RANGE RESOURCES CORP quarterly report, Q3 FY2019

Range Resources Corporation — 2019 Q3 Form 10-Q Summary

Business context and reporting period

Range Resources Corporation is an independent producer of natural gas, natural gas liquids and oil, focused primarily on the Appalachian and North Louisiana regions. The company operates as one reportable segment. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods.

Key financial metrics

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Natural gas, NGLs and oil sales	$474.8 million	$736.4 million	$1.710 billion	$2.094 billion
Total revenues and other income	$622.4 million	$811.2 million	$2.222 billion	$2.210 billion
Net income (loss)	$(27.6) million	$48.5 million	$89.0 million	$17.9 million
Diluted EPS	$(0.11)	$0.19	$0.35	$0.07
Cash flow from operations	$103.9 million	$229.4 million	$549.4 million	$774.9 million
Production	2.244 Bcfe/day	2.267 Bcfe/day	2.262 Bcfe/day	2.219 Bcfe/day
Average realized price including derivatives and transportation	$1.25/Mcfe	$1.90/Mcfe	$1.54/Mcfe	$2.04/Mcfe

Q3 2019 total revenue included $74.7 million of derivative fair-value income, compared with a $34.6 million loss in Q3 2018. For the first nine months, derivative fair-value income was $208.2 million versus a $151.9 million loss in the prior-year period. These mark-to-market amounts are volatile and include non-cash changes.

Total costs and expenses were $697.2 million in Q3 2019 and $2.134 billion for the first nine months. Q3 pretax loss was $74.8 million, partly offset by a $47.2 million tax benefit. The nine-month effective tax rate was negative 1.6%, primarily reflecting state apportionment changes and valuation allowance adjustments.

Balance sheet, debt and liquidity

Cash and cash equivalents were only $354,000 at September 30, 2019, versus $545,000 at December 31, 2018.
Total assets were $8.854 billion and stockholders’ equity was $4.158 billion.
Total debt was $3.161 billion before premiums and issuance costs, or $3.134 billion net. This included $328.0 million of bank debt, $2.784 billion of senior notes and $49.0 million of senior subordinated notes.
Debt declined from $3.869 billion at December 31, 2018, primarily through repayments of the revolving facility and open-market note repurchases.
The revolving credit facility had a $3.0 billion borrowing base and $2.0 billion of lender commitments at quarter-end. After $328.0 million of borrowings and $255.2 million of letters of credit, approximately $1.4 billion of committed capacity remained, with an additional $1.0 billion of borrowing-base capacity.
In October 2019, lender commitments were increased to $2.4 billion. The company stated that it was in compliance with applicable debt covenants at September 30, 2019.

Material changes versus the prior comparable period

Q3 natural gas, NGL and oil sales fell 36%, driven primarily by a 35% decline in average realized prices before derivative settlements and slightly lower production. NGL sales declined 49%, natural gas sales 27% and oil sales 31%.
First-nine-month commodity sales declined 18%, despite a 2% increase in production, because average realized prices before derivative settlements declined 20%.
Q3 production was affected by the sale of additional overriding royalty interests and downtime at the Marcus Hook export terminal, including ethane rejection. Marcellus production increased 3%, while North Louisiana production declined 28%.
Operating cash flow decreased $225.5 million year over year for the first nine months, reflecting lower realized prices and the effect of asset sales, partially offset by higher production and favorable working-capital changes.
Transportation, gathering, processing and compression expense increased 10% to $899.8 million for the first nine months, primarily because of Marcellus production growth and new pipelines.
General and administrative expense declined 13% for the first nine months, while interest expense declined 7% and DD&A declined 14%.
Q3 included a $36.3 million loss on asset sales, primarily a $36.5 million loss on the sale of a 2.5% overriding royalty interest for gross proceeds of $750.0 million. Total asset-sale proceeds were $784.5 million for the first nine months.
The company repurchased $93.6 million face value of senior notes during Q3 and recorded a $3.0 million gain on extinguishment of debt.

Cash flow, capital spending and outlook

For the first nine months, $549.4 million of operating cash flow and $784.5 million of asset-sale proceeds funded approximately $591.0 million of capital expenditures, including acreage purchases, debt reduction and other uses.
The 2019 capital budget was $756.0 million. Management’s stated objective was to fund capital spending within operating cash flow and pursue profitable growth while reducing debt over time.
Management expected operating cash flow, available credit capacity, asset-sale proceeds and derivative contracts to satisfy near-term obligations and liquidity needs, but acknowledged that future liquidity depends materially on commodity prices, production, reserves and access to capital.
More than 65% of projected production for the remainder of 2019 was hedged at September 30, including more than 80% of projected natural gas production. Derivative contracts extended through December 2021.
In October 2019, the board authorized a $100.0 million common-stock repurchase program. The filing does not state that repurchases had occurred under this program by the filing date.

Risks, contingencies and unusual items

Primary risks include volatility in natural gas, NGL and oil prices, production and reserve declines, basis differentials, transportation and processing commitments, derivative counterparty performance, interest rates and access to capital.
Management warned that a material commodity-price decline or reduction in production or reserves could impair oil and gas properties, reduce cash flow and affect the ability to fund capital expenditures and meet financial obligations.
Derivative gains can indicate lower future wellhead revenues, while derivative losses can indicate higher future wellhead revenues. Derivatives limit the benefit of rising prices and provide only partial protection against declines.
At September 30, 2019, net derivative fair value was approximately a $152.3 million pretax gain. A 1% increase in short-term interest rates would increase annual interest expense by approximately $3.3 million based on floating-rate debt outstanding.
The company reported a pending Pennsylvania Department of Environmental Protection matter involving alleged methane and other substance releases from a well. Range disputes the allegation but stated that resolution could result in monetary sanctions exceeding $100,000.
The company recorded $3.0 million of severance costs in the first nine months following a workforce reduction and an additional $819,000 related to the sale of Pennsylvania non-core assets.
Operating lease right-of-use assets and lease liabilities were recognized in 2019; management stated that adoption of the lease standard did not materially affect operations, cash flows or equity.

Investor verification checklist

Verify the sustainability of operating cash flow at current commodity prices after derivative settlements and transportation costs.
Review the maturity schedule, covenants, borrowing-base redeterminations and the October 2019 increase in lender commitments.
Assess the economic impact and production implications of the overriding royalty-interest sale and other Pennsylvania divestitures.
Examine hedge volumes, prices, settlement obligations and counterparty exposure through 2021.
Evaluate whether the $756.0 million capital budget can be funded from operating cash flow without materially increasing debt.
Monitor NGL infrastructure and ethane takeaway constraints, Marcus Hook operations and North Louisiana production declines.
Review the Pennsylvania environmental proceeding and other litigation for potential sanctions or remediation costs.