Range Roaring In Marcellus, But Stock Already Fully Valued, Says ML

In the Marcellus shale, Range Resources Corp. is a winner. The Fort Worth, Texas-based E&P that is considered a leader in the unconventional-gas play with millions of acres in the fairway there ‘has exceeded our expectations for progress in the Marcellus in terms of the 2009 development plan,” says Merrill Lynch Research analyst Eric Hagen.

“Going forward, we believe that consistently strong results and achieving its goal of 30 million cubic feet equivalent per day of production by the end of first-quarter 2009 in the Marcellus are key catalysts.”

He sees the company as having 13.0 times 2008 estimated EBITDA. This means, though, that Range shares are already trading well.

“Range trades well above its peers at 7.2 times (2008E EBITDA). Therefore, we do not see enough relative value to drive a change in our rating.” He reiterates a “neutral” recommendation and a price of $74.

Noteworthy, he adds, is that the company has made arrangements for water disposal, a leading issue in the Marcellus play, “that should allow it to execute its plans for the next several years. It also disclosed (in a conference call) that it believes per-well reserves and costs should be consistent across its core areas—southeastern and north-central Pennsylvania—at 3- to 4 billion cubic feet per well for a $3- $4 million completed per-well costs.”

He says, “Range has significant 3P exposure to the emerging Marcellus shale: therefore, delineation results above or below our expectations could undermine our valuation assumptions.”

Also: “The Marcellus shale will likely require substantial investment in infrastructure in order to accommodate significant horizontal development. Given the early-stage nature of the play, the timing and cost of midstream projects could impact growth expectations and stress the (Range) balance sheet.”

Hagen can be reached at eric_hagen@ml.com. Contributing to his report are Rhett Bruno (rhett_bruno@ml.com) and Drew Venker (andrew_venker@ml.com).