Barclays analyst Thomas Driscoll and team explain why they cut Range Resources (RRC) to Underweight from Equal Weight:
Range shares have performed very well this year despite severe financial challenges. While the company has a deep inventory of attractive drilling locations, it faces cost structure challenges and it has a levered balance sheet. We are lowering our price target 11% to $24 and downgrading our rating to Underweight.
Cash flow before hedges – is negative at strip prices. Range is well hedged for 16, but we estimate 16 cash flow would be negative $(100) million at strip prices if we were to exclude greater than $400 mm of potential 16 hedge gains. Investors should be cautious when estimates include significant hedge gains.
Ranges multiple may be pressured as growth slows. Range grew 20-25%/year over the past 3 years and the shares enjoy a 40-45% premium multiple. We forecast 2% growth this year and 8% next year, growth rates that benefit from our above strip gas forecast (we are using $2.50 vs. a strip average price of +/-$2.00) and ~$285 mm of hedge gains. Should the premium multiple disappear, the shares could fall nearly 50% to $17 per share. Our current price target assumes the company will continue to trade at a sharp premium as investors await a gas-price rebound.
Shares of Range Resources have 4.1% to $29.91 at 11:54 a.m. today, leaving 20% of downside toDriscoll’s target price. The Energy Select Sector SPDR ETF (XLE) has dipped just 0.4% to $61.26.