Range Resources Corporation: Q3 2017 Form 10-Q Summary
Business context and reporting period
Range Resources is an independent U.S. exploration and production company focused primarily on natural gas, NGLs and oil properties in the Appalachian and North Louisiana regions. The company operates as one reportable segment. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Results include the North Louisiana assets acquired in the September 2016 Memorial Resources Development Corp. merger. The merger added approximately 77.0 million shares and approximately $1.2 billion of assumed debt.
Key financial and operating metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Natural gas, NGLs and oil sales | $507.5 million | $304.5 million | $1.573 billion | $738.6 million |
| Total revenues and other income | $482.2 million | $413.2 million | $1.932 billion | $846.4 million |
| Net income (loss) | $(127.7) million | $(42.0) million | $112.0 million | $(360.7) million |
| Diluted EPS | $(0.52) | $(0.23) | $0.45 | $(2.10) |
| Cash flow from operations | $189.2 million | $32.6 million | $600.5 million | $205.8 million |
| Total production growth | 32% | — | 35% | — |
Q3 total production was 1,986.2 MMcfe per day, including 1,322.2 MMcf per day of natural gas, 96,661 NGL barrels per day and 14,003 oil barrels per day. Nine-month production averaged 1,954.4 MMcfe per day.
Average realized price, including derivative settlements and third-party transportation costs, increased to $1.82 per mcfe in Q3 from $1.58 and to $1.93 per mcfe for the nine months from $1.52. Reported net loss margins were approximately negative 26% in Q3 2017 versus negative 10% in Q3 2016; the nine-month net margin was approximately 6% versus negative 43% in the prior-year period.
At September 30, 2017, total assets were $11.638 billion, stockholders’ equity was $5.537 billion and cash was only $529,000. Total debt was $4.012 billion before unamortized premium and debt issuance costs, or $3.982 billion net. Debt consisted primarily of $1.086 billion of bank debt, $2.877 billion of senior notes and $49.0 million of senior subordinated notes.
The revolving credit facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments, $1.1 billion outstanding, $285.8 million of undrawn letters of credit and $628.2 million of committed borrowing capacity. The company reported compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Q3 oil, gas and NGL sales increased 67%, while nine-month sales increased 113%, reflecting higher prices, production growth and the Memorial assets.
- Q3 net loss widened by $85.7 million, primarily because of an unfavorable $88.4 million derivative fair-value loss and a $63.7 million impairment charge on Oklahoma and Texas Panhandle properties.
- Nine-month results improved substantially to $112.0 million of net income from a $360.7 million loss, aided by higher realized prices, production growth and a $188.3 million derivative fair-value gain.
- Operating cash flow increased by $156.6 million in Q3 and $394.7 million for the nine months.
- Capital spending on natural gas and oil properties increased to $771.1 million for the nine months from $339.4 million. Total capital expenditures, including acreage, were approximately $822.7 million.
- Transportation, gathering, processing and compression expense increased 38% in Q3 and 40% for the nine months, primarily due to higher production and additional North Louisiana commitments.
- Direct operating expense per mcfe increased 25% in Q3 and 6% for the nine months, while G&A per mcfe declined 3% and 9%, respectively. DD&A per mcfe declined 8% in both periods.
- The company recorded $52.2 million of abandonment and impairment expense on unproved properties for the nine months, compared with $23.8 million in 2016, and $45.8 million of exploration expense, compared with $18.6 million.
- Firm transportation and gathering commitments increased by approximately $402 million over the next 22 years, through 2038.
Outlook, management commentary, risks and unusual items
- Management stated that the 2017 capital budget was $1.15 billion and expects operating cash flow, committed borrowing capacity, asset-sale proceeds and derivatives to satisfy near-term liquidity needs.
- Management expects an effective tax rate of approximately 38% for the remainder of 2017 before discrete items.
- Commodity prices remain the principal risk. Lower natural gas, NGL or oil prices could reduce revenue, cash flow, borrowing capacity, profitability and the ability to fund development capital.
- Derivative contracts cover approximately 136.0 Bcfe for the remainder of 2017, 319.5 Bcfe for 2018 and 24.1 Bcfe in 2019, excluding basis swaps. Hedging reduces downside exposure but limits the benefit of higher prices and creates counterparty and mark-to-market volatility.
- The derivative portfolio had an estimated net pretax loss of approximately $14.6 million at September 30, 2017. Derivative fair-value changes are recorded in earnings and can materially distort reported revenue and profit.
- Management identified potential additional impairment risk if commodity prices decline further. Goodwill was tested early because of a decline in market capitalization, but no goodwill impairment was recorded.
- Liquidity is dependent on internally generated cash flow and borrowings because cash balances are intentionally kept low. A 1% increase in short-term rates on floating-rate debt would increase annual interest expense by approximately $10.9 million.
- The company faces transportation, gathering, processing, infrastructure, NGL marketing and basis risks, including limited Appalachian ethane infrastructure.
- Pending matters include a Fair Labor Standards Act and Pennsylvania wage lawsuit and a Pennsylvania Department of Environmental Protection matter that could result in monetary sanctions exceeding $100,000. Management cannot predict the litigation outcome but does not currently expect ordinary-course matters to have a material consolidated impact.
- The company recorded $4.0 million of termination costs during the nine months, including severance and accelerated equity vesting, as part of cost-reduction efforts.
Important facts for investors to verify
- Whether production growth and higher realized prices can continue to generate sufficient operating cash flow to fund the approximately $1.15 billion capital program.
- The sustainability of the company’s $4.0 billion debt load, covenant compliance and $628.2 million of committed revolver availability.
- The sensitivity of earnings and cash flow to natural gas, NGL and oil prices, including the effect of existing hedges and derivative settlements.
- Potential additional impairments of proved and unproved properties if commodity prices or reserve expectations deteriorate.
- The long-term economic impact of the additional $402 million of transportation and gathering commitments through 2038.
- The outcome and potential financial exposure from the Pennsylvania litigation and environmental proceeding.
- The extent to which the reported nine-month income benefited from non-cash derivative fair-value gains, asset-sale gains and deferred compensation mark-to-market gains.