Last week the stock market once again had some wild ups and downs, led mostly by volatile moves in the bond market. And while the start of the week was ugly, the action Friday was impressive – though the situation in the Middle East may throw those good vibes from Friday right out the window. By week’s end the S&P 500 had gained 0.5%, the Dow had fallen 0.3%, and the Nasdaq had risen by 1.6%.
The Stock – Range Resources (RRC)
Why the Strength
After trading south of $3 for nearly all of 2023, natural gas inventories are rising less than expected and demand remains steady, which has led to the commodity perking up to its highest level since January in the $3.35 area, which is still relatively “low” compared to the past few years.
That bump is a good thing for Range Resources, which looks like the top natural gas play out there: It’s a top 10 gas and natural gas liquids producer thanks to more than half a million acres in Pennsylvania, and because it has mostly contiguous locations (leading to lower CapEx compared to its peers) and buoyant wells, as well as having diverse end markets (a quarter goes to LNG, another quarter to the Gulf Coast, 30% to Midwest, etc.), its costs are amazingly low, with about 2,000 undeveloped drilling locations that have a breakeven natural gas price below $2, with an overall current breakeven near $1.25! Indeed, at $2.50 natural gas, Range estimates free cash flow would be positive (a bit less than $1 per share), while at $4, that figure would balloon to $3.50 per share or more.
To this point, shareholder returns have been modest, with that free cash flow going toward debt reduction (down to $1.6 billion of net debt now vs. $2.7 billion at the end of 2021), but now that debt is close to its goal of $1.5 billion, buybacks (share count is off 3% from a year ago) and dividends (1.0% yield) could pick up in a big way if natural gas prices really move. All told, Range Resources looks like a solid high-reward, reasonable-risk play, with a lot of upside if the recent upmove in gas continues.
Technical Analysis
RRC peaked in mid-2022 with most energy stocks and slipped for many months, finally bottoming out in February and March of this year. The action after that didn’t offer any obvious change in character, but a gradual strengthening despite rock bottom natural gas prices. The August peak of 34 led to a more modest dip (14%), but shares saw growing-volume support near 30 two straight weeks and have quickly surged back to their highs. Stop — 30
The Covered Call Trade
Buy Range Resources (RRC) Stock at 35, Sell to Open November 35 Strike Calls (exp. 11/17) for $2, or a Net Price of 33 or less
Static Return: $200 per covered call (6.06%)
Breakeven: 33
Covered Call Return (if assigned): $200 per covered call (6.06%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 33 or less. (In this case 35 minus 2 = 33. Or another example is you could pay 34.80 for the stock and sell the call for 1.80, which also equals 33)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on October 17, 2023.
