Oil & Gas Stocks

Range Resources Corporation Annual Valuation – 2014 $RRC

220px-Range_logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Defensive Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Range Resources Corp (RRC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Range Resources Corporation (Range) is an independent natural gas, natural gas liquids and oil company, engaged in the exploration, development and acquisition of natural gas and oil properties, mostly in the Appalachian and Southwestern regions of the United States. Range operates in two regions: the Appalachian (which includes shale tight gas, coal bed methane and conventional natural gas, natural gas liquids, condensate and oil production in Pennsylvania, Virginia, and West Virginia), and Southwestern (which includes the Permian Basin of West Texas and the Delaware Basin of New Mexico, the Texas Panhandle, the Ardmore Basin in Southern Oklahoma, the Nemaha Uplift in Northern Oklahoma and the Anadarko Basin of Western Oklahoma). As of Decmbeer 31, 2011, the Company has approximately 8,600 proven and unproven drilling locations in inventory. During the year ended December 31, 2011, the Company discontinued its Barnett Shale assets that were sold in April 2011.
RRC Chart

RRC data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $75.93
MG Value $25.10
MG Opinion Overvalued
Value Based on 3% Growth $9.45
Value Based on 0% Growth $5.54
Market Implied Growth Rate 53.98%
Net Current Asset Value (NCAV) -$26.88
PEmg 116.46
Current Ratio 0.44
PB Ratio 4.24

Balance Sheet – 6/30/2014

Current Assets $247,600,000
Current Liabilities $558,900,000
Total Debt $2,830,000,000
Total Assets $7,800,600,000
Intangible Assets $0
Total Liabilities $4,780,400,000
Outstanding Shares 168,610,000

Earnings Per Share

2014 (estimate) $1.55
2013 $0.70
2012 $0.08
2011 $0.26
2010 -$1.53
2009 -$0.35
2008 $2.22
2007 $1.11
2006 $1.42
2005 $0.86
2004 $0.38

Earnings Per Share – ModernGraham

2014 (estimate) $0.65
2013 $0.08
2012 -$0.11
2011 -$0.02
2010 $0.08
2009 $0.94

Dividend History
RRC Dividend Chart

RRC Dividend data by YCharts

Conclusion:

Range Resources Corporation is not suitable for either the Defensive Investor or the Enterprising Investor.  The only Defensive Investor requirements the company satisfies are the market cap size and the dividend history.  Likewise, the only Enterprising Investor requirements the company passes are the dividend payment and the earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation standpoint, the company appears overvalued after growing its EPSmg (normalized earnings) from $0.08 in 2010 to an estimated $0.65 for 2014.  This level of demonstrated growth falls short of the market’s extremely high implied estimate of 53.98% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Range Resources Corporation (RRC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Range Resources Corporation (RRC) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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