Company Spotlight - Range Resources (NYSE:RRC) Getting To The Oil | | RRC | $63.10 | The Good: Lots of oil and gas in the ground.
The Bad: Valuation is high; stock is up 8 fold in 3 years.
The Beautiful: Unique drilling method; exceptional net profit margin. | P/E | 58 | | PSR | 5.5 | | ROE | 16% | | Debt/Eq. | 0.65 | | Div.Yield | 0.30% |
February 20, 2008 - Range Resources Corp. (RRC-NYSE) is riding the range as an independent acquirer and developer of US oil and gas resources. The company's long-term strategy involves acquiring long-lived established properties. It has major development areas in the Appalachian, Gulf Coast, and Southwest (West Texas, western Oklahoma, and Texas Panhandle) regions. Natural gas accounts for about 82% of Range Resources' proved reserves of about 1.8 trillion cu. ft. of natural gas equivalent. The company holds about 2.5 million net acres of leasehold properties and an inventory of almost 11,400 net drilling locations. In 2006 Range Resources acquired Stroud Energy for $450 million.
Range Resources has a different approach to pumping oil and natural gas. If the oil or gas is somewhere, anywhere, they will get it. If there's a town sitting on it, no problem. If there's a lake right on top of huge reserves, no problem. That's because Range uses a new method of drilling called horizontal drilling which, as you might guess, allows the company to come in horizontally to the reserves and pump them out instead of going straight down, the more traditional way. This gives the company access to more sites, and it can be choosy as to which areas it develops, focusing on the richest ones.
This is good news to investors, especially the ones who bought the stock in 2004. It's up 10 times (going from $6.30 to its current all time high of $63). If you take the price back 4 more years, to 2000 when it traded for $1, the return is nothing short of spectacular. All prices are split adjusted for a 3 for 2 split in late 2005. So is there room left for new investors to make money?
If oil stays above $100 a barrel there is. But I wouldn't want to bet on that, especially if the U.S. economy goes into a recession. People will cut back on their gas consumption, and not just in North America. Supply and demand do balance out, eventually. When prices get too high for something, no matter what it is, consumers cut back on it. Gas is no exception. Don't buy this stock with the idea that oil will only go higher. At some point, and most likely sooner rather than later, oil will go down again, no matter how much more demand there is in China and India.
Still, the company is growing. It recently bought 14,000 acres in the Barnett Shale field. It now owns 104,000 acres in that field. When this region is fully operational, output should increase to 90 million cubic feet equivalent (cfe) per day from the 72 million cfe pumping now. To pay for the new acreage, the company borrowed more money, increasing its debt load to where it's 45% of the balance sheet. That's almost double the debt it held in 2005.
Production and reserves are at all-time highs with 343 million cfe per day in 2007, 17% better than 2006. In the last 20 quarters, the company has shown production increases in each quarter. Reserves are estimated at 2.2 trillion cfe. Additions in 2007 increased totals by 27% and were 5 times more than the company extracted in 2006.
Other numbers: Revenues should finish at $915 million in 2007. Analysts predict $1.04 billion for 2008. Earnings should be $1.75 for 2007. Expectations are for $2.10 in 2008. For the next 5 years, earnings are forecast to increase by 20.6% a year, on average, while revenues gorw by 12.5% a year, on average. Net profit margin is 29%. There is a small dividend of 4 cents a share per quarter. Market cap is $8 billion on 149.12 million shares.
This is an interesting stock, with a great story. Investors have heard the story and love it. Valuations are at all-time highs. And understandably so. With so many reserves to tap, the company has plenty of profits in the ground. Of course, if the price of oil and/or gas goes down, valuations will have to be adjusted. And they won't be upwards.
- Company Web site: www.rangeresources.com - Ted Allrich |
Weekly Newsletter
printer-friendly format