RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: Range Resources is engaged in the exploration, development, and acquisition of oil and gas properties primarily in the Southwestern, Appalachian, and Gulf Coast regions of the United States. The company focuses on increasing reserves through drilling and acquisitions.

Key Financial Metrics

All figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14% year-over-year, driven by a 39% increase in oil and gas sales revenue. This was due to a 23% increase in production volumes and higher realized prices.
• Discontinued Operations: Net income was significantly boosted by $63.8 million from discontinued operations, primarily resulting from the sale of Gulf of Mexico properties and Austin Chalk assets in the first quarter of 2007. Excluding these gains, income from continuing operations decreased 29% compared to the prior year.
• Derivative Impact: The company recorded a $45.8 million mark-to-market loss on oil and gas derivatives in the first six months of 2007, compared to a $28.8 million gain in the same period of 2006. This volatility stems from hedges that no longer qualify for hedge accounting.
• Cost Increases: Direct operating costs increased 17% on a per-unit basis due to higher service and personnel costs. Interest expense rose 66% due to higher debt balances and rising interest rates.
• Acquisitions: The company acquired additional interests in the Nora field for $278.6 million in May 2007.

Guidance, Outlook, and Risks

• Capital Budget: The 2007 capital budget is set at $834.0 million (excluding acquisitions), expected to be funded by internal cash flow and asset sales.
• Liquidity: The company maintains a $900.0 million revolving credit facility with a borrowing base of $1.2 billion. As of June 30, 2007, $453.5 million of borrowing capacity was available.
• Hedging Strategy: As of June 30, 2007, the company had open swaps and collars covering significant volumes of natural gas and crude oil through 2009, resulting in a net unrealized pre-tax gain of $62.6 million.
• Risks:
  • Commodity Prices: Revenues are highly dependent on volatile oil and gas prices. A 10% reduction in prices (excluding hedged amounts) would reduce revenue by approximately $39.4 million.
  • Interest Rates: Approximately $446.5 million of debt bears floating interest rates. A 1% change in short-term rates would impact interest expense by roughly $4.5 million.
  • Operational Costs: The company anticipates continued high service and personnel costs due to industry competition.

Investor Verification Checklist

• Discontinued Operations: Verify the sustainability of earnings by analyzing results excluding the $63.8 million gain from asset sales (Gulf of Mexico and Austin Chalk).
• Derivative Accounting: Review the impact of the $45.8 million mark-to-market loss on derivatives that do not qualify for hedge accounting and its effect on future revenue volatility.
• Debt Covenants: Confirm compliance with debt covenants, specifically the restricted payment baskets for dividends, which were approximately $699.3 million available under the bank facility.
• Capital Expenditures: Assess the ability to fund the $834 million capital budget given the heavy reliance on operating cash flow and potential asset sales.
• Production Mix: Note that 61% of production is from the Southwestern division and 37% from the Appalachian division; monitor performance in these key regions.