Range Resources

We have published an outlook on 2035 North American natural gas demand, which we see growing to 169 billion cubic feet per day. 

Why it matters: Our Henry Hub midcycle price is the most powerful driver for natural gas producers. Increasing it greatly improves our outlook for the firm's earning potential in a normalized environment. Higher gas prices should boost profit margins for coal and nuclear power generators. Gas demand will be robust over the next decade, driven primarily by liquefied natural gas, which we expect to grow to a quarter of all US demand, while gas power generation grows at a 3% CAGR through 2035. The market has recently soured on gas producers, as a wave of cheap gas coming from the Permian oil patch hits the Gulf Coast. We see this supply as a material near-term pressure, but ultimately insufficient to meet the growing demand.

The bottom line: We are raising our midcycle Henry Hub price to $3.70 per thousand cubic feet from $3.30/mcf. As a result, our fair value estimates for natural gas producers increased by about 30% on average. We see Antero Resources and Expand Energy as the most undervalued. As a higher-cost producer, Expand's valuation increased by 40% from the midcycle price increase. Firms in our coverage are generally low-cost and higher quality, resulting in most receiving a more modest but still substantial 20%-30% increase. Most now trade in 4-star territory.

We are raising our fair value estimate for Range Resources to $46 from $37 after increasing our assumed Henry Hub midcycle natural gas price to $3.70/mcf from $3.30/mcf. Growing demand for natural gas in the US, particularly from LNG exports and power consumption, drove the increase to our outlook. We expect US natural gas demand to grow from 107 bcf/d to 148 bcf/d by 2035, which will require higher-cost marginal supply.

We assume oil (West Texas Intermediate) prices in 2026 and 2027 will average $81 and $72 per barrel, respectively. In the same periods, natural gas (Henry Hub) prices are expected to average $3.10 and $3.49 per thousand cubic feet. Terminal prices are defined by our long-term midcycle price estimates (currently $65/bbl Brent, $60/bbl WTI, and $3.70/mcf natural gas).

Our revised fair value estimate corresponds to enterprise value/EBITDA multiples of 7.8 times and 7 times for 2026 and 2027, respectively. Our production forecast for 2026 is 2,345 thousand cubic feet of natural gas equivalent per day, which is in line with management's guidance. That drives 2026 EBITDA to $1.5 billion, and we expect free cash flow to reach $791 million in the same period. Our 2027 estimates for production, EBITDA, and free cash flow are approximately 2,656 mmcfe/d, $1.7 billion, and $943 million, respectively.

We believe Range Resources does not have a durable economic moat in developing its gas and liquids assets. Moats are quite rare in the exploration and production industry; while we see Range as having some advantages, such as a first-mover edge in the Marcellus Basin, we are not confident that the company holds a long-term competitive advantage. A key point is that the breakeven price for natural gas is very low for oil-focused firms. Oil producers benefit from low gas breakeven costs because gas is a byproduct of their operations, known as “associated gas.” It has little economic value for them, and they often sell it at negative prices within the basin to avoid flaring regulations. This dynamic leads us to have low confidence that Range or any Appalachian producer can maintain a competitive advantage.

Hydrocarbons like oil, natural gas liquids, and natural gas are commodities, so they don’t exhibit pricing power, switching costs, or other moat sources that depend on differentiation or cornering a market niche. Range Resources primarily focuses on extracting natural gas and NGLs; about two-thirds of its production is tied to natural gas.

For context, one barrel of oil equivalent is equal to 6 MMBtu of natural gas, so if natural gas trades at $3.70 per MMBtu at the Henry Hub benchmark and crude oil trades at $60 WTI, oil is nearly 3 times more valuable than gas. E&Ps tethered to natural gas can overcome this disparity with superior unit economics, long-lived reserves, and narrow price differentials to leading benchmarks like Henry Hub.

Comparing gas-weighted companies with oil-weighted companies would be a mistake. The macroeconomic drivers for the two commodities are mostly decoupled. Natural gas is a regional market dictated by local weather patterns, domestic storage inventories, and LNG export capacity, whereas oil is driven by global supply and demand. The severe seasonality of gas pricing forces gas-weighted producers to maintain aggressive hedging books, with some carrying books in which more than 50% of yearly volumes are hedged. These hedges allow the firm to have a clearer view on their production programs throughout the year, leading to more stable cash flows. Importantly, as oil production grows in the US, so does natural gas production in the form of associated gas, which undercuts the economics of gas-focused producers.

We believe Range has an attractive portfolio of Marcellus assets with a heavier NGL mix than that of a typical gas player. This should allow it to achieve solid unit economics over time, as these NGLs sell at premium prices to dry natural gas. However, these NGLs also carry higher gathering, processing, marketing, and transport costs due to the added complexity of separation (called fractionation) and transportation. Overall, we are unconvinced that this higher mix carries a structural competitive advantage over peers.

As a producer of a regional commodity, Range’s long-term contract mix with midstream operators like Energy Transfer determines its unit economics. These long-term contracts allow it to export NGLs to the Marcus Hook Port in Eastern PA, giving it close access to international export pricing.

Transportation distance is a key factor affecting these companies’ GPMT costs. GPMT costs represent the total cost of the physical supply chain for moving molecules from the well to the market. These costs are typically lower for streams of “dry gas” (gas without NGLs in the mix) than “wet gas,” which includes the added steps of fractionation and, in many cases, cryogenic cooling. For instance, dry gas players have significantly lower GPMT costs because they do not possess an NGL-heavy mix in production.

Range relies solely on third-party midstream companies to handle its volumes. Contracts with third parties are typically take-or-pay, meaning the producer pays the midstream at least a minimum volume, regardless of whether it meets the threshold. The contracts often last for the life of the lease on the production sites, which can last decades.

Furthermore, Range boasts the deepest drilling inventory in its peer group, which investors tend to award a premium multiple, all else being equal. A longer inventory life reduces exploration uncertainty and mitigates the need for risky acquisitions.

The quantitative debate with Range’s moat lies primarily in what the analyst assumes is a fair invested capital base. If you include the impairments from Range’s merger with Memorial, Range’s return on invested capital profile looks like that of close Appalachian peers. We contend that it would be a mistake to add the impairment charges back to the invested capital base, because they do not have any bearing on the recreation of Range’s asset profile today. The Memorial assets were almost entirely based in the Terryville field of North Louisiana. Range is a pure Pennsylvania operator today. The management team in charge of the failed initiative is entirely different at the CEO, COO, CFO, and chairman of the board positions.

Even with a history of poor M&A, we assert that Range’s impairments should not be added back because its inventory life precludes the need to expand beyond its Marcellus assets over at least a 10-year timeframe. Notably, Range has not participated in any M&A activity since the Memorial deal.

Given the very strong fundamentals for natural gas demand over the coming decade (Data centers, power, LNG exports, petrochemicals, heating, we believe Range is well-positioned to earn its cost of capital.

As an early entrant in the Marcellus, Range Resources has a big, blocky acreage position with plentiful undrilled low-cost acreage.

Growing in-basin demand from the US data center buildout will allow Range to capture higher pricing while keeping transportation costs low.

With a footprint in both dry gas and liquids-rich areas, management has the flexibility to shift capital around when commodity prices fluctuate.

Range Resources has optimistic views about its own valuation, which could lead management to buy back stock at top-of-cycle price levels.

It is politically difficult to construct new long-haul pipelines in the Appalachia region, restricting Range Resources' production growth.

Range has an extensive inventory life of over 30 years, which may prove less valuable in the long run if alternatives become more competitive.