Drilling Longer Laterals And Optimizing Infrastructure Will Boost Future Efficiency

Key Takeaways

• Strategic initiatives in operational efficiency and transportation capacity aim to boost revenue and margins through improved production and market access.
  
• Enhanced export capabilities and access to high-demand markets are expected to increase earnings and expand margins through higher realized prices and volumes.
  
• Future growth hinges on securing demand and transport; market volatility or operational setbacks could impact margins, cash flows, and capital returns to shareholders.

Catalysts

Operates as an independent natural gas, natural gas liquids (NGLs), and oil company in the United States.

• Range Resources plans to leverage its large contiguous acreage to drill longer laterals, which improves operational efficiency and reduces capital costs. This is expected to enhance both revenue and margins in the future.
  
• The company is optimizing its gathering and compression infrastructure and plans to add incremental processing capacity, allowing for higher production and improved margins as fixed costs spread over greater production volumes.
  
• By securing transportation capacity to strategic markets such as the Midwest and Gulf Coast, Range Resources can access end markets with higher demand, potentially leading to better pricing and increased revenue.
  
• Range aims to capitalize on growing domestic and international demand for natural gas and NGLs by ramping up production, which is likely to boost earnings through increased sales volumes.
  
• The strategic use of NGL export terminals is expected to continue driving significant premiums, contributing to revenue growth and expanding net margins through higher realized prices.

Range Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Range Resources's revenue will grow by 14.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.2% today to 23.7% in 3 years time.
• Analysts expect earnings to reach $836.2 million (and earnings per share of $3.68) by about April 2028, up from $265.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $991 million in earnings, and the most bearish expecting $583 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2028 earnings, down from 29.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Range Resources Future Earnings Per Share Growth

Risks

• Range Resources' future growth may be contingent on securing new transport and in-basin demand; failure to secure these could constrain production growth and impact revenue.
  
• The company assumes stronger natural gas and NGL demand growth; any slowdown or oversupply in these markets could suppress pricing and affect net margins.
  
• Projected capital efficiency improvements depend heavily on maintaining drilling and completion efficiencies; any setbacks in operations or unexpected costs could weigh on earnings.
  
• Overreliance on cyclical commodity markets poses risks of volatile cash flows; unexpected downturns could strain Range's ability to sustain planned capital returns to shareholders.
  
• Increases in cash-effective tax rates post-2026 could reduce after-tax cash flows, impacting net margins and financial flexibility for dividends and share buybacks.

Valuation

• The analysts have a consensus price target of $41.06 for Range Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $55.0, and the most bearish reporting a price target of just $22.55.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $836.2 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 6.9%.
• Given the current share price of $32.1, the analyst price target of $41.06 is 21.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.