Range Resources Corp. (RRC) is a natural gas and petroleum producer headquartered in Fort Worth, Texas. Currently trading at $9.98, the company’s share price has fallen 46% since its 2018 high on October 10th. This fall in share price is correlated to a similar fall in WTI Crude Oil over this same time period. Since peaking at $76.41 per barrel on October 3rd, WTI Crude’s price has decreased 40% down to $45.88 per barrel. When comparing the charts of both WTI Crude and Range Resources it is clear that there is a strong correlation between the price of WTI Crude and the share price of RRC.
In 2019, I expect the price of WTI Crude to increase to approximately $75 per barrel thanks to an infrastructure bill that will significantly enhance U.S. demand for crude oil. This infrastructure bill will be passed because it is a rare topic in this era of polarized political parties in which this is not a specifically left or right issue. Both the Senate and House of Representatives should be in favor of an infrastructure bill. President Trump will be in favor of the bill too as from what we have seen throughout his time in office he uses the stock market as a barometer of his presidential success. An infrastructure bill in 2019 will give a much-needed boost to the stock market and may also give President Trump assistance heading into the election year of 2020.
I feel that Range Resources is set up well to take full advantage of an increase in the price of WTI Crude Oil. The company’s cash flow statement is especially telling of how the company is set up moving forward. In the nine months ending on September 30th Range Resources invested $781.6 million in additions to natural gas and oil properties. They also invested another $50.5 million in acreage purchases. These purchases prove that the company is investing extensively in their growth moving forward. While investing in their growth they are also still able to net cash from operating activities. Along with these strong signs for future growth, Range Resources’ book value is $23.32 per share. This is 134% higher than the current share price of $9.98.
In order to get a very raw price target for RRC we can use Eddy Elfenbein’s “World’s Simplest Stock Valuation” calculated as:
(Growth Rate/2 + 8) · EPS = Fair Value
Range Resources’ next 5-year growth rate is 42.90% and its average estimate for next year’s EPS is 1.12. When we plug this into our stock valuation multiple we get:
(42.90/2 + 8) · 1.12 = $32.98
In order to have a bullish forecast for a stock we want the valuation equation to net a price approximately 30% higher than the current share price. In the case for RRC, the “World’s Simplest Stock Valuation” metric yields a value 231% higher than the current share price. The results of this valuation equation compiled with my expectations of an infrastructure bill being signed, which will greatly enhance U.S. natural gas and oil demand, makes Range Resources a stock that I believe is a great 1-3 year investment.
As for potential risk factors in this investment one could point to the fact that Range Resources is a highly-leveraged company. I believe that Range Resources’ ability to generate operating income will allow them to easily pay back these loans upon maturity. However, I do anticipate that the high level of long-term debt the company currently faces could deter future capital expenditures. I do not see this as a problem though because after investing over $800 million so far this year in plants, property, and equipment I feel that the company is already in a good position to grow. New investments in natural gas and oil properties will not be necessary for a significant amount of time.
From a technical perspective RRC is at a very favorable buying position. As can be seen in the chart above the Relative Strength Index (RSI) is at a value of 13.55 which represents an extremely oversold stock. This further indicates that this is an ideal time to buy a stock that has great growth potential over the next few years.
The above chart is the price of WTI Crude over the last year. When compared to that of RRC we can see the blatant similarities between the two charts. The first half of 2018’s low price for WTI Crude came in early February and this is directly mirrored by a low-point in early February for RRC. The high point that I previously discussed is evident in early October for both charts. Now if we look at today’s price we are seeing a dip in WTI Crude that will bounce up in 2019 due to an increased demand for oil. I anticipate that this bounce by WTI Crude will be directly mirrored by a similar bounce in the per share price of Range Resources.