Range Resources Corporation — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Range Resources is an independent U.S. natural gas, NGL and oil exploration and production company focused primarily on the Appalachian and North Louisiana regions. This unaudited filing covers the three and nine months ended September 30, 2016. Results include Memorial Resources Development Corp. operations from September 16, 2016, following the Memorial merger.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenues and other income | $413.2 million | $479.9 million | $846.4 million | $1,187.3 million |
| Natural gas, NGL and oil sales | $304.5 million | $252.1 million | $738.6 million | $835.6 million |
| Net loss | $(42.0) million | $(300.9) million | $(358.6) million | $(391.9) million |
| Diluted loss per share | $(0.23) | $(1.81) | $(2.09) | $(2.36) |
| Net margin | Approximately (10.2%) | Approximately (62.7%) | Approximately (42.4%) | Approximately (33.0%) |
| Operating cash flow | Not separately provided | Not separately provided | $202.0 million | $515.6 million |
| Capital expenditures and acreage purchases | Not separately provided | Not separately provided | Approximately $370.2 million of cash payments | Not separately provided |
Q3 production increased 4% to 1.508 Bcfe per day. Nine-month production also increased 4% to 1.437 Bcfe per day, driven primarily by higher NGL production and Marcellus growth. Average realized price including derivative settlements and third-party transportation costs declined to $1.58 per mcfe in Q3 from $2.18 and to $1.52 per mcfe for nine months from $2.42.
Q3 derivative fair-value income was $64.6 million, versus $202.0 million in the prior-year quarter. Nine-month derivative fair-value results were a loss of $11.3 million, versus income of $290.1 million in the prior-year period. Cash receipts from derivative settlements were $53.1 million in Q3 and $260.7 million for nine months.
Margins, costs, liquidity and debt
- Q3 direct operating expense declined 36% in absolute terms and 38% per mcfe. Nine-month direct operating expense declined 37% in absolute terms and 39% per mcfe.
- Q3 general and administrative expense declined 11% to $41.0 million; nine-month expense declined 15% to $127.7 million.
- Transportation, gathering, processing and compression expense increased 39% in Q3 and 41% for nine months, primarily due to Marcellus production growth, NGL infrastructure and additional transportation commitments.
- Q3 DD&A declined to $131.5 million from $154.0 million; nine-month DD&A declined to $374.4 million from $453.2 million.
- Cash and cash equivalents were only $0.5 million at September 30, 2016. Total assets were $11.3 billion and stockholders’ equity was $5.5 billion.
- Total debt was approximately $3.9 billion, consisting of $937.0 million of bank debt, approximately $2.9 billion of senior notes and $49.0 million of senior subordinated notes. Debt net of issuance costs was $3.83 billion.
- The revolving credit facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments, $937.0 million outstanding and $253.9 million of letters of credit, leaving $809.1 million of committed borrowing capacity.
- Range reported compliance with applicable debt covenants, including the EBITDAX-to-cash-interest, current-ratio and proved-reserves-to-total-debt requirements.
Material changes versus the prior comparable period
- Range completed the Memorial merger on September 16, 2016, issuing approximately 77.0 million Range shares. The transaction added approximately $1.2 billion of assumed debt and produced preliminary goodwill of approximately $1.6 billion. Memorial contributed $21.1 million of revenue from the closing date through September 30.
- Q3 net loss improved substantially from $300.9 million to $42.0 million, partly because the prior-year quarter included a $502.2 million proved-property impairment. Nine-month net loss improved from $391.9 million to $358.6 million, despite a $43.0 million 2016 impairment charge.
- Nine-month revenue declined 29% and operating cash flow declined 61%, reflecting lower realized commodity prices and substantially lower derivative fair-value gains.
- Production rose 4%, with NGL production increasing 35% in Q3 and 27% for nine months, while natural gas and oil volumes declined.
- Debt increased materially following the Memorial merger and related cash tender activity. Range exchanged most of its senior subordinated notes into senior notes and exchanged or purchased Memorial senior notes.
- The quarterly dividend was reduced from $0.04 to $0.02 per share in February 2016; Q3 dividends paid were $4.9 million.
Guidance, outlook, risks and unusual items
- Management stated that the 2016 capital budget, excluding the Memorial merger, was $495.0 million. Cash generated from operations, asset sales, available credit capacity and existing derivatives were expected to satisfy near-term liquidity needs.
- Management expected an effective tax rate of approximately 38% for the remainder of 2016 before discrete items.
- Commodity prices remained depressed and volatile. Further declines in natural gas, NGL or oil prices, production or reserves could reduce cash flow, borrowing capacity and the ability to fund capital expenditures.
- Derivative contracts covered approximately 128.7 Bcfe for the remainder of 2016, 288.9 Bcfe for 2017 and 26.6 Bcfe for 2018. Hedging limits upside participation and exposes Range to counterparty, basis and settlement risks.
- Transportation and gathering commitments increased by approximately $2.8 billion over the next 15 years, to total future commitments of approximately $2.84 billion. Certain North Louisiana agreements include deficiency-payment obligations if minimum volume commitments are not met.
- Goodwill and acquired property values depend on commodity prices, reserve estimates, production forecasts, costs and discount rates. The filing states that additional impairment charges remain possible.
- Range disclosed a Pennsylvania environmental proceeding involving a well in Lycoming County. The company disputes the alleged methane leakage but stated that monetary sanctions could exceed $100,000.
- Merger-related costs were $33.8 million in Q3 and $36.4 million for nine months. Senior subordinated note exchange costs added $6.6 million to Q3 interest expense.
- Controls and procedures were considered effective as of September 30, 2016, and no material change in internal control over financial reporting was reported.
Investor verification points
- Verify the final purchase-price allocation for Memorial, including the approximately $1.6 billion of goodwill and any subsequent impairment testing.
- Monitor commodity prices, realized prices after transportation and hedging, production volumes and derivative settlements.
- Reconcile debt maturities, floating-rate exposure, covenant headroom and the $809.1 million of committed borrowing capacity.
- Assess whether operating cash flow and asset sales can fund the capital program and the substantially increased transportation and gathering commitments.
- Review the sustainability of the $0.02 quarterly dividend under commodity-price and covenant constraints.
- Track potential property impairments, environmental proceedings, merger integration costs and any additional liabilities from Memorial.