Business Context and Reporting Period
Range Resources Corporation is an independent U.S. producer focused on natural gas, NGLs and oil exploration, development and acquisition in the Appalachian and Southwestern regions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014. Range operates as one reportable segment. Common shares outstanding were approximately 168.7 million at October 29, 2014.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Natural gas, NGLs and oil sales | $446.1 million | $431.2 million | $1.496 billion | $1.267 billion |
| Total revenues and other income | $616.6 million | $442.0 million | $1.839 billion | $1.435 billion |
| Income from operations | $239.9 million | $31.0 million | $580.8 million | $149.7 million |
| Net income | $146.4 million | $19.2 million | $350.3 million | $87.6 million |
| Diluted EPS | $0.86 | $0.12 | $2.10 | $0.53 |
| Net margin | 23.7% | 4.3% | 19.0% | 6.1% |
| Operating cash flow | Not separately provided | Not separately provided | $654.9 million | $502.9 million |
| Total debt at period end | $2.999 billion | Not provided | $2.999 billion | Not provided |
- Total production increased 26% in the third quarter and 23% for the first nine months, to 111.2 Bcfe and 306.8 Bcfe, respectively.
- Q3 production consisted of 75.7 million Mcf of natural gas, 4.9 million barrels of NGLs and 985,300 barrels of crude oil. Nine-month production consisted of 205.4 million Mcf of natural gas, 13.9 million barrels of NGLs and 3.0 million barrels of crude oil.
- NGL production increased 109% in the quarter and 118% year to date, principally due to increased ethane sales from the Marcellus Shale.
- Average realized price including derivative settlements and third-party transportation costs was $3.40 per Mcfe in Q3 and $3.74 per Mcfe for the first nine months, compared with $4.11 and $4.20, respectively, in the prior-year periods.
- Capital expenditures and acreage purchases totaled approximately $1.022 billion through nine months, including $867.3 million for natural gas and oil properties and $145.5 million for acreage.
- Cash and cash equivalents were $468,000 at September 30, 2014. The company generally maintains low cash balances and uses available funds to reduce bank debt.
- At September 30, 2014, bank debt was $649.0 million and senior subordinated notes totaled $2.350 billion. The revolving facility had $997.0 million of available borrowing capacity after $104.0 million of letters of credit.
Material Changes Versus the Prior Comparable Period
- Net income rose 663% in Q3 and 300% for the first nine months, driven by higher production, derivative fair value income and favorable deferred compensation mark-to-market changes.
- Natural gas, NGLs and oil sales increased 3% in Q3 and 18% year to date, despite lower realized prices, because of production growth.
- Derivative fair value income was $142.1 million in Q3 2014 versus a $40.4 million loss in Q3 2013. For the first nine months, derivative fair value was a $28.9 million loss versus a $2.5 million loss in 2013. These changes are substantially non-cash and create earnings volatility.
- The company completed the Conger Exchange in June 2014, receiving producing Virginia properties and $145.0 million of cash in exchange for Texas assets. The transaction produced a pre-tax gain of approximately $275.2 million, plus a $10.0 million gain from remeasuring Range’s previous interest in Nora Gathering, LLC.
- Transportation, gathering and compression expense increased to $84.8 million in Q3 and $235.7 million year to date, reflecting Marcellus production growth and ethane transportation commitments.
- Range redeemed its $300.0 million of 8.0% senior subordinated notes due 2019, recording a $24.6 million loss on extinguishment of debt.
- Range issued 4.56 million common shares in a public offering, generating net proceeds of $396.6 million.
- Depletion, depreciation and amortization increased in absolute dollars but declined per Mcfe by 14% in Q3 and 10% year to date. Nine-month proved-property impairment increased to $25.0 million from $7.8 million.
- General and administrative expense increased in Q3, partly because of a previously announced $4.2 million fine related to water impoundment leaks, but declined substantially year to date because the prior-year period included significant lawsuit settlements.
Outlook, Risks, Contingencies and Unusual Items
- Management expected an effective tax rate of approximately 39% for the remainder of 2014, before discrete items. The 2014 capital budget was approximately $1.52 billion.
- Management stated that operating cash flow, unused borrowing capacity, asset-sale proceeds and existing commodity derivatives were expected to fund near-term obligations and liquidity needs. A sustained decline in commodity prices or production could reduce profitability, borrowing capacity and capital funding.
- On October 16, 2014, Range replaced its revolving credit facility with a new facility having a $2.0 billion commitment, a $3.0 billion borrowing base and a maturity date of October 16, 2019. The filing states that approximately $1.2 billion of borrowing capacity was available at closing.
- Range had hedged approximately 66% of projected production for the remainder of 2014, including approximately 76% of projected natural gas production. Derivative contracts covered 82.2 Bcfe for the remainder of 2014, 187.6 Bcfe for 2015 and 35.1 Bcfe for 2016.
- Range discontinued hedge accounting prospectively in March 2013. Subsequent derivative mark-to-market gains and losses are recognized immediately in earnings, which can materially affect reported revenue and profit without a corresponding current-period cash impact.
- Firm transportation and gathering commitments increased by approximately $992.0 million over the next 25 years, while the company separately reported a $922.0 million increase in contractual obligations from new firm transportation contracts. These commitments support growth but increase fixed cost exposure.
- New delivery commitments include natural gas volumes of 50,000 to 80,000 MMBtu per day beginning between 2016 and 2019 and ethane volumes of 5,000 to 10,000 barrels per day beginning between 2017 and 2018. Some commitments depend on pipeline, gathering and ethane-cracker construction.
- Management identified ethane infrastructure and demand risk in Appalachia. If specified ethane agreements or facilities do not become available, Range may need to curtail production or purchase natural gas for blending, adversely affecting revenue.
- Capitalized exploratory well costs totaled $82.0 million, including $35.6 million outstanding for more than one year across five Marcellus projects. Management expected four of those wells to begin producing in the fourth quarter of 2014.
- Range reported that pending litigation was not expected to have a material adverse effect, although legal outcomes remain uncertain. The company was in compliance with applicable debt covenants at September 30, 2014.
- Commodity prices, basis differentials, derivative counterparty performance, interest rates, reserve estimates, infrastructure availability and execution of the drilling program remain key risks. A 1% increase in short-term interest rates would increase annual interest expense by approximately $6.5 million.
Facts Investors Should Verify
- Reconcile reported earnings with the approximately $280.1 million after-selling-expense Conger Exchange gain and other non-recurring items.
- Assess recurring earnings and cash flow excluding derivative fair value changes, deferred compensation mark-to-market gains and asset-sale gains.
- Verify production growth, Marcellus well performance, NGL and ethane realizations, and the effect of lower realized prices and regional basis differentials.
- Monitor capital spending against the approximately $1.52 billion 2014 budget and compare spending with operating cash flow.
- Review leverage, borrowing-base redeterminations, covenant compliance and availability under the replacement credit facility.
- Evaluate the financial impact of long-term transportation, gathering and delivery commitments and the timing and completion risk of related infrastructure.
- Track suspended exploratory well costs, proved-property impairments and any additional acreage impairments or abandonments.
- Confirm the sustainability of the quarterly dividend, subject to earnings, capital requirements and debt-covenant restrictions.