Range Resources Corporation: Q2 2010 Form 10-Q Summary
Business context and reporting period
Range Resources explores, develops and acquires oil and gas properties primarily in the Southwestern and Appalachian regions of the United States. This unaudited Form 10-Q covers the three and six months ended June 30, 2010, compared with the same periods in 2009.
Financial performance and key metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenues | $224.8 million | $180.4 million | $573.3 million | $456.9 million |
| Oil and gas sales | $206.8 million | $192.5 million | $443.5 million | $395.7 million |
| Income from operations | $15.5 million | $(62.4) million | $142.0 million | $(11.0) million |
| Net income (loss) | $9.1 million | $(39.9) million | $86.6 million | $(7.3) million |
| Diluted EPS | $0.06 | $(0.26) | $0.54 | $(0.05) |
| Operating margin | Approximately 6.9% | Negative | Approximately 24.8% | Negative |
| Net margin | Approximately 4.0% | Negative | Approximately 15.1% | Negative |
| Cash flow from operations | Not separately provided | Not separately provided | $260.4 million | $268.4 million |
Production increased 9% in Q2 and 10% for the six-month period, measured in total mcfe. Natural gas production rose 9% in Q2 and 10% year over year, while NGL production increased 67% in Q2 and 80% for the six-month period. Crude oil production declined 34% in Q2 and 31% for the six-month period, primarily because of the 2009 West Texas asset sale.
Average realized price including all derivative settlements declined to $5.07 per mcfe in Q2 from $6.18 per mcfe in the prior-year quarter and to $5.31 per mcfe for the six-month period from $6.39. Wellhead prices improved, but lower hedge settlements and basis-swap effects reduced total realized prices.
- Direct operating expense declined 22% per mcfe in both Q2 and the first six months.
- General and administrative expense increased 23% in Q2 and 19% for the six-month period, driven by staffing, stock compensation, legal fees and other corporate costs.
- DD&A increased in absolute dollars because of higher production but declined 6% per mcfe.
- Interest expense increased 4% in Q2 and 9% for the six-month period, primarily because fixed-rate subordinated notes replaced lower-cost floating-rate debt.
- Dividends remained $0.04 per share in Q2 and $0.08 per share for the first six months.
Liquidity, capital spending and debt
- Cash and equivalents were $166.9 million at June 30, 2010, compared with $0.8 million at December 31, 2009.
- Total debt was $1.86 billion, including $475.0 million of bank debt and $1.38 billion of senior subordinated notes. Debt increased from $1.71 billion at year-end 2009.
- The bank facility had a $1.5 billion borrowing base, a $1.25 billion facility amount and $774.9 million of available capacity at June 30. Availability was $706.9 million on July 22, 2010.
- Bank debt bore interest at approximately 2.2%; fixed-rate subordinated debt averaged approximately 7.4%.
- The debt-to-capitalization ratio was 42.4%. Management reported compliance with bank and note covenants, including the 4.0-to-1.0 debt-to-EBITDAX and 1.0-to-1.0 current-ratio requirements.
- Operating cash flow of $260.4 million was offset by $229.5 million of net investing cash outflows and supported by $135.2 million of net financing inflows.
- Capital expenditures were $359.7 million, and proved and unproved property purchases totaled $187.2 million during the first six months. The 2010 capital budget, excluding acquisitions, was approximately $1.2 billion.
Material changes and unusual items
- Range sold approximately 90% of its Ohio tight gas sand properties in March and the remainder in June. Total proceeds were approximately $323.0 million, generating a $77.4 million gain for the six-month period.
- Range purchased approximately $135.0 million of proved and unproved natural gas properties in Virginia, funded with like-kind exchange proceeds from the Ohio sale.
- Derivative fair value income was $6.5 million in Q2 versus a $9.9 million loss in Q2 2009. For six months, derivative fair value income declined to $48.9 million from $65.7 million.
- Hedge gains included in oil and gas sales fell to $19.6 million for the first six months from $104.5 million in the prior-year period.
- A $6.5 million proved-property impairment was recorded in the first quarter because of declining gas prices, relating to Gulf Coast properties.
- Deferred compensation plan accounting produced non-cash income of $14.1 million in Q2 and $19.8 million for the first six months, compared with expense of $0.8 million and $13.2 million, respectively, in 2009.
- First-half termination costs included $5.1 million of Ohio severance and $2.8 million of accelerated stock-based compensation.
Outlook, risks and contingencies
Management expects an effective tax rate of approximately 39% for the remainder of 2010 and believes operating cash flow, available bank capacity and asset-sale proceeds should fund near-term obligations and liquidity needs. Management also expects to adjust capital spending based on commodity prices, cash flow and project returns.
- Commodity prices remain the primary operating and financial risk. Sustained lower oil and gas prices could reduce revenue, cash flow, reserves, borrowing capacity, profitability and the ability to fund the capital program.
- At June 30, approximately 65% of remaining 2010 production and 47% of 2011 production was hedged. Commodity collars had a net unrealized pre-tax gain of approximately $111.9 million, but hedging can limit gains if prices rise and exposes Range to basis, production-volume and counterparty risks.
- Range had approximately $1.9 billion of debt, with $475.0 million subject to floating rates. A 1% change in short-term rates would affect annual interest expense by approximately $4.8 million.
- Marcellus development depends on pipeline and processing infrastructure. Five projects with $11.2 million of exploratory costs capitalized for more than one year were awaiting pipeline completion.
- Key risks include drilling and reserve-estimation uncertainty, impairment risk, capital-market access, debt covenants, environmental and hydraulic-fracturing regulation, third-party transportation and processing availability, and operational hazards.
- Range reported that ordinary-course litigation was not expected to have a material adverse effect on financial position, cash flows or results of operations.
- Disclosure controls were effective as of June 30, 2010, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether production growth, particularly in the Appalachian and Marcellus regions, offsets lower realized prices and reduced hedge settlements.
- The remaining 2010 capital-spending requirement relative to operating cash flow, asset-sale proceeds and available borrowing capacity.
- Future borrowing-base redeterminations and compliance with debt covenants as commodity prices and reserve estimates change.
- The economic performance and final purchase-price allocation of the Virginia properties acquired in June 2010.
- The timing and cash-flow impact of derivative settlements, including the $111.9 million net unrealized collar gain and $4.8 million basis-swap loss.
- Potential impairment charges, environmental or hydraulic-fracturing regulation, transportation constraints and litigation developments.
- The filing text does not provide a clear value for quarterly EBITDA or free cash flow; investors should derive these measures carefully and reconcile them to reported GAAP results.