Range Resources Corporation — FY2017 Form 10-K Summary
Business Context and Reporting Period
Range Resources Corporation is a U.S. independent producer of natural gas, natural gas liquids (NGLs), crude oil and condensate. Its principal operating areas are the Marcellus Shale in Pennsylvania and the Lower Cotton Valley formation in North Louisiana. The filing covers the fiscal year ended December 31, 2017, with comparisons primarily to 2016.
Range reports one operating segment and manages its properties as a single enterprise. Approximately 79% of 2017 production and 91% of year-end proved reserves were associated with the Appalachian region, principally the Marcellus Shale.
Key Financial and Operating Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Natural gas, NGLs and oil sales | $2.176 billion | $1.197 billion | +82% |
| Total revenues and other income | $2.611 billion | $1.100 billion | +137% |
| Net income (loss) | $333.1 million | $(521.4) million | Returned to profitability |
| Diluted earnings per share | $1.34 | $(2.75) | Improved |
| Cash flow from operating activities | $816.3 million | $387.1 million | +111% |
| Capital additions to natural gas and oil properties | $1.149 billion | $466.3 million | +146% |
| Average production | 2,008.9 Mmcfe/day | 1,542.1 Mmcfe/day | +30% |
| Total proved reserves | 15.3 Tcfe | 12.1 Tcfe | +26% |
Average realized price including derivative settlements and third-party transportation costs was $1.95 per mcfe, compared with $1.74 per mcfe in 2016. The reported average realized price before third-party transportation costs was $2.99 per mcfe, compared with $2.74 per mcfe in 2016.
- Production consisted of 490.3 Bcf of natural gas, 35.7 million barrels of NGLs and 4.8 million barrels of crude oil and condensate.
- Natural gas represented approximately 67% of proved reserves; NGLs represented 30% and crude oil 3%.
- Proved reserves were 55% developed and 45% undeveloped. The reserve life index was approximately 19 years.
- PV-10 of proved reserves was $8.1 billion, compared with $3.7 billion in 2016. The after-tax standardized measure was $7.2 billion, compared with $3.5 billion.
- Direct operating expense was $134.3 million; transportation, gathering, processing and compression expense was $761.2 million; DD&A was $625.0 million; and interest expense was $195.7 million.
- Debt at year-end was $4.109 billion, consisting of $1.208 billion of bank debt, $2.852 billion of senior notes and $48.6 million of senior subordinated notes. Debt represented 41.6% of capitalization.
- Year-end cash was only $0.4 million, but management reported approximately $507.6 million of liquidity, including available borrowing capacity under the credit facility.
Material Changes Versus the Prior Comparable Period
- Higher production volumes and improved commodity prices drove the increase in product sales and operating cash flow. Production growth also reflected a full year of contribution from the 2016 Memorial Resource Development merger.
- Derivative fair value income was $213.4 million in 2017, compared with a $261.4 million loss in 2016. This mark-to-market item materially affected reported revenue and earnings and is not equivalent to cash proceeds.
- Range recorded $269.7 million of abandonment and impairment expense for unproved properties, compared with $30.1 million in 2016, primarily reflecting acreage reviews and expected lease expirations.
- Proved property impairment increased to $63.7 million from $43.0 million, related to Oklahoma and Texas Panhandle properties.
- General and administrative expense increased to $233.4 million from $184.8 million, including $30.8 million of accelerated stock-based compensation associated with a succession-plan enhancement.
- Transportation, gathering, processing and compression expense increased to $761.2 million from $565.2 million, reflecting production growth and third-party infrastructure commitments.
- Range completed divestitures producing approximately $72.5 million of proceeds, including sales of Texas Panhandle and Oklahoma properties. The company stated that it had divested more than $1.2 billion of non-strategic assets over the prior three years.
- The Tax Cuts and Jobs Act produced a provisional one-time tax benefit of approximately $334.0 million through the remeasurement of deferred tax balances. The company had not completed its accounting for all tax effects at filing.
Guidance, Outlook, Risks and Unusual Items
Management approved a 2018 capital budget of $941.2 million, excluding proved property acquisitions, with approximately 85% allocated to Appalachia. The budget was expected to support approximately 11% production growth, with spending targeted at or below internally generated cash flow. Range planned approximately 100 net Marcellus wells and approximately 10 net North Louisiana wells, compared with approximately five average rigs in Appalachia and one average rig in North Louisiana.
Management emphasized liquidity preservation, financial strengthening, disciplined organic investment, improved operating efficiency and continued use of commodity derivatives. The company stated that 2018 requirements could be funded through operating cash flow, asset sales, credit-facility borrowings and potentially additional debt or equity financing if necessary.
- Commodity prices remain the central risk. Natural gas accounted for approximately 67% of proved reserves, and sustained price declines could reduce revenue, cash flow, reserves, borrowing capacity and asset values.
- The revolving credit facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments, $1.2 billion outstanding debt and $281.4 million of letters of credit. The facility matures in October 2019 and is subject to annual and event-driven borrowing-base redeterminations.
- Contractual obligations included approximately $8.5 billion of transportation, gathering and processing commitments, in addition to debt, leases and asset-retirement obligations. A contingent agreement could add transportation commitments for 400,000 mcf per day through 2038.
- Debt maturities include approximately $1.211 billion of bank debt due in 2019, with additional note maturities beginning in 2021.
- Derivative contracts covered approximately 443.2 Bcfe of 2018 production and 47.0 Bcfe of 2019 production, excluding basis swaps. Hedging reduces downside exposure but limits benefits from higher prices and creates counterparty and production-volume risk.
- Legal proceedings were described as ordinary-course matters that management did not expect to be material overall. A Pennsylvania environmental proceeding involving alleged methane migration could nonetheless result in monetary sanctions exceeding $100,000.
- Regulatory, environmental, hydraulic-fracturing, water-disposal, induced-seismicity, pipeline-capacity and third-party processing risks could increase costs or delay or restrict production.
- Goodwill was $1.6 billion and unproved properties were $2.6 billion at year-end. Management recorded no goodwill impairment, but further commodity-price declines, reserve revisions or market-capitalization declines could trigger future impairment charges.
Most Important Facts for Investors to Verify
- Whether 2018 production growth and the $941.2 million capital program were achieved within operating cash flow.
- The October 2019 refinancing or repayment plan for the $1.211 billion bank-facility maturity and the effect of borrowing-base redeterminations.
- The company’s ability to satisfy its substantial transportation, gathering, processing and minimum-volume commitments.
- Actual cash performance excluding non-cash derivative mark-to-market gains and the provisional tax benefit.
- Changes in natural gas, NGL and oil prices, hedge positions, derivative settlements and counterparty exposure.
- Whether further impairments occur for proved properties, unproved acreage or the $1.6 billion goodwill balance.
- Reserve replacement, conversion of proved undeveloped reserves and the timing and cost of the approximately $6.9 Tcfe of proved undeveloped reserves.
- Resolution of the Pennsylvania environmental proceeding and any changes in hydraulic-fracturing, methane, water-disposal or induced-seismicity regulation.