Range Resources Corporation — 2016 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. Operations are concentrated in the Marcellus Shale in Pennsylvania and the Lower Cotton Valley formation in North Louisiana. The filing covers the fiscal year ended December 31, 2016; fourth-quarter information is included in the unaudited quarterly data. Range reports one operating segment.
- Average production was 1,542.1 Mmcfe per day, up 11% from 2015; 88% of production came from the Marcellus Shale.
- Year-end proved reserves were 12.1 Tcfe, up 22% from 9.9 Tcfe; 65% was natural gas, 31% NGLs and 4% oil, with 87% located in Appalachia.
- In September 2016, Range completed the Memorial Resource Development Corporation merger, issuing approximately 77.0 million shares and adding North Louisiana operations.
Financial and operating metrics
| Metric | 2016 | 2015 | Change or comment |
|---|---|---|---|
| Natural gas, NGLs and oil sales | $1.197 billion | $1.090 billion | Up 10% |
| Total revenues and other income | $1.100 billion | $1.598 billion | Down 31%, primarily due to derivative fair-value changes |
| Net loss | $521.4 million | $713.7 million | Loss per diluted share was $2.75 versus $4.29 |
| Cash flow from operations | $387.1 million | $691.4 million | Down 44% |
| Capital additions to natural gas and oil properties | $466.3 million | $1.031 billion | Down 55% |
| Average realized price including derivatives and transportation | $1.74 per mcfe | $2.41 per mcfe | Down 28% |
| Transportation, gathering, processing and compression | $565.2 million | $396.7 million | Up 42% |
| Direct operating expense | $97.4 million | $136.4 million | Per-mcfe cost down 37% to $0.17 |
| Depletion, depreciation and amortization | $524.1 million | $581.2 million | Per-mcfe cost down 18% to $0.93 |
| Total debt | $3.774 billion | $2.651 billion | Debt-to-capitalization ratio was 41.1% |
| Stockholders’ equity | $5.408 billion | $2.760 billion | Increased principally from merger-related equity issuance |
| Cash and cash equivalents | $0.3 million | $0.5 million | Range generally uses available funds to reduce bank debt |
Reported revenue was reduced by a $261.4 million derivative fair-value loss in 2016, compared with $416.4 million of derivative fair-value income in 2015. Cash settlements received from derivatives were $347.3 million in 2016. The company uses mark-to-market accounting and discontinued hedge accounting prospectively in 2013.
Debt, liquidity and contractual commitments
- At December 31, 2016, debt consisted of approximately $882.0 million of bank debt, $2.878 billion of senior notes and $49.0 million of senior subordinated notes before debt issuance costs and premiums.
- The secured revolving credit facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments, $882.0 million outstanding and $268.1 million of letters of credit. Reported unused capacity under the commitment amount was $849.9 million.
- The facility matures in October 2019 and is subject to annual and event-driven borrowing-base redeterminations. Range was in compliance with its debt covenants at year-end.
- Total contractual obligations were estimated at $10.853 billion, including $6.673 billion of transportation and gathering commitments and $3.809 billion of principal debt obligations.
- Quarterly dividends were reduced from $0.04 per share in 2015 to $0.02 per share in 2016. Future dividends remain discretionary and subject to debt-agreement limitations.
Material changes versus the prior comparable period
- The Memorial merger added North Louisiana assets, approximately 1.3 Tcfe of proved reserves at the acquisition date and $1.2 billion of assumed debt at fair value. The transaction generated $37.2 million of merger-related expenses and $1.654 billion of goodwill.
- Range issued approximately 77.0 million shares in the merger, increasing year-end shares outstanding to approximately 247.2 million from 169.4 million.
- Debt increased by approximately $1.1 billion, primarily from the merger and related refinancing, while equity increased by approximately $2.6 billion.
- Production increased despite the prior-year sale of most Virginia and West Virginia properties. NGL production increased 37%, while crude oil and condensate production declined 12%.
- Range drilled 108 gross wells, all productive, replacing 247% of production through drilling. Capital spending and acreage purchases declined substantially as management responded to low commodity prices.
- Non-core asset sales generated $193.8 million of proceeds in 2016, including $111.5 million from Northeast Pennsylvania and $78.6 million from Western Oklahoma.
- Proved property impairment declined to $43.0 million from $590.2 million in 2015, but unproved-property abandonment and impairment expense remained $30.1 million.
Guidance, outlook, commentary and risks
- Management approved a 2017 capital budget of $1.15 billion, excluding budgeted proved-property acquisitions. Spending may be adjusted for commodity prices, drilling results and other conditions.
- Range expected to drill over 109 net Marcellus wells and operate an average of approximately four rigs in both the Marcellus and North Louisiana areas.
- Management expected 2017 DD&A of approximately $0.88 per mcfe and an effective tax rate of approximately 38%, before discrete items.
- Derivative contracts covered approximately 494.6 Bcfe of 2017 production and 121.7 Bcfe of 2018 production, excluding basis swaps. Hedging supports cash-flow predictability but limits benefits from higher prices and creates counterparty and production-volume risks.
- Commodity-price risk is significant: approximately 96% of proved reserves were natural gas and NGLs. Excess U.S. natural-gas supply, transportation constraints and NGL infrastructure limitations could pressure realized prices and production.
- Range has substantial firm transportation, gathering and processing commitments, including minimum-volume obligations and potential deficiency payments if production is insufficient.
- Key additional risks include borrowing-base reductions, leverage and refinancing, impairment of proved or unproved properties and goodwill, reserve-estimation uncertainty, hydraulic-fracturing and environmental regulation, induced seismicity, water management, third-party infrastructure dependence, litigation and cybersecurity.
- A Pennsylvania environmental matter involving one well could result in monetary sanctions exceeding $100,000; management disputes the alleged methane leakage. Other ordinary-course litigation was not expected to be material.
- Management reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified audit opinions.
Most important facts for investors to verify
- Reconcile the reported net loss and total revenue with the substantial mark-to-market derivative loss and cash derivative receipts.
- Review the Memorial merger purchase-price allocation, $1.654 billion goodwill balance, assumed debt and potential future impairment exposure.
- Assess liquidity against the October 2019 bank-facility maturity, borrowing-base redeterminations, $882.0 million of bank debt and large transportation commitments.
- Evaluate whether the $1.15 billion 2017 capital program can be funded by operating cash flow, asset sales and available borrowing capacity under prevailing commodity prices.
- Test reserve quality and development requirements, including the 5.3 Tcfe of proved undeveloped reserves and approximately $2.0 billion of estimated 2017–2019 PUD development costs.
- Monitor natural-gas, NGL and oil prices, hedge coverage, basis differentials, ethane marketing capacity and counterparty performance.
- Review contingent environmental liabilities, regulatory developments concerning hydraulic fracturing and produced-water disposal, and the company’s long-term minimum-volume obligations.