To my active followers, I am now back from a writing sabbatical, as I was deeply engaged in what turned out to be a fourteen month corporate consulting role. Now that that engagement has ended, I am getting back on the horse and intend to get back to writing on Seeking Alpha. During my sabbatical, I really missed writing, but I was still actively reading research published by other SA authors.
As I try to get back on the horse, so to speak, I need to re-acclimate and rediscover my writing sea legs. However, rest assured, during my time away, in my free time, I was as actively engaged investing my portfolios and very closely watching and observing markets. For anyone afflicted with this investing obsession, and I have a life long condition, you simply can’t shut off being a student of the market.
In today’s piece, I am going to share what I believe to be an extremely compelling bond investment in Range Resources (RRC). I have been a long time bull on both Range Resources and Antero Resources (AR) and own a fair amount of Range and Antero equity. However, today I want to showcase how ridiculously mis-priced Range Resources’ June 2021 unsecured bonds are and why yield investors might want to pick up some bonds.
Enclosed below is the specific bond I am referring to the RRC 5.75% 6/1/2021 bond (cusip:75281AAM1)
As you can see, as of this past Friday afternoon, April 3rd 2020, a relatively small quantity of RRC 5.75% 6/1/2021 bonds were offered at Fidelity. However, given the fear in the overall market as well as energy markets, I would venture to guess that if investors put a good to cancelled bid out they might be able to locate some additional bonds, at these comparable prices.
My investment thesis is really straight forward and super compelling.
In early January 2020, Range Resources was smart enough to tap the unsecured credit markets. They issued $550 million of 9.25% 2026 debt at par. At that time, this was considered expensive financing, given the nearly double-digit coupon. Fast forward to today and this move looks awfully astute, as this debt has a two year call option.
Range Issues $550 million of 9.25% 2026 Debt (callable in two years)
Moreover, by issuing the 2026 debt, Range was able to tender and buy back most of its 2021 debt as well as eliminate a portion of its 2022 debt!
Because of this foresight, Range’s 2021 bonds are almost completely de-risked.
As you can see below from Range’s most recent investor presentation, there is only $72 million (face value) of 2021 Range debt outstanding. Moreover, as of March 27th, Range announced that its Bank Credit Facility was reaffirmed.
(As I very closely read all Seeking Alpha articles about Range Resources and Antero Resources, within the comments sections of some articles, I observed and sensed from the subtext that some readers were fearful that Range’s bank line would be haircut or outright pulled. This is a indicator of how fever pitched the fear is as energy investors have been taken to the woodshed over the past few years.)
RANGE RESOURCES CORPORATION (NYSE: RRC) today announced that its $3.0 billion borrowing base was reaffirmed under the Company’s credit facility in accordance with the redetermination process. Aggregate bank commitments under the credit facility remain at $2.4 billion. At year-end 2019, Range’s liquidity was approximately $1.7 billion.
Next, we need to understand that given the extremely low strip price environment for 2020, Range’s management team has reduced its 2020 capital expenditure budget from $520 million to $430 million.
FORT WORTH, Texas, March 31, 2020 (GLOBE NEWSWIRE) — RANGE RESOURCES CORPORATION (NYSE: RRC) today announced that it has reduced its 2020 all-in capital budget from $520 million to $430 million. Range still expects to maintain production at approximately 2.3 Bcfe per day for 2020.
Finally, as of December 31, 2019, Range has hedged roughly 60% of its 2020 natural gas production at decent prices (well above the current commodity strip) and has hedged most of its condensate production at very favorable prices.
How the Math Works
Income investors are able to purchase a 14 month piece of unsecured debt at $0.80 on the dollar (perhaps slightly less). In the meantime, if purchased early next week, they will earn almost two months of accrued interest ((April 2020 and May 2020) as the next coupon payment is on June 1st) and then earn one more coupon payment on December 1, 2020. On June 1, 2021, I fully expect investors will get paid back par.
Enclosed below is how the math works. If you buy this bond for $0.80 on the dollar then you will receive the accrued interest on June 1 (for the two month you owned it as you have to buy the bond with accrued interest), a final coupon payment on December 1, 2020, and then par on June 1, 2021. As this is a 14 month piece of paper, I am going to keep the annualized return simple (even though the investment period is 14 months) as you would earn a 29.8% total return on your capital!
If we put it all together, there are only $72 million worth of Range 2021 debt outstanding, the company’s $2.4 billion credit facility was affirmed on March 27, 2020, the company’s FY 2020 capital expenditure guidance has been reduced to conserve cash (from $520 million to $430 million), and 60% of the company’s 2020 natural gas production and most of its 2020 condensate production are hedged at favorable prices.
For context, in both FY 2018 and FY 2019, Range delivered its production guidance within budget (2019 CAPEX was $728 million or $28 million under budget and 2018 CAPEX was $910 million or $31 million under budget). The dramatic reduction in CAPEX from FY 2018 to FY 2020 guidance is the proof in the pudding that all of Range Resources’ firm transport commitments have been met and that the company owns great shale rock. And although I plan to cover this aspect in a future piece, Range Resources is a low cost producer that has prolific reserves (hence why its bank line was reaffirmed in this horrible commodity price environment).
Notwithstanding the fact that I haven’t written an investment piece in fourteen months, I hope it is crystal clear why Range Resources’ 2021 unsecured bonds are super compelling, at $0.80 on the dollar, especially in a world were a 2-year U.S. treasury bond only fetches a yield of 25bps.
Disclosure: I am/we are long RRC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long the equity as well as RRC 2021 and 2022 bonds.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.