Stock Pitch - Duke University Investment Club

Stock Pitch Westen Koorbusch, Travis Wolf, Zachary Dukoff, Udit Agrawal, Isaac Fraynd Table of Contents I. 
II. 
III. 
IV. 
V. 
Investment Thesis & Company Overview Industry Overview Natural Gas Holdings & Pipeline Infrastructure Catalysts Financials & ValuaMon 2 I. Investment Thesis & Company Overview Range Resources CorporaMon BUSINESS OVERVIEW n  Range Resources CorporaMon is an independent natural gas, natural gas liquids and oil company based in Fort Worth, Texas n  They operate in the upstream and midstream sectors of the oil & gas industry, and own and operate many of their own pipelines n  One of the only companies that has released the list of chemicals it uses for hydraulic fracturing n  Stellar track record of consistent returns in a tradiMonally volaMle industry COMPETITIVE ADVANTAGES First-­‐mover advantage in the Marcellus Shale region n  Was one of the first companies to recognize the scope of the Marcellus Shale, and quickly moved to buy real estate and construct pipelines in that region Very low unit costs n  Range Resources CorporaMon has some of the lowest unit costs of extracMon in the industry, giving them higher profit margins and be\er access to capital Can survive low oil prices n  In the event of conMnued oil price declines, many of Range Resource CorporaMon’s compeMtors would be squeezed out of the market MANAGEMENT Jeffrey L. Ventura (President & CEO) n  Previously President & COO of Matador Petroleum CorporaMon n  Recipient of 2014 Chief Roughneck Award Roger S. Manny (EVP & CFO) n  Previously CFO of Matador Petroleum CorporaMon with Ventura n  Served as Senior VP of energy group at Bank of America Ray N. Walker, Jr. (EVP & COO) n  Worked previously at Halliburton in various technical and management roles n  Led RRC’s Marcellus Shale division before becoming COO John K. Applegath (Marcellus Shale) n  Former President & COO of Basic Resources n  Served in the army as a Warrant Officer while a helicopter pilot in Vietnam Alan W. Farquharson (Reservoir Engineer) n  Previously managed engineering division at Union Pacific Resources n  Focuses mainly on strategic allocaMon of capital 4 Range Resources CorporaMon (NYSE: RRC) Range Resource CorporaSon’s recent selloff with oil prices gives us an aUracSve buying opportunity for a company with low unit costs and first mover advantage in the Marcellus Shale region RecommendaMon: Buy
Current Price: $71.92
Price Target: $92.05 (28.0% Upside) CATALYSTS n  Low oil prices have led to a selloff in the stock, which is unjusMfied in our opinion n  Low unit costs mean they can outlast many compeMtors in their sector n  Predicted cold weather for this winter is not yet reflected in the stock price n  Republican-­‐controlled congress may move faster in allowing exportaMon of NGLs RISKS n  Winter may not be as cold as last winter, which could keep natural gas prices low n  Oil will conMnue its selloff, and all players in the industry will suffer as a result n  RegulaMon concerning hydraulic fracturing and other unconvenMonal drilling methods 5 II. Industry Overview The “Fracking” RevoluMon n  Hydraulic Fracking in which rock is fractured by hydraulically pressurized liquid US Shale Gas ProducSon from 1999 to 20141 Production in trillion cubic feet
What is Fracking 12
10
8
6
4
2
0
Year
9.35 trillion cubic feet of shale gas predicted for 2014 180% growth since 2008 Environmental Concerns2 n  Began as experiment in 1947, first became commercially feasible in 1997 in Barne\ Shale of North Texas n  Fluid is injected and cracks the rock bed, allowing natural gas, petroleum and brine to flow out freely n  Commonly applied to shale gas, Mght gas, Mght oil, and coal seam gas n  45% of domesMc natural gas producMon and 17% of oil producMon would halt without fracking Source: 1.  United States EIA 2.  