Range Resources Corporation: 2015 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited interim results. Range Resources is an independent natural gas, NGL and oil exploration and production company focused primarily on the Appalachian and Midcontinent regions.
Financial and Operating Highlights
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Natural gas, NGL and oil sales | $258.1 million | $583.5 million |
| Total revenues and other income | $247.5 million | $710.1 million |
| Net income (loss) | $(118.6) million | $(90.9) million |
| Diluted EPS | $(0.71) | $(0.55) |
| Cash flow from operating activities | $159.5 million | $370.1 million |
| Total production | 124.9 Bcfe | 244.4 Bcfe |
| Average realized price, including derivatives and third-party transportation | $2.31/Mcfe | $2.54/Mcfe |
- Second-quarter production increased 24%; six-month production increased 25% versus the comparable 2014 periods. Marcellus production increased 32% in both periods.
- Commodity price weakness drove results. Average realized prices declined 38% in the second quarter and 35% in the first six months.
- Direct operating expense per Mcfe declined 20% in the quarter and 24% year to date. DD&A expense per Mcfe declined 8% and 9%, respectively.
- Total assets were $8.8 billion at June 30, 2015. Cash and cash equivalents were only $0.5 million.
- Total debt was $3.464 billion, comprising $364.0 million of bank debt, $750.0 million of senior notes and $2.35 billion of senior subordinated notes.
- The revolving credit facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments, $364.0 million drawn and $108.7 million of letters of credit outstanding, leaving approximately $1.5 billion of committed borrowing capacity.
- Quarterly and year-to-date dividends remained $0.04 and $0.08 per share, respectively.
Material Changes Versus Prior Comparable Period
- Second-quarter net income of $171.4 million in 2014 turned into a net loss of $118.6 million in 2015. Six-month net income of $203.9 million in 2014 turned into a net loss of $90.9 million.
- Natural gas, NGL and oil sales declined 46% in the quarter and 44% year to date, despite production growth, primarily because of lower commodity prices.
- Derivative fair-value results were a $34.8 million loss in the second quarter versus a $24.1 million loss in 2014; year-to-date results were an $88.0 million gain versus a $171.0 million loss in 2014. These results are volatile and include non-cash fair-value changes.
- The prior-year periods benefited from a substantial Conger Exchange gain: asset-sale gains were $282.1 million in second-quarter 2014 and $281.7 million for the first six months, compared with $2.9 million and $2.7 million in 2015.
- Transportation, gathering and compression expense increased to $95.2 million in the quarter and $184.6 million year to date, reflecting production growth and Marcellus-related third-party infrastructure costs.
- Capital spending increased: additions to natural gas and oil properties were $671.2 million in the first six months of 2015 versus $546.4 million in 2014. Total capital expenditures including acreage acquisitions were approximately $724.2 million.
- Range issued $750.0 million of 4.875% senior notes due 2025 for net proceeds of $737.8 million, using proceeds initially to repay bank borrowings.
Cash Flow, Liquidity and Debt
- Operating cash flow of $370.1 million was insufficient to fund $704.9 million of investing cash uses, resulting in reliance on financing activities and available credit.
- Financing activities provided $334.8 million, including $750.0 million of senior-note proceeds, partially offset by $359.0 million of net repayments under the bank facility and $13.5 million of dividends.
- Management stated that operating cash flow, unused committed borrowing capacity, asset-sale proceeds and existing derivative contracts should satisfy near-term obligations and liquidity needs. A sustained decline in commodity prices or production could impair that capacity.
- Range was in compliance with applicable bank and senior subordinated note covenants at June 30, 2015. The bank facility requires, among other measures, an EBITDAX-to-cash-interest ratio of at least 2.5, a current ratio of at least 1.0 and a proved-reserves-to-total-debt ratio of at least 1.5 while applicable.
- Approximately $3.1 billion of debt carried fixed rates averaging 5.4%; $364.0 million of bank debt was floating rate. Management estimated that a 1% increase in short-term rates would increase annual interest expense by approximately $3.6 million.
Guidance, Outlook, Risks and Unusual Items
- The 2015 capital budget was approximately $870 million. Management emphasized continued cost reductions and drilling activity, particularly in the Marcellus Shale.
- Management expected an effective tax rate of approximately 39% for the remainder of 2015 before discrete items.
- At June 30, 2015, Range had hedged approximately 80% of projected production for the remainder of 2015, including approximately 87% of projected natural gas production. Derivative contracts covered 197.4 Bcfe for the remainder of 2015, 260.2 Bcfe for 2016 and 7.3 Bcfe for 2017.
- Derivative contracts had an aggregate net fair-value asset of approximately $262.8 million and exposed Range to counterparty, basis and commodity-price risks. Hedging also limits the benefit of higher future prices.
- Range announced a planned August 3, 2015 redemption of $500.0 million of 6.75% senior subordinated notes due 2020 at 103.375% of par, with an estimated $22.5 million loss on extinguishment of debt.
- Termination and office-closing costs totaled $6.4 million in the first six months, including severance, accelerated stock compensation and building lease costs. Additional leasehold impairments and abandonments were expected as the company reviewed acreage in the lower-price environment.
- New firm transportation contracts increased commitments by approximately $71.5 million over the next nine years. New delivery agreements require natural gas deliveries of 1,000 to 40,000 MMBtu per day for two to five years.
- A Pennsylvania environmental matter involving alleged methane and other substance releases from one well could result in monetary sanctions exceeding $100,000, although Range disputes the allegations.
- Management identified commodity-price volatility, production and reserve performance, infrastructure availability, gathering and transportation costs, ethane marketing limitations, counterparty performance, financing access and regulatory or environmental matters as significant risks.
Investor Verification Points
- Reconcile production growth with realized-price declines and assess whether operating cash flow can sustain the capital program.
- Review debt maturities, the planned 2020-note redemption, credit-facility borrowing-base requirements and covenant headroom.
- Evaluate the sensitivity of liquidity to lower natural gas, NGL and oil prices, including unhedged production and derivative counterparty exposure.
- Assess the sustainability of Marcellus growth after transportation, gathering, compression and ethane-related constraints.
- Verify the effect of the $870 million capital budget, new transportation commitments and potential acreage impairments on future free cash flow.
- Monitor the Pennsylvania environmental proceeding and the estimated $22.5 million debt-extinguishment loss expected after quarter-end.