Range Resources’ relative valuation
Range Resources (RRC) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of ~15x, which is equal to or higher than the ratios for other natural gas producers working in the Marcellus shale formation such as Southwestern Energy (SWN), Consol Energy (CNX), and EQT Corporation (EQT). These companies have forward EV-to-EBITDA ratios of 15x, 9x, and 12x, respectively. Natural gas producer Cimarex Energy (XEC) has a forward EV-to-EBITDA ratio of ~18x. RRC’s forward EV-to-EBITDA of 15x is lower than XEC’s. Overall, RRC’s valuation appears to be higher than peers’ valuations. The average EV-to-EBITDA ratio for the upstream industry is ~12x.
The above table shows the fundamental ratios for S&P 500 (SPY) upstream companies. They have similar production mixes and overlapping geographical areas of operations. In regards to the price-to-book and price-to-sales metrics, RRC’s valuations place in the middle of the range, at ~1.9x and ~4.3x, respectively.
Why is RRC trading at a premium?
Typically, companies with a higher leverage or lower current ratio trade at a discount to their book value or have a lower price-to-sales ratio. Although RRC had a higher debt-to-equity ratio of ~96% and a lower current ratio of ~1.3 in 4Q15, it was still trading at higher price-to-book and price-to-sales multiples than peers and appears expensive.
There are some possible explanations for this. RRC has made ongoing efforts to successfully reduce its debt by using proceeds from divestitures. This helped RRC to reduce its debt-to-equity ratio from ~116% in 3Q15 to ~96% in 4Q15. RRC is planning to reduce its debt through divestitures in 2016 as well. Also, RRC has a better hedging coverage than peers, with ~80% in 2016.