Range Resources at 56 Times Profit Cheap in Shale Boom: Real M&A
Range Resources Corp. (RRC)’s drilling operations in Pennsylvania’s Marcellus Shale natural-gas field are so coveted that the most expensive exploration and production company in America is now a takeover target.
While Range is trading at 56 times estimated 2012 earnings, the highest of any U.S. exploration and production company valued at more than $5 billion, the company also owns the second-most leases in the Marcellus Shale, according to data compiled by Bloomberg. With that region estimated to hold enough gas to supply the U.S. for six years, analysts project the Fort Worth, Texas-based company’s profits will triple over the next three years, the data show.
As energy companies look to tap unconventional assets after the average cost for finding and developing oil for the largest U.S. producers surged sixfold in the past decade, Raymond James Financial Inc. says Range may now be a logical target for BP Plc (BP/) or Exxon Mobil Corp. (XOM) The $10.2 billion company may fetch at least $78 a share in a takeover, according to Morningstar Inc., a 23 percent premium to yesterday’s price.
“The rationale for any M&A candidate is do you have access to top quality resource plays and do you have size in those plays?” Andrew Coleman, a Houston-based analyst at Raymond James, said in a telephone interview. “Range definitely checks both of those boxes. It’s a relatively expensive stock with a well-defined track record of growth and a very large acreage position in the Marcellus.”
Range doesn’t comment on speculation, Matt Pitzarella, a spokesman for the company, said in an e-mail.
The shale-gas producer owns leases on 1.2 million acres in the Marcellus Shale, second only to Chesapeake Energy Corp. (CHK)’s 1.78 million acres, according to data compiled by Bloomberg. Range sold most of its acreage in the Barnett Shale field in Texas last year to concentrate on the Marcellus Shale, which is the second most-profitable unconventional U.S. formation because of its high proportion of ethane and other petroleum derivatives sought by chemical makers. Only the Eagle Ford Shale in Texas yields higher returns, according to Range.
Advances over the past decade in the technology for hydraulic fracturing, or fracking, used to free gas and oil trapped in dense shale-rock formations, has contributed to rising prices for shale acreage. The process involves fracturing the formation by injecting water mixed with sand and chemicals to keep the cracks open and petroleum flowing.
‘Attractive Takeover Candidate’
“It’s an attractive takeover candidate because it’s the largest pure-play opportunity in the Marcellus Shale,” William Featherston, a New York-based energy analyst at UBS AG, said in a phone interview. “Any large company looking to gain exposure to the Marcellus at a time when gas prices are weak would be interested in Range.”
Since the stock reached a three-year high of $74.40 in October, Range has declined 15 percent as natural-gas prices fell to a 10-year low of $2.231 per million British thermal units on Jan. 23. Gas increased 4.2 percent yesterday to $2.532, the biggest gain since Feb. 2.
While Range has been cited as a possible takeover target for years after being one of the first companies to explore the Marcellus Shale, buyers may be more inclined to step in now on a wager that gas prices will rise, Raymond James’ Coleman said. On Oct. 13, Range gained 8.8 percent on speculation of a takeover bid. A year earlier, Range call trading jumped to a two-month high on similar speculation.
Not ‘Awful Forever’
With Range, “there’s great access to resources and there’s an undercurrent that gas is not going to be awful forever, so that might make some folks interested in making a bigger bet on gas,” Coleman said.
Even with the pullback in its shares, Range still trades at 56 times estimated earnings of $1.13 a share for this year, according to data compiled by Bloomberg. That’s almost three times the industry average and more expensive than 22 other U.S. exploration and production companies with market values of more than $5 billion.
Any acquirer would need to finance one of the largest deals for an exploration and production company on record. With no premium, a takeover of Range would still be valued at $11.9 billion including net debt, making it the industry’s sixth- biggest takeover ever, data compiled by Bloomberg show.
Even some of the largest companies may find it “pretty hard” to acquire a company of Range’s size, and management is unlikely to sell until gas prices rebound, Leo Mariani, an analyst with RBC Capital Markets in Austin, Texas, said in a phone interview.
Range may choose to wait out the depressed gas prices this year and further appraise its acreage reserves before selling, said UBS’s Featherston.
Range’s “resource potential,” including unproven reserves in the Marcellus and other fields, may be as much as 60 trillion cubic feet of oil and gas, according to a Feb. 7 investor presentation. The figure doesn’t include the potential for gas and liquids in the Utica Shale, an oil-and-gas formation that lies beneath the Marcellus Shale in parts of Pennsylvania.
Still, projections for a surge in sales and profits over the next three years make Range look cheaper for potential suitors. By 2014, the company’s sales will double to $2.3 billion from $1.15 billion last year, according to analysts’ estimates compiled by Bloomberg. Profit will triple to about $3 a share from $1, bringing Range’s price-to-earnings ratio down to about 21, the data show.
Major energy companies such as Exxon and BP may look to acquire Range to increase their stakes in U.S. shale plays, said Raymond James’ Coleman.
BHP’s Couch Cushions
Exxon, the world’s largest energy company by market value, bought XTO Energy Inc. for $35 billion in 2010, which gave it drilling operations in the gas-bearing Marcellus Shale formation. London-based BP, Europe’s second-largest oil producer, acquired $1.75 billion worth of natural-gas properties in Oklahoma’s Woodford Shale from Chesapeake Energy in 2008.
BHP Billiton Ltd. (BHP), the world’s biggest mining company, may also be interested in a takeover of Range, according to Mark Hanson, a Chicago-based analyst at Morningstar. The Melbourne- based company, which spent about $17 billion on shale gas deals last year, is planning to make more acquisitions, Chief Executive Officer Marius Kloppers told Australian Broadcasting Corp. television Feb. 12, without specifying targets.
“Range’s economics are some of the best in North America and they’ve got the runway for growth,” Hanson said. “They could take them out at a price that BHP could find in the couch cushions. The premium would have to be there just like with any darling stock like this.”
Alan Jeffers, a spokesman for Irving, Texas-based Exxon, BP’s Daren Beaudo and Ruban Yogarajah for BHP declined to comment on speculation.
A fair value for Range would be at least $78 a share in a takeover, a 23 percent premium to yesterday’s close of $63.25 and 4.8 percent more than its highest closing price last year, Hanson said. Raymond James’ Coleman said it would take between $75 and $80 a share to convince management to sell.
“There’s a lot to like about Range, and what you see is what you get,” said Morningstar’s Hanson. “The economics are generally better for first movers and Range certainly has that in the southwest part of the Marcellus.”