RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2011
Business Overview: Range Resources is an independent natural gas and oil company focused on exploration, development, and acquisition in the Appalachia and Southwest regions of the United States. The company utilizes the successful efforts method of accounting.

Key Financial Metrics (Nine Months Ended Sept 30, 2011)

Note: All figures are in thousands unless otherwise noted. Net income includes a significant gain from discontinued operations related to the sale of Barnett Shale assets.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 22% year-over-year (from $684.8M to $832.4M). Natural gas, NGL, and oil sales rose 38% to $755.4M, driven by a 31% increase in production volumes and higher realized prices.
• Profitability: Net income decreased 22% to $61.0M from $78.5M in the prior year. This decline is primarily due to a $77.4M gain on the sale of Ohio properties in 2010, which was not present in 2011, partially offset by improved operating results.
• Discontinued Operations: The company completed the sale of substantially all Barnett Shale assets in 2011, resulting in a $4.9M pretax gain and $15.5M net income from discontinued operations, compared to a $19.5M loss in the same period of 2010.
• Impairments: The company recorded $38.7M in impairment of proved properties in 2011 (vs. $6.5M in 2010), primarily related to East Texas and Gulf Coast onshore properties due to lower reserves and prices.
• Debt Restructuring: The company issued $500M of new 5.75% senior subordinated notes due 2021 and used proceeds to retire $150M of 2015 notes and $250M of 2016 notes, incurring an $18.6M loss on early extinguishment of debt.

Guidance, Outlook, and Risks

• Capital Budget: The 2011 capital budget (excluding acquisitions) is estimated at $1.47 billion, focused on Marcellus Shale development. Management expects to fund this via internal cash flow, asset sales, and the bank credit facility.
• Production Outlook: Daily production exceeded 534.4 mmcfe. Management anticipates continued growth in NGL production, particularly from liquids-rich gas in the Appalachia region.
• Hedging Strategy: As of September 30, 2011, the company held a net unrealized pre-tax derivative gain of $183.6M. Hedges cover significant volumes for 2011, 2012, and 2013 to mitigate price volatility.
• Liquidity: The company has a $2.0 billion borrowing base with a $1.5 billion facility amount. As of period end, there were no outstanding borrowings under the credit facility, leaving approximately $1.5 billion in available capacity.
• Risks: Primary risks include volatility in natural gas and oil prices, the ability to secure financing, and the success of drilling operations in the Marcellus Shale. The company notes that lower commodity prices could reduce borrowing capacity.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the $15.5M net income from discontinued operations (Barnett Shale sale) masks the performance of continuing operations.
• Derivative Valuation: Confirm the sustainability of the $183.6M unrealized derivative gain and its potential reclassification to earnings in future periods.
• Impairment Charges: Assess the $38.7M impairment charge on proved properties and its impact on future depreciation and depletion rates.
• Debt Maturity Profile: Review the new debt structure (5.75% notes due 2021) and the associated interest expense increase compared to the retired debt.
• Capital Expenditure Funding: Monitor the company's ability to fund the $1.47B capital budget given the heavy reliance on internal cash flow and asset sales.