RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2012
Business Overview: Range is an independent natural gas, natural gas liquids (NGLs), and oil company based in Fort Worth, Texas. It primarily explores, develops, and acquires properties in the Appalachian and Southwestern regions of the United States. The company operates in a single segment and uses the successful efforts method of accounting.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 32% in Q2 2012 and 26% in the first six months of 2012 compared to the same periods in 2011. This was driven by a 51% increase in production volumes and significant mark-to-market gains on derivatives, partially offset by lower realized commodity prices.
• Production: Total production increased 51% in both Q2 and the first six months of 2012. Appalachian region production grew 67% in Q2 and 68% year-to-date, while the Southwestern region grew 5% and 8%, respectively.
• Derivative Income: Derivative fair value income surged to $148.6 million in Q2 2012 (up from $53.0 million in Q2 2011) and $87.7 million for the six months (up from $12.2 million). This volatility is due to mark-to-market accounting on non-hedge derivatives.
• Costs: Direct operating expenses per mcfe decreased 38% in Q2 and 35% year-to-date due to lower water hauling and disposal costs. However, abandonment and impairment of unproved properties increased significantly to $43.6 million in Q2 (from $18.9 million) and $63.9 million year-to-date (from $35.4 million), largely due to a $23.1 million impairment of Pennsylvania leases.
• Debt: Total debt increased from $1.97 billion at year-end 2011 to $2.62 billion in Q2 2012, following the issuance of $600 million in 5.00% senior subordinated notes in March 2012.

Guidance, Outlook, and Risks

• Capital Program: The 2012 capital expenditure budget is set at $1.6 billion, excluding acquisitions. The company expects to fund this through operating cash flow, debt offerings, asset sales, and credit facility borrowings.
• Hedging Strategy: As of June 30, 2012, Range has hedged approximately 75% of its projected 2012 production. Outstanding contracts include swaps and collars for natural gas, oil, and NGLs extending through December 2014.
• Market Risks: The company faces significant exposure to commodity price volatility. While hedging mitigates downside risk, it also limits upside potential. A material drop in prices could reduce the ability to fund capital expenditures.
• Regulatory/Operational Risks: The company recorded a $24.7 million retroactive Pennsylvania "impact fee" for wells drilled prior to 2012. Additionally, the company faces basis risk and potential curtailment risks if ethane facilities in the Appalachian region are not available.
• Liquidity: Management believes current cash flows, borrowing capacity, and asset sales are sufficient to meet near-term obligations. The company maintains low cash balances, utilizing available funds to reduce bank debt.

Investor Verification Checklist

• Derivative Valuation: Verify the sustainability of the $343.3 million net unrealized pre-tax derivative gain and its impact on future earnings as contracts settle.
• Impairment Charges: Assess the $63.9 million impairment of unproved properties and the likelihood of future impairments given the focus on liquids-rich drilling.
• Debt Covenants: Confirm continued compliance with the debt-to-EBITDAX ratio (max 4.25:1) and current ratio (min 1.0:1) covenants under the bank credit facility.
• Production Growth: Validate the 51% production growth rate and the specific contribution of the Marcellus Shale versus other regions.
• Impact Fee Liability: Monitor the payment schedule for the $24.7 million retroactive Pennsylvania impact fee and potential future assessments.