Range Resources Corporation — Q1 2014 Form 10-Q Summary
Business context and reporting period
Range Resources Corporation is an independent U.S. producer of natural gas, natural gas liquids (NGLs) and oil, with operations primarily in the Appalachian and Southwestern regions. The filing covers the three months ended March 31, 2014. Results are unaudited and should be read with the 2013 Form 10-K.
Financial and operating metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Natural gas, NGLs and oil sales | $572.0 million | $398.2 million | +44% |
| Total revenues and other income | $457.3 million | $319.2 million | +43% |
| Income from operations before taxes | $51.5 million | $(122.8) million | Improved |
| Net income (loss) | $32.5 million | $(75.6) million | Improved |
| Diluted earnings (loss) per share | $0.20 | $(0.47) | Improved |
| Operating margin | Approximately 11.3% | Negative | Improved |
| Net margin | Approximately 7.1% | Negative | Improved |
| Cash flow from operating activities | $181.2 million | $201.2 million | −10% |
| Capital expenditures and acreage purchases | $280.1 million | Approximately $268.4 million | Higher |
| Cash and cash equivalents | $0.2 million | $0.2 million | Stable |
Total production increased 21% to 95.1 Bcfe, driven by Marcellus development and significantly higher NGL volumes. NGL production increased 151%, crude oil and condensate production increased 13%, while natural gas production was essentially unchanged. Average realized price including derivatives and transportation declined to $4.14 per Mcfe from $4.26 per Mcfe.
Natural gas, NGLs and oil sales benefited from higher production and commodity prices before derivative effects. NYMEX average prices increased to $4.89 per Mcf for natural gas, $98.61 per barrel for oil and $0.91 per gallon for NGLs. However, derivative fair value loss was $146.9 million, compared with a $99.9 million loss in the prior-year quarter.
Operating expenses included $128.7 million of depletion, depreciation and amortization, or $1.35 per Mcfe, down from $1.46 per Mcfe. General and administrative expense declined to $49.2 million from $84.1 million, primarily because Q1 2013 included a $35.0 million accrual related to an Oklahoma lawsuit. Interest expense increased to $45.4 million from $42.2 million. The effective tax rate was 36.8%, compared with 38.4%.
Debt, liquidity and capital resources
- Total debt was $3.235 billion at March 31, 2014, including $594.0 million of bank debt and $2.641 billion of senior subordinated notes.
- The revolving credit facility had a $1.75 billion facility amount, a $2.0 billion borrowing base and approximately $1.0 billion of available borrowing capacity after $127.4 million of letters of credit.
- The credit facility matures February 18, 2016. The borrowing base and facility amount were reaffirmed on April 3, 2014.
- Range was in compliance with its bank and senior subordinated note covenants at March 31, 2014.
- Operating cash flow of $181.2 million and bank borrowings funded $280.1 million of capital expenditures, including acreage acquisitions. Cash declined by only $102,000 during the quarter because financing activities partly offset investing outflows.
- The 2014 capital budget is $1.52 billion. Management believes operating cash flow, available borrowing capacity, asset-sale proceeds and existing derivatives will fund near-term obligations and liquidity needs.
Material changes versus the prior comparable period
- Returned to profitability, reporting $32.5 million of net income versus a $75.6 million net loss.
- Sales increased 44%, primarily from 21% production growth and higher commodity prices, although average realized prices after all derivative and transportation effects declined 3%.
- Marcellus production increased 29%, and NGL revenue approximately doubled to $135.5 million.
- Operating cash flow decreased despite higher production because of lower realized prices, higher operating costs and unfavorable working-capital movements.
- Derivative losses increased by $46.975 million year over year. Since March 1, 2013, all commodity derivatives have been marked to market through earnings, increasing reported earnings volatility.
- Deferred compensation plan expense shifted from a $42.4 million expense in Q1 2013 to a $2.0 million gain in Q1 2014, primarily reflecting changes in the company’s stock price.
- Transportation and gathering commitments increased by approximately $628.4 million over the next 25 years, primarily from two new firm transportation contracts.
Guidance, outlook, risks and unusual items
- Management expects an effective tax rate of approximately 39% for the remainder of 2014 before discrete tax items.
- Approximately 78% of projected production for the remainder of 2014 was hedged as of March 31, 2014, including approximately 89% of projected natural gas production. Contracts extend through December 2016.
- Derivative contracts had a net unrealized pretax loss of approximately $53.4 million at March 31, 2014. Commodity-price changes can materially affect reported earnings without an immediate cash-flow impact.
- Key risks include commodity-price volatility, basis differentials, derivative counterparty performance, production and reserve risks, capital availability, transportation and gathering obligations, and interest-rate exposure. A 1% increase in short-term rates would increase annual interest expense by approximately $5.9 million based on quarter-end floating-rate debt.
- Ethane takeaway capacity remains a risk in the Appalachian region. A planned facility expected to begin operations in mid-2015 may not become available; inability to sell ethane could require production curtailments or blending purchases.
- Range announced a potential sale of approximately 90,000 gross acres in the Permian Basin. An agreement was executed in late April subject to board approval and due diligence, and completion was not assured at the filing date.
- Management expects additional leasehold impairments and abandonments may be recorded as acreage is reviewed and drilling inventory is high-graded.
- Management stated that pending litigation is not expected to have a material adverse effect, although litigation outcomes remain uncertain.
Most important facts for investors to verify
- Whether production growth, particularly in the Marcellus and NGLs, continues to offset lower realized prices and transportation costs.
- The cash-flow and covenant impact of the $1.52 billion capital budget and approximately $3.2 billion of debt.
- Current borrowing-base availability and the February 2016 credit-facility maturity.
- Derivative positions, settlement cash flows and the effect of mark-to-market accounting on earnings.
- Execution and economics of new transportation and gathering commitments.
- Availability of ethane takeaway infrastructure and the status of the proposed Permian Basin asset sale.
- Potential exposure from suspended exploratory well costs, asset-retirement obligations, litigation and future acreage impairments.