Range Resources Stock: Buy Despite Mixed H1 2024 Earnings Report (NYSE:RRC)

Less than a week ago, Range Resources (NYSE:RRC) released its H1 and Q2 2024 earnings reports, which showed mixed results. Revenue fell short of analysts’ expectations, while earnings per share beat expectations at $0.46/share.

In this article I will present a review of the H1 2024 results and why I think Range Resources shares are worth a BUY recommendation.

Stock market results

Range Resources is currently trading at $31.4/share, which equates to a market capitalization of $7.7 billion. Over the past 52 weeks, the stock has been relatively stable in price, with price fluctuations between $27.6/share (52-week low) and $39.33/share (52-week high). The stock is down 3% year-to-date and up 11% year-over-year. In terms of volatility, over the past 52 weeks of trading, the average standard deviation was $2.6/share or 8% of the current stock price.

Production, sales and costs volumes in H1 2024

Total sales in H1 2024 amounted to USD 1,175 million, down 36% year-on-year (or USD 647 million). The main reasons for this decline are the impact of hedging and a decrease in average realized prices. In H1 2024, hedging generated revenues of USD 63 million, while in H1 2023, hedging revenues amounted to USD 491 million. In terms of prices, the average NGL price in H1 2024 was USD 25.31/barrel (+3.1% year-on-year), while the average crude oil price was USD 66.45/barrel (+1.6% year-on-year). However, the average natural gas price – which contributes the majority of revenues – was characterized by a strong decline of almost 30% year-on-year, from USD 2.54/mcf to USD 1.79/mcf.

In terms of production volume, total production in H1 2024 increased by 1.4% year-on-year, driven by growth in natural gas (+1.4%) and NGL (+2.2%).

Even revenues from natural gas brokerage fell by 47%, from $126 million in H1 2023 to $67 million in H1 2024.

Total operating expenses decreased by 10%, from USD 1,175 million in H1-2023 to USD 1,055 million in H1-2024. Key operating expenses include transportation and processing (USD 572 million, 54% of total OpEx), depreciation (USD 174 million, 16%) and G&A (USD 84 million, 8%). All operating expenses in H1-2024 are largely in line with H1-2023 data, except for natural gas brokerage costs (-46% YoY).

Net income was $120 million and positive, down 77% year over year, primarily due to a decline in revenue.

Cash flow and debt

Cash flow from operating activities was positive at $480 million due to $120 million of net income and a depreciation, amortization and translation charge of $174 million and other adjustments.

Cash flow from investing activities was negative at -$316 million due to the addition of natural gas properties (-$286 million) and land acquisitions. Finally, cash flow from financing was negative at -$125 million due to senior bond repayments and dividends.

Overall, net cash flow was positive at USD 39 million, increasing cash to USD 251 million (+18% YoY) and net debt to USD 1.47 billion, of which USD 1.72 billion is senior notes outstanding (USD 621 million due 2025, USD 600 million due 2029 and USD 500 million due 2030).

Share buyback program

In 2019, the Board of Directors of Range Resources approved a share repurchase program to repurchase shares on the open market to support the share price. During the first half of the year, Range Resources repurchased 304,000 shares at a total cost of $10.2 million. Under the program approved by the Board of Directors, management continues to be authorized to repurchase shares for an aggregate amount of up to $1.1 billion.

Range Resources Competitive Advantage

One of the reasons I value Range Resources as a company is that it has strengths that give it a competitive advantage over its peers.

Range Resources has over 510,000 acres in the Marcellus Shale with low operating costs. To give you an idea, about 87% of the undrilled Core Marcellus reserves have a breakeven cost of less than $2.50/MMbtu. The low capital intensity allows Range Resources to generate positive free cash flow at a variety of natural gas prices. In addition, Range Resources operates very efficiently, which allows it to maintain a low reinvestment rate: in other words, compared to its competitors, Range Resources – ceteris paribus – reinvests a smaller percentage of its FCF to maintain a constant level of production.

Another advantage of Range Resources is its diverse product markets, which support price diversification and flexibility. For example, when looking at natural gas export routes, 20% of natural gas goes to the Northeast, 30% to the Midwest, 25% to the Gulf Coast, and the remaining 25% goes to LNG facilities.

Commodity prospects

According to EIA data compiled by Range Resources, total U.S. natural gas demand is expected to increase by 22 billion cubic feet per day by 2028 due to several factors. On the one hand, there will be an increase in pipeline exports to Mexico, as well as stronger demand for natural gas as the U.S. has committed to reducing coal-fired power generation. In addition, the U.S. is gradually increasing its LNG production capacity as it has replaced Russia as the main gas supplier to Europe.

Range Resources, with large natural gas and LPG reserves, is well-positioned to benefit from these positive commodity prospects.

Some key information about pricing

Range Resources has a book value per diluted common share of $15.9, which is about 50% of its market value. Based on a market capitalization of $7.7 billion and net debt of $1.5 billion, the enterprise value (EV) is $9.2 billion. To give you an idea, the PV10 of proved reserves at December 31^saintin 2023 amounted to USD 7.9 billion, even if a conservative market price scenario was taken into account.

Risks

I believe Range Resources is most exposed to commodity price risk. Indeed, if natural gas or oil prices were to decline, Range Resources’ revenues would be hit hard. However, the company mitigates this risk with a hedging strategy that, for the second half of 2024, is expected to hedge nearly 85% of oil production at an average price of $81 per barrel and about 55% of natural gas at a low of $3.73 and a high of $4.97. For 2025 and 2026, the hedged volumes are currently much lower, but I would expect that as we approach the end of 2024, Range Resources’ management will also hedge production for 2025 and 2026.

Application

Overall, I think Range Resources is a solid company with a strong strategy and competitive advantages over its Marcellus Shale peers. The current share price, while not particularly cheap, still represents an interesting entry point for long-term investors who are positive about the evolution of the U.S. natural gas market and the role Range Resources can play in it.