RRC   220916C00030000

Range Resources Corp

Natural gas equities simply do not reflect the current commodity price outlook. Take $RRC for example ... since the end of March ... natural gas prices are up >50%, yet $RRC is essentially flat (slightly down if looking at today's share price). And it's not just the front of the futures curve, the entire long-term futures curve is up significantly - so the both the near- and long-term cash flow outlooks, and therefore the value of the company's assets, have increased substantially.

In the short term, natural gas prices are surging due to low storage levels compared to normal (-20% vs 1yr ago and -16% vs 5yr average) ... weak supply recently (late winter storms hitting northern part of U.S.) ... bullish "shoulder season" weather (hot in south, cold in north) ... and of course, very high prices for coal and international LNG. But more importantly, long-term prices are >$4 which is the highest they've been in a decade, reflecting the reality that demand for U.S. natural gas will increase significantly over the coming years in order to displace Europe's reliance on Russian natural gas, and also demand growth as the world continues to transition away from coal. High prices will be needed for supply to meet that growing demand. And that supply growth may not even be possible, since natural gas can only be transported domestically via pipe, and there unfortunately is extreme resistance to building new pipes (especially when they cross state lines and have to deal with Fed gov't). Ironically, this helps producers because it constrains supply and keeps prices high, so they make more money. It's the consumer who suffers, sadly.

At current futures pricing, these stocks are trading at >20% free cash flow yields over the next couple years and long-term % would be in the high teens. In other words, these companies essentially generate their entire market cap just with free cash flow in only ~5 years, and many have share buybacks in place, supporting share prices and creating shareholder value by repurchasing shares at a discount to intrinsic value. Compare that to the S&P 500 which has an average FCF yield closer to 5% ... meaning these stocks would need to increase 4x to trade at the same valuation as the rest of the market ... not saying that'll happen, but I think the gap should narrow significantly, so either share prices increase or natural gas prices decrease.

The other consideration is just that energy is still only ~4% of the overall market, but that % is growing - historically, energy has been double that. Portfolio managers cannot continue to be underweight energy as it significantly outperforms other sectors and becomes a larger and larger % of the benchmark. With rising interest rates, investors need to be looking for companies that actually make money (cash flow), and there's no "cheaper" sector right now that I'm aware of than natural gas E&Ps.

These trades are September call options, so short-term focused. I think at some point over the coming weeks, assuming prices hang in there, natural gas equities will better reflect the current cash flow outlooks. I chose RRC because it has been the biggest under-performing natural gas equity over the last 6 weeks (by a pretty large margin), which doesn't make sense given they are less hedged than most natural gas producers and thus participate more in rising prices, so I'm hoping for a little catch-up trade. RRC is also the most capital efficient operator and has the longest core inventory life of good wells in the U.S. natural gas sector, so I think they make a great long-term investment as well.

My $RRC trades

Traded RRC $30 Calls

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