Range Resources Earnings: Still Generating Free Cash Despite Price Collapse

Range Resources RRC showcased its resilience to weak natural gas prices with its first-quarter earnings. The Nymex spot price was $2.25/million Btu when Range announced its results on April 24, which is one third of what it was as recently as mid-December. The collapse was triggered by very mild weather and a temporary shutdown of the Freeport LNG export facility. The resulting surplus enabled storage levels to recover rapidly in the first few months of 2023. And with no new export facilities scheduled until 2024, there’s no short-term catalyst for support, which means gas bulls are relying on a hotter-than-usual summer or a very cold 2023-24 winter to drive up consumption. Beyond 2024, we do anticipate stronger prices as the current spot price is well below the domestic marginal cost, which we think is about $3.30/thousand cubic feet.

Despite such conditions, Range was able to generate $400 million in operating cash while keeping capital spending at $150 million. This includes a realized derivative gain of about $35 million (Range has hedged roughly half of its 2023 production at about $3.50/mcf). The firm is on track to hit its previously announced $570 million-$615 million budget, and there was no change to its outlook for flat year-on-year production, with quarterly volumes a little above the midpoint of the annual guidance range of 2.12-2.16 billion cubic feet equivalent per day. While the firm is still generating surplus cash, the 2023 yield will probably fall below 5% unless gas prices rebound swiftly (management’s 23% yield estimate incorporates a very optimistic $5.50/mmBtu estimate). And beyond 2023, we think the reinvestment rate will rise from about 50% to 70%-80%. So investors can expect a continued return of capital but at more pedestrian rates—2022 is likely to be the high-water mark for free cash flow and distributions. In the first quarter, the firm repurchased 400,000 shares at $24 per share, compared with our unchanged fair value estimate of $20 per share.