Range Resources’ relative valuation
The table below shows different fundamental ratios for S&P 500 (SPY) upstream companies that have a similar production mix and have overlapping geographical areas of operations.
Range Resources (RRC) has a forward EV-to-EBITDA ratio of ~12x, which is higher when compared with other natural gas producers from the Marcellus Shale. These include Southwestern Energy (SWN), Consol Energy (CNX), and EQT Corporation (EQT), which have forward EV-to-EBITDA ratios of 10x, 7x, and 11x, respectively.
Natural gas producer Cimarex Energy (XEC), which also operates in unconventional resource space, has a forward EV-to-EBITDA ratio of ~13x. Range Resources’ forward EV-to-EBITDA of 12x is slightly lower than that of XEC’s. Overall, RRC’s valuation appears to be at the higher end when compared with its peers. The average EV-to-EBITDA ratio for the upstream industry is ~12.2x.
When compared with the price-to-book and price-to-sales metrics, Range Resources’ valuation appears to be in the middle of the range with values of ~1.34x and ~3.06x, respectively.
Is RRC cheaper or expensive?
The above table shows that one trend is clear—companies with higher leverage or lower current ratio are trading at a discount to their book value or they have lower price to sales. A possible explanation could be a fear of an energy-driven debt crisis if commodity prices stay low, or move further down, for much longer than anticipated.
Also given a path of rising interest rates at a time when energy companies are so indebted and are scrambling for access to capital, interest expenses for highly leveraged companies can rise further.
As of 3Q15, Range Resources (RRC) has a much higher debt-to-equity ratio of ~116% and a lower current ratio of ~0.91. However, it is still trading at relatively higher price-to-book and price-to-sales multiples and appears to be expensive.