Range Resources Corporation: Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
Range Resources Corporation is an independent natural gas, natural gas liquids (NGLs), crude oil and condensate producer focused primarily on the Appalachian region. The filing covers the unaudited three months ended March 31, 2020, compared with the same period in 2019.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenues and other income | $693.9 million | $748.1 million | Down 7% |
| Natural gas, NGLs and oil sales | $432.1 million | $671.7 million | Down 36% |
| Derivative fair value income (loss) | $233.2 million | $(61.7) million | Favorable swing |
| Income before income taxes | $195.2 million | $7.1 million | Increased substantially |
| Net income | $145.0 million | $1.4 million | Increased substantially |
| Diluted earnings per share | $0.58 | $0.01 | Increased |
| Net income margin | Approximately 20.9% | Approximately 0.2% | Improved |
| Cash flow from operating activities | $124.5 million | $260.7 million | Down $136.2 million |
| Capital additions and acreage purchases | Approximately $141.7 million | Approximately $213.7 million | Lower |
Average daily production increased 2% to approximately 2.294 Bcfe. Natural gas production rose 4%, crude oil production rose 8%, and NGL production was essentially unchanged. Average realized prices including derivative settlements and third-party transportation costs declined 39% to $1.18 per mcfe.
At March 31, 2020, total assets were $6.6 billion and stockholders’ equity was $2.5 billion. Cash and cash equivalents were only $528,000. Gross debt was approximately $3.2 billion, consisting primarily of $557.0 million drawn under the bank credit facility and $2.7 billion of senior and senior subordinated notes. Debt reported on the balance sheet, net of premiums and issuance costs, was $3.187 billion.
The revolving credit facility had a $3.0 billion borrowing base, $2.4 billion of lender commitments, $557.0 million of borrowings and $333.0 million of undrawn letters of credit, leaving approximately $1.5 billion of committed borrowing capacity plus $600.0 million of additional borrowing-base capacity. Range was in compliance with its applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Commodity prices weakened materially. Average NYMEX natural gas, oil and Mont Belvieu NGL prices declined to $1.95 per mcf, $47.11 per barrel and $0.33 per gallon, respectively, from $3.14, $54.86 and $0.54.
- Production sales fell $239.6 million, driven primarily by lower prices, partially offset by higher production volumes.
- Derivative fair value income was $233.2 million versus a $61.7 million loss in Q1 2019. Cash receipts from derivative settlements were $99.9 million versus $24.8 million.
- Range recorded a $122.1 million pretax gain on asset sales, principally from the change in operatorship and disposition of shallow legacy assets in Northwest Pennsylvania. The transaction also removed approximately $126.1 million of asset retirement obligations.
- Range recorded a $77.0 million impairment of proved North Louisiana properties and incurred $17.0 million of North Louisiana deficiency charges under a gas processing agreement.
- Operating cost controls reduced general and administrative expense 9%, direct operating expense 4%, interest expense 8%, and depletion, depreciation and amortization expense 26% in absolute terms.
- Range issued $550.0 million of 9.25% senior notes due 2026 and used the proceeds to redeem or repurchase older notes and reduce bank borrowings. It also repurchased $111.0 million principal amount of senior notes at a discount, recording a net $12.9 million gain on early extinguishment of debt in the income statement.
- The company suspended its dividend in January 2020 and repurchased 8.0 million shares for approximately $22.5 million during the quarter.
Guidance, Outlook, Risks and Unusual Items
Range reduced its initial 2020 capital budget from $520.0 million to $430.0 million because of the lower commodity-price environment. Management expects to target capital spending within operating cash flow, continue cost reductions and efficiency initiatives, pursue asset sales, hedge production and manage debt. Management stated that operating cash flow, available credit capacity, asset-sale proceeds and existing derivatives should satisfy near-term obligations and liquidity needs, but acknowledged that long-term liquidity is sensitive to commodity prices, production and reserves.
More than 60% of projected production for the remainder of 2020 was hedged as of March 31, 2020, including more than 70% of projected natural gas production. The derivative portfolio had an approximate net pretax fair value gain of $256.0 million, but mark-to-market changes may create significant earnings volatility and hedge benefits may be limited by counterparty default or basis differences.
COVID-19, government restrictions and the Russia-Saudi Arabia oil-market dispute created substantial uncertainty, reduced demand and increased commodity-price volatility. Management reported no significant operational disruption as of the filing date but warned of potential impacts on demand, employees, supply chains, customers, financing costs, borrowing availability, asset values and production.
Other significant risks include low natural gas, NGL and oil prices; insufficient transportation, storage or local market capacity; potential production curtailments; high leverage; floating-rate exposure; impairment of oil and gas properties; and counterparty credit risk. A 1% increase in short-term interest rates would increase annual interest expense by approximately $5.6 million based on March 31, 2020 floating-rate debt.
In April 2020, the Pennsylvania Office of Attorney General notified a Range subsidiary that it would pursue misdemeanor charges concerning alleged violations related to releases and discharges of produced water, reuse water and drill cuttings. The filing states that potential fines or penalties cannot currently be estimated. Range also disclosed an existing Pennsylvania Department of Environmental Protection matter that could result in monetary sanctions exceeding $100,000.
Important Facts for Investors to Verify
- Whether sustained low commodity prices and COVID-19 demand effects reduce operating cash flow below the revised capital budget and debt-service requirements.
- The timing and outcome of future borrowing-base redeterminations, including whether the $3.0 billion borrowing base and $2.4 billion lender commitments remain available.
- Debt maturities, refinancing requirements and the effect of the 9.25% 2026 notes on future interest expense and liquidity.
- The realizability of derivative assets and the timing of derivative settlements, particularly because Q1 earnings benefited materially from noncash fair value gains.
- Whether additional impairments, North Louisiana deficiency charges, asset retirement obligations or further asset-sale losses or gains will be recorded.
- The financial and operational consequences of the Pennsylvania environmental and legal proceedings.
- Whether the dividend suspension, share repurchases and continuing asset sales remain consistent with covenant requirements and the company’s liquidity priorities.