switching costs on the part of the clients of oil and gas companies, which means they can switch to competitors easily without significant cost implications. So, this does not create a moat for Range.
  • Network Effects: Network effects do not affect the company as the product is not based on an interconnected network, and value is not dependent on number of users using the product. So, this does not create a moat for Range.
  • Intangible Assets: Range does not have any strong brand or any patent that can make it difficult for competitors to imitate their products. There are no such major legal or regulatory advantages. So, this does not create a moat for Range.
  • Cost Advantages: Range has cost advantages over other players due to their operations being focused and efficient in the Appalachian region as well as due to their implementation of newer technological processes for extraction. It has been able to maintain profitability during periods of low gas prices. The management has also said to be focused on reducing costs in future, and if they succeed, that would give them a much wider competitive advantage. However, many players are working on reducing their cost structure, and this process is prone to be copied, so it cannot be seen as a wide and long lasting moat, rather a narrow moat.

The company states to be in the lower end of cost structure, so this can be used as a tool for future growth and profitability.

Risk Factors * Volatile commodity prices This is a big risk factor for the company. Since revenues are derived from the sale of oil and gas, they are highly dependent on market prices. This price volatility is usually tied to many global factors which are extremely difficult to predict and control. * Large Debt: The debt of the company remains relatively high which can put them at risk if they are unable to service that debt due to fluctuating prices. * Limited Diversification: Since most of its operations are centered in the Appalachian region, any adverse local conditions or regulatory changes, can heavily impact the company.

Controversies and Problems

  • Natural Gas Price Slump: The recent drop in natural gas prices has significantly impacted the company’s revenues and profits.

According to recent earning calls, they will be shifting production to oil and NGL, to mitigate the effect of slump in nat gas prices.

  • Regulatory Environment: Increasing environmental restrictions and regulations could constrain the company’s ability to operate.
  • Debt concerns: The debt has caused concerns for the company for several years, and they are working to deleverage it.

Management states to be focused on deleveraging the balance sheet for future growth and profitability.

  • Shareholder dilution: Some investors think the share repurchases programs are being carried out due to high stock prices rather than value creation. The company must prove they are using shareholder money effectively.

Management Outlook and Solutions

  • Management is focused on increasing production from other liquid resources and decreasing natural gas production. This will enable the company to have a more robust revenue stream, not solely based on natural gas.

  • Management has started to focus more on shareholder returns and cash flows.

  • Management is focused on cutting costs and they are implementing newer technologies that would reduce operational expenses.

  • They have a great understanding of the industry and their specific positioning, and the management believes this will give them long term advantage.

Understandability: 3 / 5

  • The company’s operations are not overly complicated but do require some understanding of geology, extraction methods and financial modelling.
  • The company’s financial statements do require some level of understanding to be analyzed.
  • The industry itself is heavily dependent on commodity markets which make it tough to get predictable results.

Therefore the understandability of the business is a 3 out of 5.