RRC Notes

1Q09 Results - 4/28/09

RRC Reports In Line Results; Plans Remain On Track

Note: This is not one the usual suspects we talk about around here. It gets mentioned from time to time and I aim to change that going forward. They are a gassy player, with a strong history of production growth, low operating expenses, a decent balance sheet, strong hedge position for 2009 and good sized positions in the Marcellus, Barnett, and Nora area.

The 1Q09 Numbers:

• Production: 415.8 MMcfepd, up 12% YoY (previously announced); 88% natural gas
• Revenues of $276.4 mm vs $253 mm expecte
• LOE per Mcfe of $0.93, strong.
• EPS of $0.24 (ex items) vs $0.21 expected. Note the lack of a write down …  successful efforts account vs full cost.
• CFPS of $1.00 vs $0.97 expected

Guidance:

• 2009 previous guidance of 10% YoY growth was not mentioned in the press release however,
• they did say they expect to exit 2009 with Marcellus shale volumes of 80 to 100 MMcfepd, up from 30 MMcfepd at the beginning of this year and
• they see doubling that in 2010 (they’ve said this one before)

Operational Update:

• Marcellus Shale:
  • > 60 wells planned for 2009
  • 1 well with 7.9 MMcfepd 24 hour IP which is pretty strong for this play
  • "In process of testing" another well at 10.7 MMcfepd
  • Late 2008 wells were averaging 7.3 MMcfepd
  • 1.4 mm net acres (900,000 acres in the "fairway")
  • Average well EUR: 3.5 Bcfe, cost to drill $3.5 mm
  • they think they have unrisked reserve potential of 22 Tcfe (8x YE08 reserves)
• Barnett Shale:
  • 3 rigs running remainder of 2009, down from 6 in
  • March production was 125 MMcfepd and rising (or 30% of the 1Q average)
  • They think they drilled the highest rate to date in the play with a Tarrant County well with average production of 9.6 MMcfedpd for its first 30 days on stream.
  • Balance Sheet: 43% debt to equity

Hedge: 83% of 2009 volumes hedged north of $8.

Nutshell: Not knock the cover off the ball like the SWN quarter but very solid, will listen and being working up the company story a little better.

Conference Call: Today, 1 PM EST.

7/16/09

RRC Pre Announces 2Q Volumes, Provides Ops Update

Volumes:

• 2Q Production of 434 MMcfepd, beats guidance of 420 to 425 Mcfepd; cites better than expected drilling results Barnett and Marcellus
  
• Sees double digit volume growth in 2009; prior guidance was 10% growth so without getting specific they are bumping that up a bit.

Operations Update

• Running 14 rigs vs 30 a year ago but they’ve been very busy with the drill bit, both in their Barnett and Marcellus shales and in their more conventional gas plays.

Marcellus Update:

• Marcellus production now > 50 MMcfepd net; sees production close to high end of YE09 target of 80 to 100
  • No "monster wells" highlighted in this press release but the trend has been moving from low 7s MMcfepd at YE08 higher, with at least one well coming in over 24 MMcfepd.
    
• 46 wells drilled in last 2 years; of these 24 on line for over 120 days, estimates EUR of these at 4.4 Bcfe - strong for the play and up from their last estimate of 3.5 Bcfe in the 1Q press release.
  
• This year alone that amounts to an additional net 53 Bcfe of incremental reserves (for a total of 262 Bcfe) which is not insignificant relative to RRC’s year end proved reserves of 2,700 Bcfe
  
• Completed well cost of $3.5 mm for under $1 per Mcfe development cost after 15% royalty; yields IRR of 50% at $5 gas (they get strong pricing in Pennsylvania to Nymex)
  
• 3 rigs now, 6 by year end
  
• Total of 70 wells planned for 2009 with 50 on line by year end. This is up from 60 planned at the end of 1Q.
  
• RRC has 1.4 mm net acres (900,000 acres in the "fairway")
  
• Before the increased EUR comment they thought they had unrisked reserve potential of 22 Tcfe (8x YE08 reserves)

Barnett Update:

• Barnett production of 120 MMcfepd net
  
• Recent strong tests; big well in Parker County (on the edge of core Barnett  territory) at 7.6 MMcfepd
  
• 2 rig program for now. This is down from a planned 3 rigs as of last quarter, surely due to gas prices.
  
• They see 2H09 F&D in the core at $1.25 per Mcfe which is a touch higher than in past comments but the IRRs here should still be close to 20% at $4 gas.  Thankfully they are well hedged for 2009 (see below).

In other areas:

• Appalachia - continues to hum along; this is $1 per Mcfe finding cost country, stacked payss with very low lifting costs ($0.60 per Mcfe)
• Midcon - set a new production record at 57 MMcfepd.

Hedges:

• Second Half 2009: 80% collared with floors at $7.49 and ceilings averaging $8.15. Nice.
  
• Starting to hedge 2010:
  
  • 1H10: 30% of expected volumes hedged with floors at $5.50 and a ceiling of $7.41
    
  • 2H10: 7% hedged with a $5.50 floor

 

Valuation:

• P/CF of 10.1x for 2009, 9.6x for 2010; lofty but not overly so for such a high RP company (17+ years) that isn’t overly leveraged and is having repeatable, high IRR success.
  
  

Nutshell: Good to see a production beat and increased focus on the company’s highest return play, the Marcellus. Very good to seem them up the estimate of recoverable reserves there (or at least imply that they will by talking about their longest set of running wells there).  Range has recently increased its financial flexibility through asset sales and continues to protect medium term cash flow while allowing for upside should gas prices improve next year (or at least they are giving themselves time to hedge at better prices during the normal seasonal run in prices later this year (yep, I still think we see higher prices by year end).  The production beat will likely mean a small boost to 2009 CFPS estimates but the real boost to the story comes from better drilling results leading to stronger reserve bookings. The stock is likely to do well today and into their 2Q press release on July 23rd. I have been looking to bring (RRC) into my fold of habitually traded companies since last quarter and I am likely to take some calls here this morning. Just an FYI, they do have a shelf filed so this could be the "announcement before the deal" and I won’t swing for the fence in terms of number of contracts today.