Range Resources Corporation — Q1 2021 Form 10-Q Summary
Business context and reporting period
Range Resources is an independent natural gas, natural gas liquids (NGLs) and oil company focused on exploration, development and acquisition of properties in the Appalachian region. The filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Results are unaudited and presented under U.S. GAAP.
Financial performance and liquidity
- Revenue and other income: $626.0 million, compared with $693.9 million in Q1 2020. Natural gas, NGLs and oil sales increased 40% to $603.3 million, but derivative fair value results declined from $233.2 million of income to a $57.9 million loss.
- Net income: $27.2 million, or $0.11 diluted earnings per share, compared with $166.2 million, or $0.66 per diluted share.
- Net margin: Approximately 4.3% of revenue, compared with approximately 23.9% in Q1 2020.
- Operating cash flow: $109.3 million, compared with $124.5 million. Working-capital changes were a $77.3 million use of cash in Q1 2021 versus a $9.3 million source in Q1 2020.
- Capital expenditures: Approximately $111.6 million, including acreage acquisitions, consisting primarily of $99.2 million for natural gas properties and $11.8 million for acreage purchases.
- Production: Average production was 2.081 Bcfe per day, down 9% from 2.294 Bcfe per day. Total production volumes declined 10% year over year.
- Realized pricing: Average realized price including derivative settlements and third-party transportation costs increased 31% to $1.55 per mcfe. Excluding derivative settlements, the average realized price increased 56% to $3.22 per mcfe.
- Costs: Direct operating expense declined 45% to $17.7 million; transportation, gathering, processing and compression expense declined 4% to $274.3 million; and general and administrative expense declined 10% to $38.0 million. Interest expense increased 20% to $56.9 million.
- Debt: Total debt was $3.14 billion at March 31, 2021, including $124.0 million drawn under the bank credit facility and approximately $3.01 billion of senior and senior subordinated notes. Long-term debt, net of issuance costs and current maturities, was $3.06 billion.
- Liquidity: Cash was $449,000. The revolving credit facility had a $3.0 billion borrowing base, $2.4 billion of lender commitments, $124.0 million outstanding, $334.6 million of letters of credit and approximately $1.9 billion of committed borrowing capacity available. The company was in compliance with its debt covenants.
- Balance sheet: Total assets were $6.17 billion and stockholders’ equity was $1.66 billion at March 31, 2021.
Material changes versus the prior comparable period
- Higher commodity prices substantially improved reported production revenue, but the year-over-year comparison was negatively affected by a $291.1 million swing in derivative fair value results.
- Net income decreased $139.0 million, primarily because of lower derivative fair value income and the absence of the $122.1 million gain on asset sales recorded in Q1 2020.
- Q1 2020 included a $77.0 million proved-property impairment charge; no proved-property impairment was recorded in Q1 2021.
- Production declined following the sale of the North Louisiana assets in Q3 2020 and natural production declines.
- In January 2021, Range issued $600.0 million of 8.25% senior notes due 2029 and used the net proceeds of approximately $590.8 million to repay bank facility borrowings. Bank debt declined from $702.0 million at December 31, 2020 to $124.0 million at March 31, 2021.
- Exit and termination costs increased to $13.7 million from $1.6 million, primarily because of $13.0 million of accretion related to retained gathering, transportation and processing obligations from the North Louisiana asset sale.
- Deferred compensation plan expense changed from an $8.5 million gain to a $19.8 million loss, largely reflecting the increase in Range’s share price during the quarter.
- The company did not repurchase shares during Q1 2021. Its $100.0 million repurchase authorization remained in place.
Guidance, outlook, commentary and risks
- Management’s initial 2021 capital budget was $425.0 million and its stated objective is to fund capital spending at or below operating cash flow.
- Management expects commodity prices to remain volatile because of COVID-19 recovery uncertainty, global supply and demand, OPEC-related actions, LNG demand and policies encouraging lower-carbon energy.
- As of March 31, 2021, the company had hedged more than 55% of projected remaining 2021 production and more than 65% of projected 2021 natural gas production. The derivative portfolio had an approximate $44.9 million net unrealized pretax loss.
- Management stated that operating cash flow, available credit capacity, potential asset-sale proceeds and existing derivatives should be adequate for near-term obligations and liquidity needs, but a material decline in commodity prices, production or reserves could impair funding capacity and profitability.
- Range retained discounted obligations of approximately $471.9 million related to gathering, transportation and processing commitments extending through 2030 after the North Louisiana disposition.
- A shareholder class action filed in March 2021 alleges misclassification of certain wells and related asset-retirement-obligation disclosures. Management considers the claims baseless and intends to defend them vigorously.
- The Pennsylvania Department of Environmental Protection has asserted environmental allegations involving a Lycoming County well. The matter could result in monetary sanctions exceeding $250,000, although the company disputes the allegations.
- The company disclosed that a previously reported material weakness involving tax-law accounting and deferred taxes was remediated as of March 31, 2021. Disclosure controls were deemed effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether higher commodity prices and realized pricing can offset lower production volumes and substantial fixed transportation and debt costs.
- The sustainability of operating cash flow relative to the $425.0 million capital budget and the company’s target of funding capital spending from cash flow.
- Debt maturities, refinancing requirements and the ability to maintain access to the $1.9 billion of stated committed credit capacity.
- The sensitivity of earnings and cash flow to derivative settlements, mark-to-market changes and the company’s hedging coverage.
- The ultimate cost and timing of retained divestiture-related transportation obligations, asset-retirement obligations and environmental matters.
- The status and potential financial impact of the shareholder litigation and the Pennsylvania regulatory proceeding.