Range Resources Corporation — 2013 Second-Quarter Form 10-Q
Business Context and Reporting Period
Range Resources is an independent U.S. natural gas, natural gas liquids (NGLs) and oil exploration, development and acquisition company focused primarily on the Appalachian and Southwestern regions. The filing covers the quarter and six months ended June 30, 2013. Results are unaudited. The company reported 163.4 million common shares outstanding as of July 22, 2013.
Key Financial Metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Natural gas, NGLs and oil sales | $437.7 million | $298.3 million | $835.9 million | $616.0 million |
| Total revenues and other income | $673.4 million | $448.9 million | $992.6 million | $699.9 million |
| Income from operations before taxes | $241.5 million | $94.7 million | $118.7 million | $25.0 million |
| Net income | $144.0 million | $55.7 million | $68.4 million | $13.9 million |
| Diluted earnings per share | $0.88 | $0.34 | $0.42 | $0.09 |
| Operating margin | 35.9% | 21.1% | 12.0% | 3.6% |
| Net margin | 21.4% | 12.4% | 6.9% | 2.0% |
Six-month operating cash flow was $279.9 million, compared with $282.9 million in the prior-year period. Capital expenditures and acreage purchases totaled approximately $622.2 million, including $592.7 million for natural gas and oil properties and $27.4 million for acreage. Cash and cash equivalents were $284,000 at June 30, 2013.
Total debt was $2.949 billion at June 30, 2013, consisting of $309.0 million of bank debt and approximately $2.640 billion of subordinated notes. The company had a $1.75 billion facility amount, a $2.0 billion borrowing base, $84.7 million of undrawn letters of credit and approximately $1.4 billion of available borrowing capacity. The bank facility matures February 18, 2016. The company reported compliance with its debt covenants.
Production increased 27% in the second quarter and 29% for the six-month period, measured in total mcfe. Second-quarter natural gas production rose 24%, NGL production rose 35% and crude oil production rose 39%. Six-month production increased 28% for natural gas, 28% for NGLs and 44% for crude oil.
Material Changes Versus Prior Comparable Period
- Second-quarter natural gas, NGLs and oil sales increased 47%; total revenues and other income increased 50%. Six-month sales increased 36% and total revenues increased 42%.
- Growth was driven by higher production, improved realized natural gas prices and a $83.3 million gain on asset sales. Range sold certain New Mexico and West Texas properties and recognized an approximately $83.5 million pre-tax gain before selling expenses.
- Derivative fair value income was $137.8 million in the quarter, compared with $148.6 million in 2012, and $37.9 million for six months, compared with $87.7 million. Effective March 1, 2013, Range discontinued hedge accounting prospectively, increasing earnings volatility because realized and unrealized derivative changes are recognized immediately in earnings.
- General and administrative expense increased to $102.0 million in the quarter and $186.0 million for six months, primarily due to the Oklahoma royalty-owner litigation settlement. The settlement required an $87.5 million payment into escrow, subject to court approval.
- Range issued $750.0 million of 5.00% senior subordinated notes due 2023 and redeemed its $250.0 million of 7.25% notes due 2018. The redemption generated a $12.3 million loss on extinguishment of debt.
- Transportation, gathering and compression expense increased to $66.0 million in the quarter and $128.5 million for six months, reflecting production growth in the Marcellus region and related third-party commitments.
- Direct operating expense declined to $0.39 per mcfe from $0.41 in the quarter and from $0.45 for the comparable six-month period. DD&A declined to $1.46 per mcfe from $1.66 in the quarter and to $1.45 from $1.67 for six months.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management set the 2013 capital expenditure budget at $1.3 billion, excluding proved property acquisitions. The program is expected to be funded through operating cash flow, asset-sale proceeds, debt and available bank capacity.
- Management expects an effective tax rate of approximately 40% for the remainder of 2013, subject to potential effects from Pennsylvania tax legislation.
- Range expects commodity prices to remain volatile and continues to focus capital on higher-return oil and liquids-rich gas activities. Approximately 77% of projected production for the remainder of 2013, including approximately 77% of projected natural gas production, was hedged as of June 30.
- Derivative contracts had an aggregate net unrealized pre-tax gain of approximately $127.5 million at June 30, 2013. The contracts expire monthly through December 2015. Derivative fair value changes may materially affect reported earnings without an immediate cash-flow impact.
- Management identified risks from commodity-price volatility, basis differentials, derivative counterparty performance, production declines, drilling and development execution, transportation capacity and access to capital.
- Ethane infrastructure and sales agreements in the Marcellus are expected to begin operations from late 2013 through early 2015. If facilities are delayed or unavailable, Range may be required to curtail production.
- Transportation and gathering commitments increased by approximately $135.5 million over the next 10 years due to rate adjustments.
- Range had $20.5 million of capitalized exploratory well costs outstanding for more than one year at June 30, 2013, including five wells awaiting pipelines and three in completion.
- The company reported no material changes to previously disclosed risk factors and no significant off-balance-sheet debt arrangements.
Important Facts for Investors to Verify
- Reconcile the unusually low six-month net income relative to second-quarter net income and review first-quarter results for the effect of litigation, derivatives and other discrete items.
- Assess the sustainability of earnings excluding the $83.3 million asset-sale gain, derivative fair value income and other non-recurring or non-cash items.
- Review the court approval and final accounting treatment of the $87.5 million Oklahoma settlement.
- Evaluate leverage, fixed-rate debt maturities, bank borrowing-base redeterminations and covenant compliance.
- Monitor the effect of discontinuing hedge accounting on future earnings volatility and cash flows.
- Compare the $1.3 billion capital budget with operating cash flow, production growth and available liquidity.
- Verify transportation, gathering and ethane infrastructure commitments, including potential production-curtailment exposure.
- Review commodity-price, basis, counterparty and interest-rate sensitivity; a 1% increase in short-term rates would increase annual interest expense by approximately $3.1 million based on June 30 debt.