University of Texas, AusMn Fracking is sSll an environmental controversy and this is sSll a 7 major risk to the advances in fracking DRILL BABY DRILL…but where? US Shale Reserves US Shale Output1 Marcellus and USca FormaSon2 n  95,000 square miles across the Appalachian Basin n  Second largest natural gas accumulaMon on the planet, with up to 500 trillion cubic feet of recoverable reserves n  Accounts for 85% of all natural gas produced in the Northeast US n  7,000 feet under Marcellus is the USca Shale, which is even more geographically expansive than the Marcellus Shale. n  Exact size is unknown, but it already is producing natural gas, natural gas liquids, and crude oil. Source: 1.  US EIA 2.  US EIA 8 Natural Gas Prices U.S. Natural Gas Uses 6% 13% 31% New Uses1 n  The “bridge” to a low-­‐carbon future Power GeneraMon n  Produces 30% less CO2 than petroleum and 45% less than coal Industrial OperaMons n  Natural gas sets the benchmark for which other clean power sources must compete against Use in Homes 21% n  Increased industrial use will lead to greater compeMMveness for US manufacturing Commercial Seqngs 29% n  CNG (compressed natural gas) used in transportaMon n  17.25 million currently vehicles run on CNG Natural gas supplies 25% of energy in the U.S Henry Hub Spot Price ($) Natural Gas Price History1 Pricing Mechanics 12.00 n  Benchmarked on the Henry Hub Index. 10.00 n  Like all commodiMes, price is driven by supply and demand n  Main drivers of demand Weather, economic growth, fuel compeMMon, storage, exports 8.00 6.00 4.00 n  Main drivers of supply; Storage, producMon rates, pipeline capacity, technical issues 2.00 0.00 1980 1990 2000 2010 2020 2030 2040 2050 Although prices have dropped recently, the EIA expects prices to steadily rise in the future. Source: 1.  MIT, The Future of Natural Gas 2.  United States EIA n  Approval to trade is needed for countries which do not have exisMng US Free-­‐Trade agreements –including major countries in Asia and Europe. The US government is likely to conSnue to approve exports, leading to an increase in natural gas prices. 9 III. Natural Gas Holdings & Pipeline Infrastructure Holdings Reserves Appalachian Reserve Breakdown n  92% of reserves are in the Appalachian Region (PA, WV) n  Marcellus, Upper Devonian, UMca Natural Gas n  83% of PA posiMon is in Marcellus NGL Crude Oil 6% 0.5% n  8% in the Southwest (TX, OK) n  Texas Panhandle n  Nemaha Upliu 93.5% n  Mississippi Basin n  Target reserve increases of 25% per year n  Nearly half of holdings are wetà focus on NGL market ProducSon n  Range was first to the Marcellus formaMon in 2004 n  Gain experMse in extracMon n  Output has increased by 22% the past 5 years n  Currently produce 939 mcf per day, expected 3 bcf by 2018 n  88% of producMon comes from the Appalachian region n  Natural Gas (95%) n  Heat homes, fuel cars n  Petrochemicals n  Natural Gas Liquids (4%) n  Petrochemicals n  Crude Oil (1%) Well Size n  Adding more wells and increasing lateral size are two major goals for RRC n  Close to 3,000 wells in Marcellus region n  Lifespan of 9 years n  Over 200 new wells were placed in 2014 n  Target goal of 6,200 lateral feet in well size n  Currently, dry wells have a lateral size of 5,200 u n  Wet wells 4,200 u n  Enables more producMon
n  More cost efficient n  Shows experMse in PA area 11 Natural Gas Types Wet vs Dry Gas Marcellus NGL n  Dry Gas (100% methane) n  Used to heat homes 4% 4% n  Only shipped within North America 9% Ethane Propane n  Sells for $4.10 mcf at wellhead n  Wet Gas (<85% methane) n  Separated into NGL and Natural Gas 30% Isobutane 53% Normal Butane Natural Gasoline n  ImpuriMes (propane, ethane, butane) give a liquid feel n  Used for petrochemicals n  Sells for $7.40 mcf at wellhead NGL Market Gas Type per Region n  NGLs are allowed to be exported out of the country n  Dry Natural Gas cannot leave North America n  NGLs are priced more expensively in Europe n  Europe receives 30% of NGLs from Russia n  Russia and China recently to a $400 billion natural gas agreement n  Put pressure on prices to Western Europe n  Would have to import from Qatar n  High