Range Resources Corporation — 2018 Q3 Form 10-Q
Business context and reporting period
Range Resources is an independent producer of natural gas, natural gas liquids (NGLs) and oil, primarily operating in the Appalachian and North Louisiana regions. The filing covers the three and nine months ended September 30, 2018. The company operates as one reporting segment. Daily production averaged 2.3 Bcfe in the third quarter and 2.2 Bcfe for the first nine months.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Natural gas, NGLs and oil sales | $736.4 million | $507.5 million | $2.094 billion | $1.573 billion |
| Total revenues and other income | $811.2 million | $482.2 million | $2.210 billion | $1.932 billion |
| Income (loss) before taxes | $72.7 million | $(199.7) million | $56.2 million | $210.0 million |
| Net income (loss) | $48.5 million | $(127.7) million | $17.9 million | $112.0 million |
| Diluted EPS | $0.19 | $(0.52) | $0.07 | $0.45 |
| Operating cash flow | $229.4 million | $189.2 million | $774.9 million | $600.5 million |
| Capital expenditures and acreage purchases | Not separately provided for the quarter | Not separately provided for the quarter | $832.0 million | $818.0 million |
Production increased 14% year over year in both the quarter and nine-month period. Average realized price including derivative settlements and third-party transportation costs was $1.90 per mcfe in Q3 and $2.04 per mcfe for nine months, compared with $1.82 and $1.93, respectively, in the prior-year periods.
Q3 operating margin improved materially as revenue growth exceeded expense growth; however, the filing does not present a single consolidated operating-margin or EBITDA figure. Transportation, gathering, processing and compression expense increased 59% to $304.6 million in Q3 and 46% to $819.1 million for nine months, partly due to production growth, new pipelines and gross presentation under the new revenue standard.
At September 30, 2018, cash was $0.4 million, total assets were $11.9 billion, total debt was $4.2 billion, and debt net of issuance costs was $4.161 billion. The company had $1.3 billion outstanding under its bank facility, $281.4 million of undrawn letters of credit and $452.6 million of committed borrowing capacity, plus approximately $1.0 billion of additional borrowing-base capacity. The company was in compliance with its debt covenants.
Material changes versus the prior comparable periods
- Q3 net income improved from a $127.7 million loss to $48.5 million of income, primarily due to higher production and realized prices, more favorable derivative results and the absence of the $63.7 million Q3 2017 proved-property impairment.
- Nine-month net income declined to $17.9 million from $112.0 million because derivative fair value results shifted from a $188.3 million gain in 2017 to a $151.9 million loss in 2018. The nine-month 2018 results also included $22.6 million of proved-property impairment.
- Natural gas production increased 15% for nine months, NGL production increased 12%, while crude oil production declined 3%. Marcellus production increased 24% and North Louisiana production declined 18% for the nine-month period.
- Operating cash flow increased $174.4 million year over year to $774.9 million, while capital spending and acreage purchases were approximately $833.2 million.
- Average debt outstanding increased 9% for the first nine months, and the average bank-facility rate increased to 3.7% from 2.6%. Interest expense increased to $161.0 million from $144.2 million.
- The company adopted the revenue recognition standard in 2018. Certain gas processing arrangements are now reported gross, increasing both sales and transportation, gathering, processing and compression expense without changing net income.
Guidance, outlook, risks and unusual items
- The 2018 capital budget was $941.2 million. Management stated that it expects to pursue profitable growth within cash flows and to use operating cash flow, asset-sale proceeds and available borrowing capacity to fund near-term needs.
- Management expected an effective tax rate of approximately 24% for the remainder of 2018 before discrete items.
- As of September 30, the company had hedged more than 75% of projected remaining 2018 production and more than 80% of projected natural gas production. Derivative contracts covered 148.1 Bcfe for the remainder of 2018, 356.2 Bcfe for 2019 and 7.0 Bcfe for 2020, excluding basis swaps.
- Derivative positions had a net unrealized pretax loss of approximately $104.8 million. Commodity-price changes can materially affect reported revenue and earnings through mark-to-market adjustments, as illustrated by the nine-month 2018 derivative loss.
- On October 15, 2018, after quarter-end, Range announced the sale of a proportionately reduced 1% royalty on current Washington County, Pennsylvania leases for $300.0 million. The filing states that the transaction was subject to customary terms and conditions.
- Transportation and gathering commitments increased by approximately $2.4 billion over the next 20 years, through 2038, primarily because of a new Pennsylvania pipeline and pricing changes.
- A Pennsylvania environmental proceeding could result in monetary sanctions exceeding $100,000. Management believes the company has evidence that the affected well is not leaking.
- Key risks include commodity-price volatility, basis and counterparty risk under derivatives, dependence on infrastructure and NGL/ethane markets, high leverage and interest-rate exposure. A 1% increase in short-term rates would increase annual interest expense by approximately $12.7 million.
- The company stated that no material changes occurred to the risk factors disclosed in its 2017 Form 10-K. Disclosure controls were considered effective as of September 30, 2018.
Facts investors should verify
- Whether production growth and higher liquids prices can offset rising transportation, gathering and processing costs.
- The sustainability of operating cash flow relative to the $941.2 million capital budget and the company’s debt-reduction objective.
- The effect of the $300.0 million post-quarter-end royalty transaction on liquidity, leverage and future production economics.
- Future derivative settlements and mark-to-market volatility, including the company’s substantial oil and NGL hedge exposure.
- Available liquidity after considering $281.4 million of letters of credit, borrowing-base redeterminations and covenant requirements.
- The financial impact of long-term transportation and gathering commitments, which increased by approximately $2.4 billion.
- Potential outcomes of the Pennsylvania environmental proceeding and any additional property impairments or lease abandonments.