Range Resources Corporation — 2018 Q2 Form 10-Q Summary
Business context and reporting period
Range Resources is an independent U.S. exploration and production company focused primarily on natural gas, NGLs and oil properties in the Appalachian and North Louisiana regions. The filing covers the three and six months ended June 30, 2018; financial statements are unaudited. The company reported 249.5 million common shares outstanding as of July 27, 2018.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Natural gas, NGL and oil sales | $661.4 million | $506.1 million | $1.358 billion | $1.066 billion |
| Total revenues and other income | $656.2 million | $673.1 million | $1.399 billion | $1.450 billion |
| Net income/(loss) | $(79.8) million | $69.6 million | $(30.6) million | $239.7 million |
| Diluted EPS | $(0.32) | $0.28 | $(0.13) | $0.97 |
| Cash flow from operations | $174.9 million | $185.4 million | $545.5 million | $411.3 million |
| Production | 2.20 Bcfe/day | 1.94 Bcfe/day | 2.19 Bcfe/day | 1.94 Bcfe/day |
Q2 total revenues declined despite 31% growth in physical commodity sales because derivative fair value income changed to a $103.3 million loss from $111.2 million of income. Six-month derivative fair value results were a $117.3 million loss versus $276.8 million of income in the prior-year period.
Average realized price including derivative settlements and third-party transportation costs increased 4% to $1.88 per mcfe in Q2 and 7% to $2.11 per mcfe for the first six months. Production increased 13% in both comparison periods, driven primarily by Marcellus development. Q2 Marcellus production rose 26%, while North Louisiana production declined 25%.
Q2 costs and expenses were $764.5 million, up from $545.9 million. Major items included $269.9 million of transportation, gathering, processing and compression expense, $161.0 million of DD&A, $54.9 million of abandonment and impairment of unproved properties, and $15.3 million of proved-property impairment. Six-month proved and unproved property impairment totaled $89.3 million.
Q2 income tax benefit was $28.5 million, compared with $57.7 million of expense in the prior-year quarter. The six-month effective tax rate was negative 86.1%, reflecting the loss and discrete tax items. Management expected an approximately 24% effective tax rate for the remainder of 2018 before discrete items.
Liquidity, debt and capital spending
- Cash and cash equivalents were $415,000 at June 30, 2018, compared with $448,000 at December 31, 2017.
- Total debt was $4.24 billion, including $1.31 billion of bank debt, $2.88 billion of senior notes and $49.0 million of senior subordinated notes. Debt net of issuance costs was $4.21 billion.
- The amended revolving credit facility has a $3.0 billion borrowing base, $2.0 billion of lender commitments and an April 2023 maturity. Outstanding borrowings were $1.3 billion; $281.4 million of letters of credit left $404.6 million of committed borrowing capacity available.
- The company stated that an additional $1.0 billion of borrowing-base capacity could provide potential liquidity, subject to lender commitments and applicable conditions.
- Six-month capital expenditures, including acreage acquisitions, were approximately $624.2 million. The 2018 capital budget was $941.2 million.
- Operating cash flow and credit-facility borrowings funded capital expenditures, while cash balances remained low because available funds were generally used to reduce bank debt.
- The company paid $9.96 million of dividends during the first six months, or $0.04 per share. The quarterly dividend was $0.02 per share.
Material changes versus the prior comparable period
- Production rose 13%, while commodity sales increased 31% in Q2 and 27% for the first six months.
- Net income shifted to losses primarily because of unfavorable non-cash derivative fair value changes and higher property impairment charges.
- Transportation, gathering, processing and compression expense increased 41% in Q2 and 39% for the first six months, reflecting production growth, new transportation costs and a revenue-presentation change.
- The company adopted the new revenue recognition standard on January 1, 2018. Certain gas-processing arrangements are now reported gross, increasing both sales and transportation expense without changing net loss.
- Interest expense increased to $53.9 million in Q2 and $106.2 million for the first six months, driven by higher average debt and higher bank-facility rates.
- Six-month operating cash flow increased $134.2 million, supported by higher production, improved realized prices and working-capital changes.
- Firm transportation and gathering commitments increased approximately $171 million over the next 20 years, primarily due to pricing changes.
Guidance, outlook, risks and unusual items
Management stated that internally generated cash flow, available credit capacity, asset-sale proceeds and existing derivatives were expected to satisfy near-term obligations and liquidity needs. The company intends to pursue profitable growth within cash flows and continue monitoring opportunities to refinance or reduce debt.
More than 70% of projected production for the remainder of 2018 was hedged, including more than 80% of projected natural gas production. Derivative contracts had an aggregate net unrealized pretax loss of approximately $104.3 million at June 30, 2018 and generally expire monthly through December 2020. Hedging limits exposure to price declines but also limits the benefit of rising prices and creates counterparty and basis risk.
Principal risks include volatile natural gas, NGL and oil prices; production, reserve and drilling risks; high leverage and floating-rate exposure; transportation and gathering commitments; limited Appalachian ethane infrastructure; counterparty performance; potential additional acreage impairments and abandonments; and the ability to fund capital spending. A 1% increase in short-term interest rates was estimated to increase annual interest expense by approximately $13.1 million.
The company reported no material changes to previously disclosed risk factors, no significant off-balance-sheet debt arrangements, and compliance with applicable debt covenants. A Pennsylvania environmental matter involving a Lycoming County well could result in monetary sanctions exceeding $100,000, although the company disputes the alleged leakage. Litigation liabilities were not expected by management to materially affect consolidated financial position or liquidity, but ultimate outcomes may differ.
Important facts for investors to verify
- Reconcile reported revenue and expense growth under the new gross revenue-recognition presentation with prior-period results.
- Assess cash generation after capital expenditures, including the approximately $941.2 million full-year capital budget.
- Monitor debt balances, borrowing-base redeterminations, available committed capacity and covenant compliance.
- Review the sensitivity of earnings and cash flow to commodity prices, derivative settlements and the approximately $104.3 million net derivative liability.
- Evaluate the sustainability of Marcellus production growth, North Louisiana declines and the associated transportation and gathering commitments.
- Track additional impairment or lease-abandonment charges, particularly in North Louisiana, Oklahoma and legacy Pennsylvania assets.
- Review environmental, regulatory and litigation developments, including the Pennsylvania DEP matter.