Range Resources Corporation: 2020 Q3 Form 10-Q Summary
Business context and reporting period
Range Resources is an independent natural gas and NGL company focused primarily on exploration, development and acquisition of properties in the Appalachian region. The filing covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods. Results were materially affected by COVID-19, weak commodity prices, asset dispositions, hedging mark-to-market volatility and debt restructuring.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues and other income | $299.3 million, versus $622.4 million | $1.370 billion, versus $2.222 billion |
| Natural gas, NGL and oil sales | $381.6 million, down 20% | $1.163 billion, down 32% |
| Net income (loss) | $(680.0) million, or $(2.83) per diluted share | $(681.6) million, or $(2.82) per diluted share |
| Operating cash flow | $(24.3) million | $179.0 million, versus $549.4 million |
| Capital expenditures and acreage purchases | Not separately provided for the quarter in the filing excerpt | Approximately $342.9 million |
| Cash and cash equivalents | $0.5 million at September 30, 2020 | |
| Total debt | $3.1 billion principal amount; $3.087 billion net of issuance costs | |
| Stockholders’ equity | $1.663 billion at September 30, 2020 |
Derivative fair value income was a loss of $124.7 million in the third quarter and income of $102.2 million for the first nine months. Cash settlements on derivatives provided $85.8 million in the quarter and $305.2 million year to date. The reported loss included $521.6 million of exit and termination costs, primarily the $479.8 million present value of retained North Louisiana gathering, processing and transportation obligations.
Production averaged 2.2 Bcfe per day in the third quarter and 2.3 Bcfe per day for the first nine months. Average realized prices, including derivative settlements and third-party transportation costs, were $0.99 per mcfe in the quarter and $1.02 per mcfe year to date, compared with $1.25 and $1.54, respectively, in 2019.
Material changes versus the prior comparable periods
- Commodity sales declined primarily because average realized prices fell 18% before derivative settlements in the third quarter and 33% for the first nine months. Production was broadly stable, with first-nine-month total production up 1%.
- Third-quarter and year-to-date net results deteriorated from a $27.6 million loss and $89.0 million profit, respectively, in 2019, to substantial losses in 2020.
- Operating cash flow fell $128.2 million in the third quarter and $370.5 million for the first nine months, reflecting lower realized prices, asset-sale closing adjustments and a $28.5 million minimum-volume-commitment payment.
- Transportation, gathering, processing and compression expense declined 9% in the third quarter and 8% year to date. Direct operating expense declined 41% and 29%, respectively, on a per-mcfe basis; G&A expense declined 5% and 14% per mcfe.
- In August, Range sold its North Louisiana assets for estimated consideration of $260.0 million, including $245.0 million of cash and $15.0 million of contingent consideration. The transaction generated a pretax loss of $8.1 million and left Range with substantial long-term contractual obligations.
- Range sold shallow legacy assets in Northwest Pennsylvania in the first quarter and recorded a $122.5 million pretax gain, principally from eliminating associated asset-retirement obligations.
- Range issued $850.0 million of 9.25% senior notes due 2026, including $300.0 million of additional notes in September, and used proceeds and asset-sale cash to retire or repurchase lower-rate notes.
- Range repurchased 8.2 million common shares during the first nine months at approximately $29.7 million, excluding fees. The common-stock dividend was suspended in January 2020.
Liquidity, debt and outlook
At September 30, 2020, the revolving credit facility had a $3.0 billion borrowing base, $2.4 billion of lender commitments, $706.0 million drawn and $332.0 million of undrawn letters of credit. Committed availability was approximately $1.4 billion, with an additional $600.0 million of borrowing-base capacity potentially available. Range was in compliance with its debt covenants, including the required EBITDAX-to-cash-interest ratio and current ratio.
Management reduced its 2020 capital budget from $520.0 million to $430.0 million and expected full-year spending of no more than $415.0 million. Management stated that operating cash flow, committed borrowing capacity, asset-sale proceeds and existing derivatives should cover near-term obligations and liquidity needs, while acknowledging that sustained low commodity prices or lower production and reserves could impair its ability to fund capital spending and debt obligations.
More than 65% of projected production for the remainder of 2020 and more than 80% of projected natural gas production were hedged as of September 30. Derivative positions exposed Range to commodity-price movements, counterparty performance and potential losses if prices rise beyond hedged levels. The aggregate net fair value of commodity derivatives was an unrealized pretax loss of approximately $83.5 million.
Risks, contingencies and unusual items
- COVID-19 continued to create uncertainty around demand, commodity prices, workforce availability, supply chains and operating conditions. The company reported no significant operational disruption as of the filing date.
- North Louisiana divestiture obligations include approximately $496.4 million of accrued exit costs and retained gathering, processing and transportation commitments extending through 2030. Total future transportation, gathering and processing commitments were $8.235 billion, including $496.4 million of accrued obligations.
- Debt totaled approximately $3.1 billion, while cash was only $0.5 million. Approximately $2.4 billion of debt carried fixed rates averaging 6.5%; a 1% increase in floating rates was estimated to increase annual interest expense by approximately $7.1 million.
- Commodity prices, basis differentials, NGL infrastructure and market access remain key operating risks. Limited Appalachian ethane demand or infrastructure could require production curtailments or costly gas blending or diversion.
- Range is contesting a Pennsylvania Department of Environmental Protection order concerning alleged methane impacts to groundwater and water wells. Resolution could result in penalties exceeding $100,000; the filing states that material environmental liabilities were not recorded.
- The company recorded $77.0 million of additional North Louisiana impairment in the first quarter and a $2.0 million lease-related impairment in the third quarter.
Important facts for investors to verify
- Whether operating cash flow and realized commodity prices improve sufficiently to fund the capital program without increased borrowings or additional asset sales.
- The timing and ultimate cash cost of the retained North Louisiana contractual obligations and the $90.0 million maximum contingent consideration.
- Debt maturities, refinancing requirements and compliance with credit-facility covenants under lower commodity-price scenarios.
- The effect of derivative settlements and future mark-to-market changes on cash flow, reported revenue and earnings.
- Actual 2020 capital spending relative to the revised $415.0 million maximum and the effect of reduced investment on production and reserves.
- Progress and potential penalties associated with the Pennsylvania environmental proceeding and other regulatory notices.