Morgan Stanley Resumes Coverage Of Range Resources With $45 Price Target

The acquisition provides Range Resources core acreage positions in both the Appalachian Basin and Northern Louisiana. Range estimates resource potential of over 5 Tcfe for the Louisiana assets in and around the Terryville field. The upcoming catalysts include results from three extension wells in Louisiana likely by end of 2016.

The brokerage believes Range Resources should extract greater value from Memorial's assets due to its strong track record of cutting costs and improving well performance. Further, Morgan Stanley has a bullish view on gas and NGL prices.

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"We see significant upside if gas and NGL prices rebound, balanced by greater balance sheet risk than peers if commodity prices remain weak in 2017," analyst Drew Venker wrote in a note.

"We see relatively balanced risk-reward for Range net of the balance sheet improvement: the stock offers deep NAV upside, but downside is greater than many of its Appalachia peers due to its higher leverage and premium multiple," Venker continued.

Resource Potential And Risk

Meanwhile, the analyst noted that Memorial's Louisiana assets have large resource potential, but greater risk than the Marcellus as much of the acreage position is untested — versus the Marcellus, which has been extensively drilled and is fully delineated.

After the Memorial deal, Venker expects Range's YE-2017 leverage to remain above peers on his strip price deck at 3.7x net debt to EBITDA vs. the Marcellus-Utica peers at 2.0x.

"If gas and NGL prices remain subdued next year, balance sheet concerns could quickly become investors' primary concern on RRC. However, in a higher price environment in 2017, any remaining leverage concerns will quickly dissipate," Venker added.

Shares of Range Resources closed Monday's regular trading at $37.15. Venker's price target of $45 represents a potential upside of 21 percent.

Full ratings data available on Benzinga Pro.