RRC

Range Resources Corp. 10-Q Summary (Q3 2008)

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2008. Range Resources Corporation is an independent oil and gas company engaged in the exploration, development, and acquisition of properties primarily in the Southwestern, Appalachian, and Gulf Coast regions of the United States. The company focuses on increasing reserves through drilling and acquisitions, with significant recent activity in the Barnett and Marcellus Shales.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Surge: Total revenues increased 157% in Q3 2008 compared to Q3 2007. This was driven by a 62% increase in oil and gas sales (due to 19% higher production and 16% higher realized prices) and a massive $247.9 million increase in derivative fair value income.
• Derivative Impact: The company reported a non-cash unrealized mark-to-market gain of $294.3 million in Q3 2008 due to falling commodity prices. This volatility is attributed to derivatives that do not qualify for hedge accounting (mark-to-market) following the sale of Gulf of Mexico and East Texas properties.
• Expense Growth: All expense categories increased. Direct operating expenses rose 10% per unit due to higher workover costs and personnel expenses. Exploration expenses jumped 207% in Q3 2008, primarily due to increased seismic spending.
• Debt Increase: Total debt increased by approximately $500 million year-over-year to fund acquisitions and capital expenditures. The company issued $250 million in 7.25% Senior Subordinated Notes in May 2008.
• Deferred Compensation: A significant non-cash gain of $37.5 million was recorded in Q3 2008 related to the deferred compensation plan, driven by a decline in the company's stock price.

Guidance, Outlook, and Risks

• Capital Budget: The 2008 capital budget is set at $1.3 billion (excluding acquisitions). Management indicated that due to the recent significant decline in commodity prices, the capital budget for 2009 will likely be decreased.
• Liquidity: The company maintains a $1.5 billion borrowing base with $450 million in committed availability as of September 30, 2008. Management believes liquidity is sufficient to absorb commodity price declines, though they are monitoring the global financial market volatility.
• Operational Outlook: Production growth continues, with significant increases in the Gulf Coast (85% YoY) and Southwestern (20% YoY) areas. However, the company faces upward pressure on costs due to the infrastructure build-out in the Marcellus Shale and competition for personnel.
• Risks:
  • Commodity Price Volatility: Revenues are highly sensitive to oil and gas prices. While hedges provide some protection, mark-to-market accounting on non-hedge derivatives creates earnings volatility.
  • Market Access: Adverse conditions in debt and equity markets could increase financing costs or limit access to capital.
  • Counterparty Risk: The company has exposure to financial institutions for derivatives and noted a receivable from SemGroup (in bankruptcy) of approximately $1.0 million, with a $450,000 charge recognized.

Investor Verification Checklist

• Derivative Accounting: Verify the sustainability of earnings given the $294 million non-cash derivative gain in Q3 2008 and the portion of derivatives marked-to-market rather than hedged.
• Capital Expenditure Discipline: Monitor the company's ability to adjust its 2009 capital budget in response to falling commodity prices to maintain cash flow coverage.
• Debt Covenants: Confirm continued compliance with the debt-to-EBITDAX (max 4.0:1) and current ratio (min 1.0:1) covenants under the bank credit facility.
• Marcellus Infrastructure: Assess the timeline and cost of the pipeline and processing facilities in southwestern Pennsylvania, which are critical for monetizing new Marcellus production.
• Stock Price Sensitivity: Review the impact of stock price fluctuations on the deferred compensation plan expense, which caused a $37.5 million swing in Q3 2008.