This Company Could Soar When Nat Gas Rebounds


While there's no doubt that the current discount in natural gas prices is unsustainable, it's virtually impossible to time a commodity bottom. The overarching concern for investors appears to be finding companies that won't go bust if gas prices stay low for longer than expected, while still offering an attractive upside. One company appears to have struck this balance perfectly.

What to look for
Besides the appropriate balance between downside protection and upside potential, what else should investors look for when considering natural gas stocks?

Fool senior analyst Mike Olsen sums it up well. He looks for companies with great management teams, relatively conservative leverage, a history of effective capital allocation, and low cost structures.

Two that meet these criteria are Ultra Petroleum (NYS: UPL) and Southwestern Energy (NYS: SWN) . And after a closer look, I think I can safely say that Range Resources (NYS: RRC) fits this bill as well.

A company with a lot of Range
Range is an independent oil and gas company focused on natural gas. A leading producer of shale tight gas and conventional natural gas, as well as natural gas liquids and coal bed methane, the company boasts 1.8 million gross acres under lease and owns more than 5,000 producing wells.

Range has been a solid performer for the past decade, growing revenue per share by 12.9% annually and EBITDA by 7.3%. Last year marked the ninth consecutive year of production growth, which has averaged 17% annually since 2003. With a massive inventory and sizable reserves, the company expects to post double-digit production growth for several years to come.

Over the past few years, Range has improved its cost structure, as well as its balance sheet. It's one of the few companies that can survive with gas prices at very low levels. This is partly because of its broad exposure to "super-rich" fields, most notably in the Marcellus, where gas can be extracted at remarkably low cost, and also partly because the company has gained significant liquids exposure.

An inflection point in the company's history
The company believes it is currently at an inflection point. The organic growth rate projection, which earlier this year was estimated to be 30%-35%, has been bumped up as of the second quarter. It now expects to grow production near the higher end of that range, closer to 35%, as compared to its historical average of around 10% or less.

Capital efficiency has improved, too, as the company's large inventory continues to post high rates of return, despite the negative pricing environment for natural gas. Unit costs, including finding and development costs, depreciation, depletion, and amortization costs, and lease operating expenses, have also come down.

Promising Q2 results
For the second quarter, revenues and net income rose by 32.1% and 8.1%, respectively, from the prior-year quarter. The company's gross profit margin clocked in at a remarkable 81.30%, while the net profit margin came in at 12.5%. Both metrics are above the industry average.

Though the company's earnings have been somewhat unstable as of late, it still managed to grow earnings per share by 21.4% from the year-ago quarter. Return on equity improved slightly as well, though it still trails the industry average.

Most impressively, Range pulled off this solid performance despite rock-bottom prices for natural gas, which still makes up the bulk of its production. Production volume jumped 42% from the year-earlier period, averaging 719.3 million cubic feet equivalent per day (MMcfe/d).

Range's production mix was 80% natural gas, 14% natural gas liquids, and 6% oil, which is almost exactly the same mix as peer Chesapeake Energy (NYS: CHK) , but more gas-heavy compared to competitor Devon Energy (NYS: DVN) , which has much greater exposure to oil.

Final thoughts
Overall, I think this is a solid company with significant upside. It has long been a top performing stock, managing to stand upright even when its peers were beaten down due to rock-bottom gas prices, and I think this trend should continue. Moreover, it has consistently grown reserves and production, while containing costs -- a crucial combination for a successful energy company.

And if yesterday's gains were any indication, Range stands to benefit tremendously from a takeoff in natural gas prices. Despite a retreat in the broader market, shares of Range gained 2.6% Monday, along with peers Southwestern Energy and Cabot Oil & Gas, which jumped 3.8% and 2.3%, respectively, as natural gas futures rose for the second time in three days.

The only thing I'm not digging about Range is the price point. On a price-to-book and a price-to-cash-flow basis, both Ultra Petroleum and Southwestern Energy look more attractive. But if you buy into Range's inflection point thesis, the company's tremendous long-term growth potential should more than compensate for paying a slight relative premium for the stock now.

While Range has hedged 80% of its remaining production for 2012, the fact remains: Exploration and production companies are heavily dependent on commodity prices. But one oil and gas company has found a way to profit despite volatile prices. Read more about this little-known energy equipment provider ready to soar in The Motley Fool's special free report: "The Only Energy Stock You'll Ever Need." Don't miss out on this limited-time opportunity to discover the name of this under-the-radar company. Click here to access your report -- it's totally free.

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Fool contributor Arjun Sreekumar does not own shares of any companies listed above. The Motley Fool owns shares of Ultra Petroleum, Chesapeake Energy, and Devon Energy. Motley Fool newsletter services have recommended buying shares of Ultra Petroleum, Range Resources, and Devon Energy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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