Business Context and Reporting Period
Range Resources Corporation, an independent U.S. natural gas, NGL and oil producer, filed this Form 10-K for the fiscal year ended December 31, 2015. The company operates one reportable segment, with approximately 97% of proved reserves located in the Marcellus Shale in Pennsylvania.
The filing includes unaudited fourth-quarter information. Fourth-quarter 2015 results were materially affected by the sale of Virginia and West Virginia assets and impairment charges.
Key Financial and Operating Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Natural gas, NGL and oil sales | $1.090 billion | $1.912 billion | Down 43% |
| Total revenues and other income | $1.598 billion | $2.426 billion | Down 34% |
| Net income/(loss) | $(713.7) million | $634.4 million | Declined to a loss |
| Diluted EPS | $(4.29) | $3.79 | Declined to a loss |
| Cash flow from operations | $683.7 million | $954.1 million | Down 28% |
| Total production | 1,395.4 Mmcfe per day | 1,162.4 Mmcfe per day | Up 20% |
| Average realized price including derivatives and transportation | $2.41 per mcfe | $3.64 per mcfe | Down 34% |
| Direct operating cost | $0.27 per mcfe | $0.35 per mcfe | Down 23% |
| Total debt | $2.651 billion | $3.031 billion | Down $379.5 million |
| Stockholders’ equity | $2.760 billion | $3.457 billion | Down 20% |
Net loss margin was approximately 44.7% of total revenues and other income, compared with net income margin of approximately 26.1% in 2014. Results included substantial non-cash and unusual charges, including $590.2 million of proved-property impairments and a $406.9 million pretax net loss on asset sales.
- Production consisted of 362.7 Bcf of natural gas, 20.4 Mmbbls of NGLs and 4.1 Mmbbls of crude oil and condensate. Marcellus production increased 27%.
- Proved reserves totaled 9.9 Tcfe, down 4% from 10.3 Tcfe. Excluding the Virginia and West Virginia disposition, management reported 6% reserve growth.
- PV-10 declined to $3.0 billion from $10.1 billion, and the after-tax standardized measure declined to $2.7 billion from $7.6 billion, principally reflecting lower commodity prices.
- Capital additions to natural gas and oil properties were $1.031 billion; total reported costs incurred for acquisition, exploration and development were $925.7 million.
- Cash and cash equivalents were only $0.5 million at year-end, but the company generally uses available cash to reduce bank debt.
Material Changes Versus the Prior Comparable Period
- Commodity prices fell sharply. Average NYMEX natural gas declined to $2.65 per mcf from $4.37, oil to $49.21 per barrel from $92.64, and the Mont Belvieu NGL composite to $0.40 per gallon from $0.76.
- Production growth was more than offset by lower realized prices, reducing product sales by 43% despite 20% volume growth.
- Range sold most Virginia and West Virginia properties and gathering assets for $876.0 million before closing adjustments and recognized a $407.7 million pretax loss. It also sold West Texas and miscellaneous assets.
- Proved-property impairment expense increased to $590.2 million from $28.0 million, including charges for Northern Oklahoma, legacy Northwest Pennsylvania assets, the Texas Panhandle and South Texas.
- Management reduced the 2015 capital budget from $1.3 billion to $870 million, reduced operating and administrative costs, closed the Oklahoma City office and implemented workforce reductions.
- Range issued $750.0 million of 4.875% senior notes due 2025 and redeemed $500.0 million of 6.75% senior subordinated notes due 2020. Debt to capitalization increased to 49.0% from 46.7% because equity declined substantially despite lower absolute debt.
- Direct operating, general and administrative, interest and DD&A costs per mcfe all declined, although transportation, gathering and compression expense increased to $396.7 million from $325.3 million as Appalachian volumes grew.
Guidance, Outlook, Commentary and Risks
- Management approved a 2016 capital budget of $495.0 million, with 98% allocated to the Marcellus Shale, and planned to drill more than 65 net Marcellus wells using an average of approximately three rigs.
- Management expects to adjust capital spending based on commodity prices, drilling results and liquidity. Funding sources may include operating cash flow, asset sales, bank borrowings, debt or equity issuance.
- Management expected natural gas, NGL and oil prices to remain under pressure in 2016 because of excess supply and elevated storage levels. Commodity derivatives covered 305.9 Bcfe of 2016 production and 8.4 Bcfe of 2017 production as of year-end.
- The board reduced the quarterly dividend from $0.04 to $0.02 per share in February 2016.
- Year-end debt was $2.7 billion, including $86.4 million of bank debt, $738.1 million of senior notes and $1.827 billion of senior subordinated notes. The credit facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments and $137.9 million of outstanding letters of credit; reported available commitment capacity was approximately $1.8 billion.
- Debt agreements restrict dividends, additional debt, asset sales and other actions. Management reported compliance with applicable covenants, but the filing states that the senior subordinated note indentures currently limit bank-facility usage to $1.5 billion under the year-end reserve-value test.
- Contractual obligations included $3.650 billion of transportation and gathering commitments, $74.5 million of operating leases and $264.1 million of asset-retirement obligations. Additional contingent transportation and gathering commitments may apply as infrastructure is constructed or modified.
- Key risks include commodity-price volatility, further reserve revisions or impairment, dependence on Appalachian infrastructure and third-party processing, high fixed transportation commitments, leverage and borrowing-base reductions, hydraulic-fracturing and environmental regulation, water and disposal constraints, derivative-counterparty risk and operational hazards.
- A Pennsylvania environmental proceeding concerning alleged methane releases from one well could result in monetary sanctions exceeding $100,000; management disputes the allegation. The filing states that other litigation is not expected to have a material adverse effect.
Facts Investors Should Verify
- Reconcile the sharp decline in reported earnings and PV-10 with the underlying production growth and the effects of impairments, asset-sale losses, derivative accounting and deferred taxes.
- Confirm the 2016 capital program, expected production, hedge coverage and whether operating cash flow is sufficient to fund capital spending and contractual commitments without additional borrowing or asset sales.
- Review borrowing-base redeterminations, the $1.5 billion debt-incurrence limitation, covenant headroom and maturity/refinancing requirements.
- Assess whether Marcellus production growth can offset low realized prices, rising transportation commitments and limited regional demand for ethane and other NGLs.
- Evaluate the quality and timing of proved undeveloped reserves, including the 1.2 Tcfe reclassification caused by reduced capital spending and the required future development expenditures.
- Monitor additional property impairments, lease expirations, environmental proceedings, regulatory changes and the sustainability of the reduced dividend.