RANGE RESOURCES CORP quarterly report, Q2 FY2017

Range Resources Corporation — 2017 Q2 Form 10-Q Summary

Business Context and Reporting Period

Range Resources is an independent oil and gas company focused primarily on natural gas, NGLs and oil exploration, development and acquisition in the Appalachian and North Louisiana regions. The filing covers the quarter and six months ended June 30, 2017. Results include Memorial Resource Development Corp. operations following the September 2016 merger, which affects comparability with 2016.

Financial Performance and Key Metrics

Metric	Q2 2017	Q2 2016	Six Months 2017	Six Months 2016
Natural gas, NGL and oil sales	$506.1 million	$224.6 million	$1.066 billion	$434.1 million
Total revenues and other income	$673.1 million	$101.8 million	$1.450 billion	$433.2 million
Income before income taxes	$127.2 million	$(354.4) million	$409.7 million	$(490.2) million
Net income (loss)	$69.6 million	$(224.9) million	$239.7 million	$(318.7) million
Diluted EPS	$0.28	$(1.35)	$0.97	$(1.91)
Net cash from operating activities	$185.5 million	Not separately provided in the filing text	$411.3 million	$173.2 million
Total production	176.95 Bcfe	129.29 Bcfe	350.82 Bcfe	255.07 Bcfe

Q2 pretax margin was approximately 18.9% and net margin approximately 10.3%; six-month pretax margin was approximately 28.3% and net margin approximately 16.5%. These calculated margins were materially influenced by derivative fair-value income.

Derivative fair-value income was $111.2 million in Q2 and $276.8 million for the six months, compared with losses of $162.8 million and $75.9 million, respectively, in the prior-year periods.
Production increased 37% in Q2 and 38% for the six months. Natural gas production increased 44% and 40%, respectively; NGL and crude oil volumes each increased 24% and 33%/25%, respectively.
Average realized price including derivative settlements and third-party transportation costs increased to $1.80 per mcfe in Q2 from $1.44 and to $1.98 per mcfe for the six months from $1.49.
Transportation, gathering, processing and compression expense increased 40% in Q2 and 41% for the six months, primarily from higher production and North Louisiana commitments.
G&A expense increased in absolute dollars but declined to $0.30 per mcfe in Q2 from $0.36 and to $0.28 per mcfe for the six months from $0.34.
DD&A increased to $152.5 million in Q2 and $302.3 million for the six months, while the DD&A rate declined 9% to $0.86 per mcfe.

Balance Sheet, Debt and Liquidity

Cash and cash equivalents were $0.5 million at June 30, 2017, compared with $0.3 million at December 31, 2016.
Total debt was $3.88 billion before debt issuance costs, including $954.0 million of bank debt, $2.88 billion of senior notes and $49.0 million of senior subordinated notes. Debt net of issuance costs was $3.85 billion.
The revolving credit facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments, $954.0 million outstanding and $285.7 million of letters of credit, leaving $760.3 million of committed borrowing capacity.
Range was in compliance with applicable debt covenants at June 30, 2017. The facility matures October 16, 2019.
Six-month operating cash flow of $411.3 million funded a substantial portion of approximately $510.6 million of capital expenditures, including acreage acquisitions. Net investing cash use was $481.6 million.
The quarterly dividend remained $0.02 per share. The filing states that future dividends depend on earnings, capital expenditures, debt covenants and other factors.

Material Changes Versus the Prior Comparable Period

Range shifted from a significant loss to profitability, primarily due to higher commodity prices, 37% to 38% production growth, the Memorial merger contribution and favorable derivative mark-to-market changes.
Natural gas, NGL and oil sales increased 125% in Q2 and 145% for the six months. The Memorial merger added approximately $257.5 million of natural gas, oil and NGL revenue during the first six months of 2017.
Interest expense increased to $47.9 million in Q2 and $95.0 million for the six months because of higher average debt following the Memorial merger, partly offset by lower average interest rates.
Range recorded no proved-property impairment in 2017 compared with a $43.0 million impairment in the first six months of 2016.
Range recorded a $23.4 million pretax gain on asset sales in the first six months of 2017, including a $22.1 million gain on Western Oklahoma properties, versus a $4.9 million pretax loss in the prior-year period.
Deferred compensation plan expense was a $14.5 million Q2 gain and $27.6 million six-month gain, compared with losses of $25.7 million and $41.8 million, respectively, largely reflecting changes in Range’s share price.
Termination costs were $4.1 million for the six months, primarily related to workforce reductions and accelerated vesting, compared with $0.2 million in the prior-year period.

Guidance, Outlook, Risks and Unusual Items

Management’s 2017 capital budget is $1.15 billion. Six-month capital expenditures, including acreage acquisitions, were approximately $510.6 million.
Management expects an effective tax rate of approximately 40% for the remainder of 2017 before discrete items.
Management believes operating cash flow, unused committed borrowing capacity, asset-sale proceeds and existing derivatives will satisfy near-term obligations and liquidity needs, but notes that further commodity-price declines or lower production and reserves could impair capital funding and profitability.
More than 65% of projected production for the remainder of 2017 and more than 75% of projected natural gas production were hedged as of June 30, 2017. Derivatives expire monthly through December 2019 and limit both downside exposure and participation in rising prices.
Derivative contracts had an approximate net pretax fair-value gain of $99.8 million at June 30, 2017. Natural gas basis swaps had a $10.5 million fair-value loss.
Transportation and gathering commitments increased approximately $420 million over the next 22 years, through 2038, primarily from extensions and pricing changes to existing contracts.
Range reported an unresolved Pennsylvania environmental proceeding involving alleged methane and other substances escaping from a well. The company disputes the allegation but states that monetary sanctions could exceed $100,000.
Pending litigation and regulatory matters are not expected by management to have a material adverse effect, although final liabilities could differ materially from estimates.
New revenue-recognition guidance is expected to be adopted in the first quarter of 2018 using the modified retrospective method; the filing states that the impact was still under evaluation.

Most Important Facts for an Investor to Verify

Whether production growth and North Louisiana integration generate sufficient cash flow to support the $1.15 billion capital program without materially increasing leverage.
The sustainability and cash-versus-noncash composition of reported earnings, particularly the large derivative fair-value gains.
Debt maturity, borrowing-base and covenant capacity, including the $760.3 million of committed availability and the October 2019 credit-facility maturity.
The effect of long-term transportation and gathering commitments on realized prices, margins and liquidity during periods of lower commodity prices.
Hedge volumes, prices, counterparty exposure and the extent to which hedges limit upside participation.
The final accounting impact of the Memorial merger, including goodwill, deferred taxes, acquired reserves and remaining purchase-price allocation matters.
Developments in the Pennsylvania environmental proceeding and other litigation or regulatory contingencies.