Range Resources Corporation — 2015 Q3 Form 10-Q Summary
Business context and reporting period
Range Resources is an independent U.S. natural gas, NGL and oil exploration, development and production company focused primarily on the Appalachian and Midcontinent regions. The filing covers the quarter and nine months ended September 30, 2015. Results are unaudited and reflect one operating segment.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenues and other income | $479.3 million | $616.6 million | $1.189 billion | $1.839 billion |
| Natural gas, NGL and oil sales | $252.1 million | $446.1 million | $835.6 million | $1.496 billion |
| Derivative fair-value income | $202.0 million | $142.1 million | $290.1 million | $(28.9) million |
| Net income (loss) | $(300.9) million | $146.4 million | $(391.9) million | $350.3 million |
| Diluted EPS | $(1.81) | $0.86 | $(2.36) | $2.10 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $515.6 million | $654.9 million |
| Total production | 132.9 Bcfe | 111.2 Bcfe | 377.3 Bcfe | 306.8 Bcfe |
Q3 net loss margin was approximately 62.8% of revenue, compared with a 23.7% net profit margin in Q3 2014. The nine-month net loss margin was approximately 33.0%, compared with a 19.0% net profit margin in the prior-year period. These comparisons are heavily affected by non-cash impairment and derivative fair-value items.
- Average realized price, including derivative settlements and third-party transportation costs, was $2.18 per mcfe in Q3 and $2.42 per mcfe for the nine months, versus $3.40 and $3.74, respectively, in the comparable 2014 periods.
- Direct operating expense declined 24% per mcfe in both Q3 and the nine-month period. DD&A declined 9% per mcfe.
- Capital expenditures and acreage purchases used approximately $965.3 million of cash in the first nine months, including $901.2 million for natural gas and oil properties and $61.2 million for acreage.
- Cash and cash equivalents were $0.5 million at September 30, 2015, compared with $0.4 million at December 31, 2014.
- Total debt was $3.587 billion, consisting of $987.0 million of bank debt, $750.0 million of senior notes and $1.850 billion of subordinated notes.
- The revolving facility had $876.2 million of committed borrowing capacity remaining after $136.8 million of letters of credit. The borrowing base was $3.0 billion and lender commitments were $2.0 billion.
- The quarterly dividend remained $0.04 per share; $20.3 million was paid during the first nine months.
Material changes versus the prior comparable period
- Production increased 20% in Q3 and 23% for the first nine months, led by Marcellus production growth. Marcellus production increased 28% in Q3 and 30% for the nine-month period.
- Commodity sales revenue declined 43% in Q3 and 44% for the nine months because of substantially lower prices, partially offset by higher production.
- Natural gas, NGL and oil prices remained under pressure. Q3 average NYMEX prices were $2.76 per mcf for gas and $46.61 per barrel for oil, versus $4.05 and $96.99, respectively, in Q3 2014.
- The company recorded a $502.2 million non-cash impairment charge on proved properties in Northern Oklahoma and legacy Northwest Pennsylvania properties. The affected assets represented less than 3% of Q3 production.
- Derivative fair-value income increased to $202.0 million in Q3 from $142.1 million and to $290.1 million for the nine months from a $28.9 million loss. Nine-month cash derivative settlements were a $360.6 million receipt, versus a $113.9 million payment in 2014.
- In May 2015, Range issued $750.0 million of 4.875% senior notes due 2025. In August, it redeemed all $500.0 million of 6.75% senior subordinated notes due 2020 and recognized a $22.5 million loss on extinguishment.
- The company reduced operating costs, closed its Oklahoma City office and recorded $6.3 million of termination costs in the first nine months.
- Unlike 2014, the 2015 period did not include the approximately $280 million after-expense gain from the Conger Exchange transaction.
Guidance, outlook, commentary and risks
- Management expects commodity prices to remain volatile and under pressure because of oversupply, elevated liquids inventories and modest demand growth. It expects continued cost reductions but cautions that timing and magnitude are uncertain.
- The 2015 capital budget was approximately $870 million. Management stated that operating cash flow, available borrowing capacity, asset-sale proceeds and derivative contracts should satisfy near-term obligations and liquidity needs.
- Management expected an effective tax rate of approximately 39% for the remainder of 2015 before discrete tax items. Valuation allowances were increased for federal and state tax attributes that management did not believe were realizable.
- At September 30, Range had hedged approximately 80% of projected production for the remainder of 2015, including more than 85% of projected natural gas production. Hedging agreements covered 95.9 Bcfe for the remainder of 2015, 262.4 Bcfe for 2016 and 7.3 Bcfe for 2017.
- Derivative fair value was a net asset of approximately $334.8 million. Hedging limits the benefit of rising prices and exposes the company to counterparty, basis and settlement risks.
- Approximately $2.6 billion of debt was fixed-rate debt averaging 5.1%; $987.0 million was floating-rate bank debt. A 1% increase in short-term rates would increase annual interest expense by approximately $9.9 million.
- New firm transportation and gathering contracts increased commitments by approximately $476.3 million over the next 14 years. New delivery commitments cover 1,000 to 40,000 Mmbtu per day for terms of two to five years.
- Further commodity-price declines could cause additional property impairments, reduce cash flow and borrowing capacity, and impair the company’s ability to fund capital spending and debt obligations.
- The Pennsylvania Department of Environmental Protection indicated that it intends to assess a civil penalty related to a Lycoming County well. Range disputes the alleged leakage but stated that monetary sanctions could exceed $100,000.
- Management reported compliance with applicable debt covenants at September 30, 2015 and stated that disclosure controls were effective.
Most important facts for investors to verify
- Whether production growth and Marcellus operating efficiencies can offset sustained weakness in gas, NGL and oil prices.
- The company’s ability to fund capital expenditures from operating cash flow without materially increasing debt.
- Borrowing-base and lender-commitment changes, covenant headroom and remaining revolver availability.
- The sensitivity of proved-property carrying values to commodity prices and the potential for additional impairment charges.
- The actual cash economics of derivatives, including settlement timing, basis exposure and counterparty credit risk.
- The scale and duration of transportation, gathering, delivery and asset-retirement obligations.
- Developments in the Pennsylvania environmental proceeding and any resulting penalties or remediation costs.