Range missed a bit on earnings and the stock was down 1% on a generally up day. But every time I listen to this company I want to buy their stock. They belong to an elite club amongst E&P companies. They control the core and a huge contiguous acreage of a highly economic play. There are probably two other companies that I can think of off hand that you could say this about, Cabot in the North East Marcellus, and EOG in the Eagleford. These are premium companies with premium valuations though.
What it difficult for me is to buy a company like Range growing at 20-25%, with an EV/EBITDA of 20x on a trailing 12 month basis, or 12.5x on a 2014 bloomberg consensus EBITDA basis, and not buy Whiting at 6x trailing EBITDA or 5X current year estimate, and growing at 14% or so. Range also outspent CFO by 32% last year, vs. Whiting outspend of 9% and Cabot flat.
One thing that Range has that Cabot does not have is a truly massive drilling inventory. Cabot has plenty of inventory too, but Range's inventory is incredible. In the core Marcellus of SW PA they probably have to spend about $45b of drilling capex to drill 9,000 wells (~60 acre spacing). Then they may have that again to spend on their Utica and their Devonian acreage, then they have their dry Marcellus acreage. Altogether, at $5mm per well, there might be $175B of capex that will have to be spent to drill their current leasehold. Most of this acreage has a very high rate of return.
A few interesting comments from the call:
They talked extensively about a single "super rich" marcellus pad where they had had a well IP at a 24 hr rate of 6,350 BOED, of which over half was liquids. This was an infill well on an pad with other 2 year old wells. It was drilled at 900 ft spacing. They say that their newest wells are doing about 60% better on average than the 2 year old wells per 1000 ft of lateral length (old wells had shorter lateral lengths, new ones are set to average about 5300 ft this year). The improvement is due to better frac design, more stages, more optimized proppant, and other technical changes. This well cost $850k less than the earlier wells due to efficiencies from being on the same pad.
They continued to emphasize IRRs, and how they would improve for all sorts of different reasons. They also emphasized that technical improvements had certainly not run their course, and that there were more improvements to come.
There is also a dry Utica test coming off one of their SW Marcellus pads, which should be reported in the October call. They made a half hearted attempt to talk down expectations, but then went on to say that the Utica rock looked as good as Marcellus, and that there was as much gas in place, and at a higher pressure.
Their enthusiasm was very palpable, as it always is. Even if they did miss expectations a bit, its hard to imagine anyone sold any of the stock after listening to that call.
One other interesting bit- they are running one rig in their NE Marcellus acreage just to maintain production and hold acres. I wonder if they are only maintaining because they can't get take-away allocation up there or if it is just that they see better returns in the SW, but need to drill to hold onto their acreage.
My biggest misgivings with respect to Range are: growing 20% is very impressive, but they are still running a massive cash flow deficit. It seems like with 100% IRRs ("half cycle") you should be able to grow at 20% inside of cash flow. Part of the reason for the deficit is that even this year they are spending $300mm out of $1.5b capex budget on land and seismic. Why is this spending level necessary given the huge resource position already in hand? Cabot claims similar IRRs, but is growing much faster and living inside cash flows.
I'm planning to do a Marcellus overview post soon as well.
What it difficult for me is to buy a company like Range growing at 20-25%, with an EV/EBITDA of 20x on a trailing 12 month basis, or 12.5x on a 2014 bloomberg consensus EBITDA basis, and not buy Whiting at 6x trailing EBITDA or 5X current year estimate, and growing at 14% or so. Range also outspent CFO by 32% last year, vs. Whiting outspend of 9% and Cabot flat.
One thing that Range has that Cabot does not have is a truly massive drilling inventory. Cabot has plenty of inventory too, but Range's inventory is incredible. In the core Marcellus of SW PA they probably have to spend about $45b of drilling capex to drill 9,000 wells (~60 acre spacing). Then they may have that again to spend on their Utica and their Devonian acreage, then they have their dry Marcellus acreage. Altogether, at $5mm per well, there might be $175B of capex that will have to be spent to drill their current leasehold. Most of this acreage has a very high rate of return.
A few interesting comments from the call:
They talked extensively about a single "super rich" marcellus pad where they had had a well IP at a 24 hr rate of 6,350 BOED, of which over half was liquids. This was an infill well on an pad with other 2 year old wells. It was drilled at 900 ft spacing. They say that their newest wells are doing about 60% better on average than the 2 year old wells per 1000 ft of lateral length (old wells had shorter lateral lengths, new ones are set to average about 5300 ft this year). The improvement is due to better frac design, more stages, more optimized proppant, and other technical changes. This well cost $850k less than the earlier wells due to efficiencies from being on the same pad.
They continued to emphasize IRRs, and how they would improve for all sorts of different reasons. They also emphasized that technical improvements had certainly not run their course, and that there were more improvements to come.
There is also a dry Utica test coming off one of their SW Marcellus pads, which should be reported in the October call. They made a half hearted attempt to talk down expectations, but then went on to say that the Utica rock looked as good as Marcellus, and that there was as much gas in place, and at a higher pressure.
Their enthusiasm was very palpable, as it always is. Even if they did miss expectations a bit, its hard to imagine anyone sold any of the stock after listening to that call.
One other interesting bit- they are running one rig in their NE Marcellus acreage just to maintain production and hold acres. I wonder if they are only maintaining because they can't get take-away allocation up there or if it is just that they see better returns in the SW, but need to drill to hold onto their acreage.
My biggest misgivings with respect to Range are: growing 20% is very impressive, but they are still running a massive cash flow deficit. It seems like with 100% IRRs ("half cycle") you should be able to grow at 20% inside of cash flow. Part of the reason for the deficit is that even this year they are spending $300mm out of $1.5b capex budget on land and seismic. Why is this spending level necessary given the huge resource position already in hand? Cabot claims similar IRRs, but is growing much faster and living inside cash flows.
I'm planning to do a Marcellus overview post soon as well.
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