Notable Calls

Range Resources (NYSE:RRC) the recent high-flying Marcellus play is getting downgraded at Canaccord to SELL from Hold with a $60 price target (prev. $61)

According to Canaccord, over the past month, RRC has outperformed the sector by over 20% on apparent takeout speculation. They believe RRC reflects a ~30% buyout premium even though a buyout in their view seems increasingly unlikely. RRC trades at a 14x firms ’12 EBITDA estimate – an almost 140% premium to the sector.


THE DETAILS:

As Range should spend ~60% beyond cash flow next year, we see little potential to accelerate value creation further within the current equity capitalization. The bull case is that the company’s assets are worth more in the hands of a better-capitalized enterprise.

However, we believe Marcellus activity is governed by infrastructure, not capital. In southwest Pennsylvania, limited ethane capacity should preclude further acceleration in liquids-rich production until ’14. In northeast Pennsylvania, a material increase in dry gas activity appears incompatible with the acute regional pipeline constraints.

In time, the Utica Shale is likely to compete with the Marcellus, further amplifying regional price degradation and infrastructure constraints. Based on our conversations, one reported suitor may already have too much on its plate given its previous Appalachian Basin acquisition. Additionally, that same reported buyer all but denied the talk.

Range should exhibit 3% production growth in ’11. Our ’12 production growth estimate of 43% is significantly above company guidance of 25-30%.

Notablecalls: RRC has been on tear of lately helped by all sorts of takeover rumours and results that revealed better than expected production.

The thing is up almost 50% from its Oct 4 low.

Now we have Canaccord throwing cold water on the takeover speculation saying potential suitors have already too much on their plates. It appears one one the suitors denied their interest outright.

Yet the thing trades like it's going to be taken over any moment now.

Don't get me wrong, RRC seems like a powerful Marcellus story that may have legs for the next 10 years. It's just that the stock may have gotten somewhat ahead of itself.

One to watch on the short side in the n-t. Could trade below $70 level once the fast money bails.

RRC has a history of doing secondary offerings so I wouldn't be surprised if we saw one with the stock so strong of late.