Marcellus Shale pioneer Range Resources Corp. added $1 billion to its existing $500 million share buyback program and kept paying an 8 cents quarterly dividend as high natural gas prices drove its free cash flow to $521 million in the third quarter, a company record.
Range is the first of the top U.S. shale gas producers to report out the third quarter. If Range's results are any indication, the sector will be swimming in cash after the quarter.
The free cash is a function of elevated natural gas prices and spending discipline by producers. The average price of the NYMEX gas futures contract was $7.91/MMBtu during the quarter, according to S&P Global Market Intelligence, an 84% increase over the same quarter last year.
Company worth double what investors are paying, CEO says
Range President and CEO Jeffrey Ventura told analysts on an Oct. 25 call that the company's stock is worth $60/share based on fundamentals and that buying back shares is the best use of free cash. By mid-afternoon Oct. 25, Range shares were valued at $28.59/share, an 8% increase for the day on heavier-than-normal trading.
"The Range board authorized a significant $1 billion increase to the company's share repurchase program [Oct. 21]," Ventura told analysts. "In September, we paid [8 cents] per share in quarterly dividends, and we're rapidly approaching our long-term debt targets, which we expect to hit early next year at current strip pricing while simultaneously funding the base dividend and additional share repurchases."
"The buyback program represents a compelling investment of our capital as we traded at a substantial discount to the underlying value of our reserves and resource base," Ventura added.
Oil and gas analysts at Raymond James said Range's outstanding debt is getting lower, and that should continue. "Range is staring down sub-1-times net debt/EBITDA and should reach that mark by year-end," Raymond James said after results were announced Oct. 24.
"Given their ample free cash flow outlook ($1.2 billion in 2023), RRC is in a great position to continue taking advantage of buybacks while utilizing (or even raising) their newly implemented base dividend," Raymond James said.
The investment bank expected to see Range buying back the majority of the 242 million shares included in this new authorization.
Volumes flat as prices rose
Range's $521 million in free cash came from selling 2.1 Bcf/d worth of oil, natural gas and natural gas liquid at an average price of $4.95/Mcfe in the third quarter, the company reported after the markets closed Oct. 24. The volume of natural gas, oil and liquids that Range produced was flat to the second quarter of 2021, but the average sales price was 41% higher, including hedging.
For natural gas alone, Range said it produced and sold 1.49 Bcf/d, 1% less than the third quarter of 2021, while realizing $4.41/Mcf, a 64% increase, including hedges, over the year prior.
Range also does a significant amount of business selling NGL from western Pennsylvania to European companies and reported a 2% increase in NGL volumes in the third quarter to 100,387 barrels per day with realized prices up 15% over the same quarter last year.
For 2023, Range reaffirmed its guidance of flat production levels at 2.12-2.16 Bcfe/d, with NGL making up 30% of these volumes.
Range slightly missed analysts' expectations on an adjusted basis, but it exceeded expectations under GAAP accounting. It posted adjusted income of $336.2 million, or $1.37/share, where analysts surveyed by S&P Global Market Intelligence were looking for $1.41/share. On a GAAP basis, Range beat Wall Street with $373 million, or $1.49/share, in profits, where analysts had expected $1.39/share.
"Given the recent stock underperformance, we expect investors to buy any potential weakness in today's trading," Gabriele Sorbara, Siebert Williams Shank & Co. LLC managing director, told clients before the earnings call. Sorbara lists Range as a "Buy," with the expectation that Range and its shale gas peers will continue to throw off cash into the winter.