Shares of Range Resources (NYSE: RRC) sank on Friday and were down more than 10% at 2:30 p.m. EDT. Fueling the sell-off was a downgrade by Goldman Sachs, which cut its rating from buy to neutral.
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Not only did the Wall Street bank lower its rating but it also slashed its price target, cutting it from $35 all the way down to $20.50 per share. Driving the decision to downgrade is Goldman Sachs' view that Range Resources lacks exposure to improving local Appalachian prices, which it sees as a negative for the stock. Incidentally, it also downgraded fellow gas producer Rice Energy (NYSE: RICE) today, which also saw its rating fall from buy to neutral. That move, however, was due more to valuation since Rice Energy had outperformed rivals after jumping more than 25% this year on the heels of EQT Corp.'s (NYSE: EQT) agreement to acquire the company.
Goldman's concern with Range is that while upcoming natural gas pipeline completions should boost localized prices in the region, rivals are better positioned to capture those higher prices due to the location of their assets. As a result, the company appears likely to underperform regional rivals in what looks to be a lower-for-longer gas price environment. One evidence of this impact is Range's watered-down forecast for 2018 since it now only sees output rising 10% to 20% next year versus its prior outlook for 20% growth because it now expects that gas will be less than the $3.25 it needs to fuel a higher growth rate.
With today's plunge, Range's stock has been cut in half this year due in part to the fact that it needs higher gas prices to fuel faster growth. Consequently, it has fallen behind rivals that can boost production by a larger clip at lower prices. That said, given that the company's valuation has come down so sharply this year, Range offers investors who are bullish on gas with an opportunity to scoop up shares at what could be a bargain price.
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