RRC

Range Resources Corp. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Range Resources Corporation for the period ended March 31, 2003. Range Resources is engaged in the development, acquisition, and exploration of oil and gas properties primarily in the Southwestern, Gulf Coast, and Appalachian regions of the United States. The company also operates a subsidiary, Independent Producer Finance (IPF), which provides financing to smaller producers. The financial statements are unaudited but reflect all normal recurring adjustments.

Key Financial Metrics

Note: Net Income for Q1 2003 includes a one-time cumulative effect gain of $4.49 million due to the adoption of SFAS 143 (Asset Retirement Obligations).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 25% to $56.97 million, driven by higher average sales prices for oil ($23.64/bbl vs. $22.66/bbl) and natural gas ($3.95/mcf vs. $3.26/mcf) after hedging. Production volumes increased 3% to 154.0 Mmcfe per day.
• Profitability: Net income more than doubled to $9.45 million. Excluding the $4.49 million accounting change gain, core net income was $4.96 million compared to $4.34 million in the prior year.
• Operating Expenses: Direct operating expenses rose 42% to $13.03 million due to higher production taxes and costs from new wells. Exploration expenses decreased 53% to $2.45 million due to lower dry hole costs.
• Hedging Impact: Realized hedging losses reduced oil and gas revenues by $25.9 million in Q1 2003, compared to a hedging gain of $11.7 million in Q1 2002. The company holds a net unrealized pre-tax hedging loss of $56.0 million on open contracts.
• Accounting Change: Adoption of SFAS 143 resulted in a $4.5 million net gain and increased the carrying value of proved properties by $37.3 million while recording $54.0 million in asset retirement obligations.

Guidance, Outlook, and Risks

• Liquidity: Management believes capital resources are adequate for the next 12 months. Available borrowing capacity was $25.2 million on the Parent facility and $24.0 million on the Great Lakes facility as of March 31, 2003.
• Capital Budget: The 2003 capital budget is $110.0 million, intended to be funded by internal cash flow and bank borrowings. The company seeks to reduce debt as a percentage of capitalization.
• Hedging Strategy: The company hedges 50% to 75% of projected production on a rolling 12 to 24-month basis. Current hedges cover approximately 80% of anticipated production for the remainder of 2003.
• Risks:
  • Commodity Prices: A material drop in oil and gas prices would reduce the ability to fund capital expenditures and meet obligations. The high depletion, depreciation, and amortization (DD&A) rate ($1.51/mcfe) makes profitability sensitive to price declines.
  • IPF Portfolio: The IPF subsidiary has not entered new financing agreements since 2001 and faces substantial operational risk as it focuses on recovering investments from a declining portfolio.
  • Debt Covenants: The company is in compliance with all covenants, but restricted payments are limited. The most restrictive covenant limits the ability to repurchase convertible debentures and trust preferred securities.

Investor Verification Checklist

• Accounting Change Impact: Verify the sustainability of earnings by excluding the $4.49 million one-time gain from the SFAS 143 adoption.
• Hedging Exposure: Assess the impact of the $56.0 million unrealized hedging loss and the $25.9 million realized loss on future revenue if commodity prices remain below contract prices.
• Debt Structure: Review the composition of the $374.8 million debt load, specifically the $84.4 million in Trust Preferred securities and the $20.7 million in convertible debentures.
• IPF Valuation: Monitor the $13.7 million valuation allowance on IPF receivables and the strategy for the declining portfolio.
• Capital Expenditures: Confirm the ability to fund the $110 million 2003 capital budget given the current cash flow and borrowing base constraints.