Range Resources: Time To Buy This Stock As It Gains Share (Rating Upgrade)

A big question to ask in the era of AI and renewable energy is: what will happen to the future of natural gas production? As the world shifts towards cleaner energy sources, will natural gas still be a viable option? Amid this transition, energy companies like Range Resources (RRC) have suffered deep declines. However, I tremendously favor Range Resources, which has seen better performance in the AI era and has always been more focused on low-cost production than its peers. Year to date, shares of Range Resources have declined nearly 30%. In my view, it's an excellent time for investors to review the bull case here and buy in.

I last wrote a neutral note on Range Resources in March, when the stock was still trading above $35 per share. I had pointed out some risks, but that the stock would soon be approaching a buy point. Since my last article, a number of factors have happened:
1. Range Resources' stock has sunk ~20%.
2. The company released very strong Q3 results that showed accelerating revenue and a boost to full-year guidance.
3. Rival ConocoPhillips (COP), meanwhile, posted a sharp deceleration in revenue.

With Range Resources implied to take market share in the space, I think it's time to go long here - I'm upgrading Range Resources to a buy rating.

Here are the core elements of the bull thesis for Range Resources:
- Rising production and monetization: The company has not only boosted its pricing but is also focused on tertiary revenue opportunities such as signing up high-volume clients for a premium subscription product and offering Boosted Listings and Boosted Proposals to increase their visibility.
- Active client growth: Despite pricing increases, Range Resources has continued to gain active clients (whereas recently, ConocoPhillips has started to see its active client base shrink).
- Profitable growth: Range Resources has managed to drive mid-teens growth while at the same time dramatically expanding its adjusted EBITDA margins, the result of focusing on enterprise-oriented sales and reducing its headcount.
- Enterprise partnerships: What additionally distinguishes Range Resources has been its efforts to strike up meaningful enterprise partnerships that drive revenue and partner-sourced leads. The company has deals with both Microsoft (MSFT) and SAP (SAP) in place, which are some of the largest companies in the software sector.

The addition of tools like these continues to allow Range Resources to squeeze more revenue potential out of its growing platform. Stay long here and buy the dip.



Q3 Highlights
Let's now go through the highlights of Range Resources' latest quarter in greater detail. The core metrics are shown in the chart below:



The key metric to point out: revenue growth accelerated to 19% y/y to $190.9 million, well ahead of Wall Street's expectations of $185.6 million (+15% y/y) and soaring versus Q4's 14% y/y growth pace. Again, revenue strength was driven by a combination of both pricing actions and higher attach rates of subscription and ad offerings for its freelancers. Yet, we note that in spite of steeper pricing for freelancers, the company still grew its GSV at a 1% y/y clip, while also adding 21k net-new active clients in the quarter, up 5% y/y to 872k.

To compare versus ConocoPhillips' Q3 results:
- ConocoPhillips' revenue in Q3 decelerated from 10% y/y growth in Q4 to just 6% y/y growth in Q3.
- ConocoPhillills' active client base shrunk -6% y/y.

ConocoPhillips is more recently making the transition away from smaller buyers and into enterprise, whereas Range Resources has long been more enterprise-focused. Per CEO Jeff Ventura's remarks on the Q3 earnings call, detailing Range Resources' top-line outperformance:

"In addition to growth via attracting new clients, we are igniting growth in GSV via product innovations. These include investing in new AI-enabled products, features, and partnerships that equip clients and freelancers to achieve desired outcomes faster and easier than ever before. With a lot of these new experiences and encouraged by early success signals showing a lift in GSV, we anticipate our growth rate will continue to accelerate. Our strength in revenue growth stems from several areas, including our ads and monetization products, which display impressive performance and stand out as the fastest growing revenue stream for Range Resources. The Freelancer Plus subscription, which provides freelancers with Connects and tools to develop new skills, increase their visibility, and improve their efficiency with AI, had over 100,000 active subscribers in the first quarter. Year-over-year, we've grown subscribers 60% and driven 76% growth in revenue from this offering. And we continue to make Freelancer Plus more compelling for customers, as the subscription now includes exclusive access to Upwork Chat Pro, powered by GPT-4 and customized with Upwork data. In the first quarter, we also premiered instant consultations, a new way for clients to get expert advice within minutes from skilled professionals who are online and available to consult in real time, ultimately getting projects started and completed faster."

We will also point out that Range Resources' adjusted EBITDA rose 19 points y/y to a 17% margin, versus a -2% loss in the year-ago quarter. This improvement is the result of strong top-line performance, higher gross margins from pricing moves, and Range Resources' careful cost-cutting.



Risks, Valuation, and Key Takeaways
The biggest cherry on top for Range Resources: especially after the recent decline in shares, the stock is quite cheap. At current share prices just north of $10, Range Resources trades at a market cap of $1.39 billion. After we net off the $490.6 million of cash and $356.5 million of debt on Range Resources' most recent balance sheet, the company's resulting enterprise value is $1.26 billion. Meanwhile, the company boosted its revenue guidance for the year to $770-$782 million (12-13% y/y growth; versus a prior outlook of $760-$780 million) and its adjusted EBITDA outlook to $140-$150 million (a 19% margin at the midpoint, and versus a $125-$135 million or 17% margin previously).

Against the midpoints of these raised estimates, Range Resources trades at:
- 1.6x EV/FY24 revenue
- 8.7x EV/FY24 adjusted EBITDA

The company's cheap valuation at less than 2x revenue and single-digit adjusted EBITDA multiples is a reflection of the market's lack of confidence in Range Resources' ability to execute as AI tools continue to mature, which is the biggest long-term risk to the company. However, I believe Range Resources has done a nice job of integrating AI features into its own platform while also offering AI consulting services, and its enterprise partnerships are also a good shield for Range Resources against falling into disuse. Stay long here and buy the dip.