transportaMon costs due to areas temperature and distance n  Only 5% of tankers move through Suez Canal 41% 41% 70% 59% 59% 30% Upper Devonian Marcellus Wet UMca Dry 12 Infrastructure Current Issues n  A lack of pipelines to ports has impeded producMon n  Forced RRC to ship by trucks and rail n  TransportaMon costs rise n  (i,e) New England uMlity companies rely 46% on natural gas n  Raised electric prices 30-­‐50% due to import needs n  Not enough exporMng terminals n  Ironically, there are too many import terminals n  Lake Charles and Geographic LocaSon n  Prime posiMon in PA, gives access to Northeast markets and Europe n  Northeast power plants shiuing from coal to natural gas n  Marcellus Shale’s proximity to Philadelphia allows for fast transportaMon from wells to export centers n  Easily accessible to mid west markets n  No real geographic barriers n  ExisMng pipelines to Gulf Coast n  Tennessee Gas Pipeline n  Transport to Gulf Coast exporMng faciliMes once open Costs $1.20 $1.00 $0.80 LOE $0.60 TransportaMon $0.40 $0.20 $-­‐ 2008 2009 2010 2011 2012 2013 2014 Facility Expansion n  Proposed pipelines total a 25 bcf expansion of liquid flow n  Mariner East is expected to be completed by early 2015 n  Expected to increase cash flow by $100 mm n  Transport NGL to Marcus Hook plant in Philadelphia n  Sunoco LogisMcs announced its plan to build a second pipeline to Mariner East 2 to Marcus Hook n  Quadruple liquid flow n  6 new NGL export faciliMes have been approved and will be completed by 2022 n  Allow market supply to increase by 10 bcf n  Lake Charles and Golden Pass, Louisiana 13 IV. Catalysts InEPlace
Prime Gas
Real state (GIP) Analysis Shows Greatest Potential in SW PA
When GIP analysis from the Marcellus,
Upper Devonian and Point Pleasant are
combined, the largest stacked pay
resource is located in SW PA where Range
has concentrated its acreage position
Note: Townships where Range holds ~3,000 or more acres (as of 12/31/2013), and estimated as prospective, are outlined green. GIP – Range estimates.
n  Range Resources has a lot of company specific catalysts that disMnguish it from compeMtors 17
n  Range has high quality acreage in Southwest Pennsylvania n  This area has the highest potenMal for shale producMon using the Gas In Place(GIP) analysis n  Only 9% of potenMal Marcellus shale locaMons have been drilled thus far leaving large upside potenMal n  Entry into UMca shale gives further opportuniMes for growth 15 Source: Company PresentaMon High ProducMon rowth 20% - G
25%
Growth Trajectory
3,000
2,500
Growth trajectory to 3 Bcfe net per day:
• Wells identified
Corporate
production at 25%
growth rate
• Compression and processing plants
scheduled
Mmcfe/d Net
2,000
1,500
• Required takeaway capacity contracted
Corporate
production at 20%
growth rate
1,000
500
-
Note: Includes impact of historical acquisitions and asset sales
7
7
n  Their unit costs are expected to keep decreasing due to lower well costs in the SW PA region as well as decreasing reserve replacement costs n  Ownership of pipes and the Mariner projects allows Range to streamline TransportaMon and accommodate weather conMngencies giving them an advantage over compeMtors n  Company expects producMon to grow at 20 -­‐25 % for years to come 16 Source: Company PresentaMon Unit Costs Are a Key Focus
Low Unit Costs $4.50
$4.00
$/mcfe
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$-$0.00
2008
2009
2010
2011
2012
2013
2014E
Reserve
Replacement(1)
$1.64
$1.25
$0.83
$0.68
$0.68
$0.66
$0.63
LOE (2)
$0.99
$0.82
$0.72
$0.60
$0.41
$0.37
$0.34
Prod. taxes
$0.39
$0.20
$0.19
$0.14
$0.15(3)
$0.13
$0.12
G&A (2)
$0.49
$0.51
$0.55
$0.56
$0.46
$0.42
$0.37
Interest
$0.71
$0.74
$0.73
$0.69
$0.61
$0.51
$0.41
Trans. &
Gathering
$0.08
$0.32
$0.40
$0.62
$0.70
$0.75
$0.77
Total
$4.30
$3.84
$3.42
$3.29
$3.01
$2.84
$2.64
(1) Three-year average of drill bit F&D costs, excluding acreage (2) Excludes non-cash stock compensation (3) Excludes retroactive payments for PA impact fee17 in 2012.
