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  • Roger S. Conrad

Gas-Levered E&P: Buy the Dips and Sell the Rips

By Peter Staas on Oct. 8, 2016


When NGL prices plummeted in recent years and traded at a significant discount in the Marcellus Shale, Range Resources shifted its development activity to the dry-gas portion of its acreage.

At the end of 2016, management estimates that the company will have the flexibility to deliver about 70 percent of its natural-gas production to markets outside Pennsylvania. This percentage will increase to 80 percent by the end of 2017.

And as an early mover in the play, Range Resources also boasts significantly lower transportation costs that Antero Resources (NYSE: AR), a rival that paid a much higher price to lock up pipeline capacity later in the game.

Range Resources has also secured capacity to transport ethane to the petrochemical complex in Sarnia, Ontario, and is the anchor shipper on Sunoco Logistics Partners LP’s (NYSE: SXL) Mariner East pipeline, which transports ethane and propane from western Pennsylvania to the Marcus Hook terminal for distribution to domestic and waterborne markets.

More important, Range Resources inked a 15-year agreement in place to sell 20,000 barrels per day of ethane to Ineos’ Norwegian petrochemical facilities and has engaged a marketer to place up to 20,000 barrels per day of propane in the international market.

The company has also reserved capacity on Enterprise Products Partners LP’s (NYSE: EPD) Appalachia-to-Texas Express (ATEX), an ethane pipeline that transports the natural gas liquid to Mont Belvieu, Louisiana. As the start-up of additional petrochemical capacity on the Gulf Coast increases ethane demand and tightens the market, favorable price differentials should put this pipeline in the money.

Earlier this year, Range Resources surprised the market by announcing an agreement to acquire Memorial Resource Development (NYSE: MRD) in an all-stock deal worth about $4 billion that closed on Sept. 19.

Whereas the majority of pure-play operators in the Marcellus Shale have focused on asset acquisitions that complement their existing acreage, Range Resources opted to add a second front: the emerging Terryville play in Northern Louisiana, which is prospective for a number of gas-bearing formations.

Memorial Resource Development held more than 220,000 net acres in this area, and the new owner expects to grow production by about 10 percent next year. This play shows promise, but is in a much earlier stage of development, giving Range Resources ample opportunity to unlock out additional efficiencies by applying the lessons learned over its 12 years in the Marcellus Shale.

Management indicated that funding for its Louisiana operations would come from this segment’s cash flow in the near term, but highlighted the long-term flexibility to allocate capital to whichever region offers the best economics.

Certainly, the Terryville’s proximity to demand centers on the Gulf Coast is a relative advantage. Range Resources’ marketing arm reportedly has fielded inquiries from LNG exporters, power generators and international buyers interested in taking volumes from the play.

The transaction also helps to improve Range Resources’ leverage metrics. With only $3 million drawn on its $1.76 billion credit facility and no debt maturities until 2021, the company has ample liquidity.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor