Ranger Oil Stock: Higher Net Debt Expected at End of 2022 (ROCC)

Imaginima

Ranger Oil (NASDAQ: ROCC) increased its production forecast and capital budget after making more targeted acquisitions. It also instituted a small dividend and increased the size of its share buyback program.

These items increased Ranger’s projected net year-end debt at around $500 million (depending on its stock buyback pace), which is substantially more than I had scheduled for May. However, Ranger’s leverage still looks reasonable, at around 0.5x annualized 2H 2022 EBITDAX. At $38, it appears to be reasonably priced for a long-term (post-2022) $70 WTI oil scenario, and if oil averages $80 (current band) in 2023, that would add 2 to $3 at its estimated value.

More purchases

Ranger continued to make acquisitions during the second quarter of 2022, mentioning that it had signed agreements for transactions involving a combined purchase price of approximately $110 million during the quarter.

These acquisitions were primarily comprised of additional working interests in existing wells operated by Ranger as well as contiguous acreage (both producing and undeveloped). The acquisitions were expected to add approximately 1,600 BOEPD (79% oil, 13% NGL and 8% natural gas) to production. This boosted Ranger’s exit rate in Q2 2022 (pro forma for transactions) to over 42,000 BOEPD (including 30,000 barrels of oil production per day)

Additional expenses

Ranger maintains its investment forecast for its initial 2022 development plan at $425 million, which is at the high end of its original forecast. It also adds $30 million for additional D&C investments due to ramping up development activities as well as its acquisition of additional working interests and its ability to make longer branch lines (from the acquisition of contiguous area). The additional capital is expected to increase production volumes in late 2022 and into 2023.

Ranger is using a third rig in Q3 2022, but plans to return to two rigs in Q4 2022. It is also evaluating the possibility of using a third rig in 2023.

Outlook 2H 2022

Based on the midpoint of its updated full-year forecast, Ranger expects average total production of approximately 44,200 BOEPDs in the second half of 2022, including approximately 31,700 barrels per day of oil production. This appears to be mid-single-digit production growth over Ranger’s Q2 2022 output rate pro forma production, with Q4 2022 production expected to be higher than Q3 2022 production.

The current band for the second half of 2022 is around $90 of WTI oil, and at that price Ranger is expected to generate $614 million in oil and gas revenue (before hedging). Ranger’s 2022 2H hurdles have an estimated value of minus $50 million.

Barrels/Mcf $ per barrel/Mcf (realized) millions of dollars
Oil 5,837,500 $90.00 $525
NGL 1,178,368 $31.00 $37
Natural gas 6,738,792 $7.70 $52
Coverage value -$50
Total income $564

With approximately $250 million in capital expenditures in the second half of 2022, Ranger is expected to end up with $169 million of positive cash flow over that period.

millions of dollars
Rental operating expenses $47
Collection, processing and transport $22
Taxes on production and ad valorem $38
G&A in cash $17
Cash interest $21
Capital expenditure

$250

Total expenses

$395

Ranger Debt Situation

Ranger had net debt of $537 million at the end of the second quarter of 2022. It also completed various transactions in July with a net outlay of $81 million. Ranger’s current dividend payments are approximately $3 million per quarter. It also spent about $21 million on stock buybacks in July 2022.

So Ranger is now expected to end 2022 with net debt of $476 million, before any further share buyback spending. This is approximately 0.5x Ranger’s EBITDAX (based on annualized 2H 2022 EBITDAX). At the end of July, Ranger had $94 million of capacity remaining for its share buyback program.

Notes on assessment

I now estimate the value of Ranger at around $38 per share long term (post 2022) $70 WTI oil and $4.00 NYMEX gas. This rises to around $40-41 per share if oil and gas prices remain at current levels through the end of 2023 before returning to those long-term prices.

This valuation estimate is based on 2022 2H production levels, which appears to be roughly what Ranger expects to maintain in 2023 with a dual-platform development program. Ranger noted that it expects mid-to-high single-digit production growth with two platforms, and Ranger’s 2H 2022 production levels are expected to be approximately 7% higher than its average production of 2022.

If Ranger opts for a three-platform development program instead, it expects low to medium teen production growth in 2023, which translates to approximately 47,000 BOEPDs in average production in 2023.

Conclusion

Ranger could end 2022 with around $476 million in net debt if it stops doing stock buybacks, although it has been quite active in that area. Ranger has also been spending on add-on acquisitions, so its debt level will end up being higher than I had previously anticipated. With its increased production, however, Ranger’s debt situation remains reasonable. At its current price, Ranger appears to be a fair price for long-term (post-2022) WTI oil at $70, although if band prices remain higher for 2023 (currently around $80 WTI oil), that would add $2-3 to Ranger’s estimated value. (at around $40 to $41).

Ann J. Cox