Source: Company PresentaMon 9
9
Natural Gas Prices Natural Gas n  Range is the largest producer of Natural Gas Liquids in Appalachia n  A harsh winter would increase demand for Nat Gas impacMng prices n  Range has reached Ethane and Propane export agreements that will increase annualized cash flow by ~ $100 MM starMng 2015 18 Source: EIA, Short-­‐Term Energy Outlook, November 2014 V. Financials & ValuaSon ValuaMon – Net Asset Value (ConservaMve)
($ in millions, except per share data)
Revenue ($ in Millions) ProducSon & Development Expenses: Cash Flows ($ in Millions) Total Total Natural Total Annual ProducSon ProducSon Development Pre-­‐Tax Cash Aler-­‐Tax Oil & NGL Gas Revenue MMBOE Per BOE Expenses Expenses Cash Flows Tax Rate Cash Flows Year 2014 $ 786 $ 1,270 $ 2,055 69 $ 2.22 $ 152 $ 94 $ 1,809 22.6% $ 1,400 Year 2015 943 1,524 2,466 82 2.22 183 94 2,189 22.6% 1,694 Year 2016 1,131 1,828 2,959 99 2.22 219 94 2,646 22.6% 2,047 Year 2017 1,357 2,194 3,551 119 2.22 263 94 3,194 22.6% 2,471 Year 2018 1,629 2,633 4,262 142 2.22 316 94 3,852 22.6% 2,980 Year 2019 1,955 3,159 5,114 171 2.22 379 94 4,641 22.6% 3,591 Year 2020 1,373 3,791 5,164 194 2.22 430 94 4,640 22.6% 3,590 Year 2021 1,400 4,549 5,949 230 2.22 510 94 5,345 22.6% 4,136 Year 2022 1,680 1,717 3,396 120 2.22 265 94 3,037 22.6% 2,350 Year 2023 1,680 -­‐ 1,680 48 2.22 107 94 1,479 22.6% 1,144 Year 2024 1,680 -­‐ 1,680 48 2.22 107 -­‐ 1,573 22.6% 1,217 Year 2025 1,621 -­‐ 1,621 46 2.22 103 -­‐ 1,518 22.6% 1,175 AssumpSons Reserve Development Rate Development Years $ Per Bbl Oil (Hedged) $ Per Bbl NGL (Hedged) $ Per MCF Nat. Gas (Hedged) EffecMve Tax Rate Discount Rate 20.0% 10 YR $ 86.00 $ 35.00 $ 4.00 22.6% 10.0% Share Price CalculaSon PV of Proven Res $15,785.43 + Cash 468 + Equity Inv 129 -­‐ Debt (2,999) + Undeveloped Acreage 706 -­‐ Asset ReMrement Oblig (254.0) Equity Value Diluted Shares Out. Share Price Source: 10K, 10Q. Bloomberg $13,835.64 166.5 $83.12 20 ValuaMon – Net Asset Value (OpMmisMc)
($ in millions, except per share data)
Revenue ($ in Millions) ProducSon & Development Expenses: Cash Flows ($ in Millions) Total Total Natural Total Annual ProducSon ProducSon Development Pre-­‐Tax Cash Aler-­‐Tax Oil & NGL Gas Revenue MMBOE Per BOE Expenses Expenses Cash Flows Tax Rate Cash Flows Year 2014 $ 818 $ 1,323 $ 2,141 72 $ 2.22 $ 159 $ 94 $ 1,888 22.6% $ 1,461 Year 2015 1,023 1,653 2,676 89 2.22 198 94 2,384 22.6% 1,844 Year 2016 1,279 2,066 3,345 112 2.22 248 94 3,003 22.6% 2,323 Year 2017 1,598 2,583 4,181 140 2.22 310 94 3,777 22.6% 2,922 Year 2018 1,998 3,229 5,227 175 2.22 388 94 4,745 22.6% 3,671 Year 2019 1,993 4,036 6,029 212 2.22 471 94 5,464 22.6% 4,227 Year 2020 1,552 5,045 6,597 255 2.22 565 94 5,938 22.6% 4,594 Year 2021 1,940 2,729 4,669 169 2.22 376 94 4,200 22.6% 3,250 Year 2022 2,425 -­‐ 2,425 69 2.22 154 94 2,177 22.6% 1,685 Year 2023 2,425 -­‐ 2,425 69 2.22 154 94 2,177 22.6% 1,685 Year 2024 181 -­‐ 181 5 2.22 11 -­‐ 169 22.6% 131 Year 2025 -­‐ -­‐ -­‐ -­‐ 2.22 -­‐ -­‐ -­‐ 22.6% -­‐ AssumpSons Reserve Development Rate Development Years $ Per Bbl Oil (Hedged) $ Per Bbl NGL (Hedged) $ Per MCF Nat. Gas (Hedged) EffecMve Tax Rate Discount Rate 25.0% 10 YR $ 86.00 $ 35.00 $ 4.00 22.6% 8.5% Share Price CalculaSon PV of Proven Res $17,767.85 + Cash 468 + Equity Inv 129 -­‐ Debt (2,999) + Undeveloped Acreage 706 -­‐ Asset ReMrement Oblig (254.0) Equity Value Diluted Shares Out. Share Price Source: 10K, 10Q. Bloomberg $18,473.97 166.5 $95.03 21