RANGE RESOURCES CORP quarterly report, Q2 FY2014

Range Resources Corporation — 2014 Q2 Form 10-Q Summary

Business context and reporting period

Range Resources is an independent U.S. natural gas, natural gas liquids (NGLs) and oil exploration and production company focused primarily on the Appalachian and Southwestern regions. The filing covers the quarter and six months ended June 30, 2014; interim financial statements are unaudited.

Key financial metrics

Metric	Three months ended June 30, 2014	Three months ended June 30, 2013	Six months ended June 30, 2014	Six months ended June 30, 2013
Natural gas, NGL and oil sales	$477.5 million	$437.7 million	$1.050 billion	$835.9 million
Total revenues and other income	$765.5 million	$673.4 million	$1.223 billion	$992.6 million
Income from operations before taxes	$289.4 million	$241.5 million	$340.8 million	$118.7 million
Net income	$171.4 million	$144.0 million	$203.9 million	$68.4 million
Diluted EPS	$1.04	$0.88	$1.24	$0.42
Net cash from operating activities	Text does not provide a quarterly cash-flow total in the financial statements	Text does not provide a quarterly cash-flow total in the financial statements	$441.5 million	$279.9 million

Production increased 21% year over year to 1,104.7 MMcfe per day in the second quarter and 1,080.6 MMcfe per day for the six-month period. Marcellus production increased 28% in the quarter and 29% year to date.
Second-quarter natural gas, NGL and oil sales increased 9%, while six-month sales increased 26%. Growth was driven mainly by production, partly offset by lower realized prices and lower hedge settlements.
Average realized price including derivative settlements and third-party transportation costs declined to $3.73 per mcfe from $4.23 in the quarter and to $3.93 from $4.24 for the six months.
Direct operating expense per mcfe declined 10% in the quarter and 3% year to date. DD&A expense per mcfe declined 8% in both periods.
At June 30, total assets were $7.801 billion, stockholders’ equity was $3.020 billion and cash was only $292,000.
Total debt was $2.830 billion, consisting of $480.0 million of bank debt and approximately $2.350 billion of subordinated notes. The company had $1.1 billion of available committed borrowing capacity and $131.0 million of undrawn letters of credit.
The quarterly dividend remained $0.04 per share; $13.1 million was paid during the first six months.

Material changes versus the prior comparable period

Net income increased 19% in the second quarter and 198% for the first six months, but comparisons benefited materially from asset-sale gains and lower legal settlement expense.
Derivative fair-value results deteriorated substantially: a $24.1 million loss in the quarter and a $171.0 million loss year to date, compared with income of $137.8 million and $37.9 million, respectively, in 2013. These changes are largely non-cash but create earnings volatility.
Range completed the Conger Exchange with EQT on June 16, 2014. It exchanged Texas assets for Virginia producing properties and other assets plus approximately $145 million in cash, recognizing a pretax gain of approximately $275.2 million before selling expenses and a $10.0 million gain from remeasuring its prior interest in Nora Gathering.
The company issued 4.56 million common shares for net proceeds of $396.7 million.
Range redeemed its $300.0 million of 8.00% senior subordinated notes due 2019 at 104% of par, recording a $24.6 million loss on extinguishment of debt.
General and administrative expense declined 44% in the quarter and 43% for the six months, primarily because the 2013 periods included a $52.5 million Oklahoma lawsuit accrual.
The company recorded a $25.0 million non-cash impairment of proved properties in Mississippi, West Texas and North Texas, compared with $741,000 in the 2013 periods.

Outlook, commentary, risks and unusual items

Management expects an effective tax rate of approximately 39% for the remainder of 2014, before discrete tax items.
The 2014 capital budget is approximately $1.52 billion. Management expects operating cash flow, available credit, asset-sale proceeds and existing derivatives to satisfy near-term obligations and liquidity needs, but acknowledges that lower commodity prices or production could reduce funding capacity.
Approximately 70% of projected production for the remainder of 2014 was hedged at June 30, including approximately 81% of projected natural gas production. Derivatives covered 164.4 Bcfe for the remainder of 2014, 180.3 Bcfe for 2015 and 34.0 Bcfe for 2016.
Commodity prices remain the principal operating risk. Derivatives limit downside exposure on protected volumes but also limit the benefit of higher prices. The net unrealized pretax derivative position was a liability of approximately $68.5 million.
New firm transportation and gathering commitments increased contractual obligations by approximately $775 million over the next 25 years. Additional delivery contracts are contingent on pipeline and gathering construction and begin primarily from 2016 through 2019.
Ethane infrastructure and demand remain a risk in Appalachia. If contracted ethane facilities are unavailable, Range may need to curtail production or purchase natural gas for blending.
The company has one suspended exploratory well with $7.0 million of costs capitalized for more than one year while evaluating pipeline options. Management also stated that additional unproved-lease impairments or abandonments may occur as acreage is re-evaluated.
Range was in compliance with its debt covenants at June 30, 2014. A 1% increase in short-term interest rates would increase annual interest expense by approximately $4.8 million based on floating-rate debt outstanding.
Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing states that there were no material changes to previously disclosed risk factors.

Important facts for investors to verify

Separate recurring operating performance from the approximately $280 million after-expense Conger-related gain and other asset-sale gains.
Assess cash generation after the approximately $661.9 million of capital expenditures and acreage purchases during the first six months.
Review the sustainability of production growth, particularly Marcellus growth, and the effect of lower realized prices and transportation costs.
Monitor derivative mark-to-market volatility, hedge coverage, counterparty exposure and the approximately $68.5 million net unrealized derivative liability.
Evaluate liquidity relative to the $1.52 billion capital budget, $2.83 billion debt balance, February 2016 credit-facility maturity and borrowing-base redeterminations.
Review the long-term transportation, gathering and delivery commitments, including the approximately $775 million increase in obligations.
Consider the non-cash proved-property impairment, suspended exploratory well costs and potential future acreage impairments.