Business Context and Reporting Period
Range Resources Corporation 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 unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017, and the balance sheet is compared with December 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Natural gas, NGLs and oil sales | $696.6 million | $559.5 million | 25% increase |
| Total revenues and other income | $742.6 million | $776.7 million | 4% decrease |
| Income before income taxes | $91.9 million | $282.5 million | 67% decrease |
| Net income | $49.2 million | $170.1 million | 71% decrease |
| Diluted earnings per share | $0.20 | $0.69 | Decrease |
| Net margin | 6.6% | 21.9% | Lower |
| Cash flow from operating activities | $370.6 million | $225.9 million | 64% increase |
| Capital expenditures and acreage purchases | $334.0 million | $215.5 million | Increase |
| Total debt, net of issuance costs | $4.082 billion | $4.109 billion at December 31, 2017 | Decrease |
Production increased 13% to 196.95 Bcfe for the quarter, or approximately 2.19 Bcfe per day. Natural gas production increased 16%, NGL production increased 9%, and oil production was essentially flat. Average realized prices including derivative settlements and third-party transportation costs increased to $2.34 per mcfe from $2.17 per mcfe.
Operating cash flow exceeded capital expenditures and acreage purchases by approximately $36.6 million before financing and other cash uses. Cash and cash equivalents were only $527,000 at March 31, 2018, compared with $448,000 at year-end 2017.
Debt consisted of approximately $1.182 billion of bank debt, $2.877 billion of senior notes and $49.0 million of senior subordinated notes. The company had $281.4 million of undrawn letters of credit and $536.6 million of committed borrowing capacity under its credit facility. It remained in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Product sales increased 25%, supported by 13% production growth and higher NGL and oil prices. Natural gas prices were lower on the NYMEX, but Range reported improved natural gas differentials.
- Total revenues declined despite higher product sales because Q1 2017 included $165.6 million of derivative fair value income, compared with a $14.0 million derivative fair value loss in Q1 2018.
- Net income declined primarily because of the unfavorable year-over-year derivative valuation swing, higher transportation and gathering costs, higher general and administrative expense, and a $7.3 million proved-property impairment charge.
- Transportation, gathering, processing and compression expense increased 38% to $244.6 million. The increase included $37.8 million resulting from the new revenue recognition presentation, which increased both reported NGL revenue and related expense without affecting net income.
- General and administrative expense increased 44% to $68.4 million, primarily due to higher stock-based compensation, including $18.2 million of accelerated vesting related to equity grants.
- Cash flow from operations improved substantially because of higher production, improved realized prices and a $54.6 million working-capital inflow, compared with a $20.8 million outflow in Q1 2017.
- The prior-year period included a $22.6 million gain on the sale of Western Oklahoma properties; Q1 2018 included only a $23,000 gain on asset sales.
- The company adopted the new revenue recognition standard in Q1 2018 using the modified retrospective method. There was no cumulative-effect adjustment, but certain gas-processing revenue and expenses are now reported gross.
Guidance, Outlook, Risks and Unusual Items
- Management stated that the 2018 capital budget was $941.2 million and expects operating cash flow, available credit capacity, asset-sale proceeds and existing derivatives to satisfy near-term liquidity needs.
- Management expected an effective tax rate of approximately 24% for the remainder of 2018 before discrete items. The Q1 effective tax rate was 46.4%, compared with 39.8% in the prior-year quarter.
- More than 60% of projected production for the remainder of 2018 was hedged, including more than 70% of projected natural gas production. Derivative contracts extended through December 2020 and had a net unrealized pretax loss of approximately $19.9 million at quarter-end.
- Commodity prices remain the principal operating risk. A sustained decline in natural gas, NGL or oil prices could reduce revenue, cash flow, reserves, borrowing capacity and the ability to fund capital expenditures.
- Derivative contracts reduce price volatility but limit the benefit of rising prices and expose the company to counterparty and basis risk. A 1% increase in short-term interest rates would increase annual interest expense by approximately $11.8 million based on quarter-end floating-rate debt.
- On April 13, 2018, after quarter-end, Range entered into an amended and restated revolving credit facility maturing April 13, 2023. The facility has a $4.0 billion maximum amount; the company stated that its terms were similar to the prior facility.
- Firm transportation and gathering commitments increased by approximately $52.2 million over the next 20 years, primarily due to pricing changes in existing contracts.
- The company recorded $11.8 million of abandonment and impairment expense for unproved properties and indicated that additional leasehold impairments or abandonments could occur as acreage is reviewed and drilling inventory is high-graded.
- Range disclosed a Pennsylvania Department of Environmental Protection matter involving alleged methane and other substances escaping from a well. The company disputes the allegations, but resolution could result in monetary sanctions exceeding $100,000.
- Management reported no material changes to previously disclosed risk factors, no significant off-balance-sheet arrangements and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether production growth and higher realized prices can continue to offset transportation, operating, capital and interest costs.
- The effect of future commodity prices and derivative settlements on reported earnings, cash flow and hedge coverage.
- Available borrowing capacity, borrowing-base redeterminations, covenant compliance and the terms of the April 2018 credit-facility refinancing.
- Whether the $941.2 million capital budget can be funded primarily through operating cash flow without materially increasing debt.
- The sustainability of the reported operating cash flow after considering capital expenditures, acreage purchases and required debt service.
- Potential additional impairments or abandonment charges, particularly for Oklahoma and other non-core or expiring acreage.
- The impact of the new revenue recognition presentation on reported revenue and transportation expense, recognizing that it did not change net income.
- Exposure to long-term transportation and gathering commitments, NGL infrastructure constraints and the Pennsylvania environmental proceeding.