RANGE RESOURCES CORP annual report, FY2013

Business Context and Reporting Period

Range Resources Corporation filed this Form 10-K for the fiscal year ended December 31, 2013. Range is an independent U.S. exploration and production company focused on natural gas, natural gas liquids (NGLs) and oil in the Appalachian and Southwestern regions. It reports one operating segment and is heavily concentrated in the Marcellus Shale.

Average production was 939.8 Mmcfe per day, up 25% from 2012; approximately 77% was natural gas.
Appalachia represented 87% of 2013 production and 92% of year-end proved reserves.
At December 31, 2013, proved reserves totaled 8.2 Tcfe, including 69% natural gas and 51% proved developed reserves.

Financial and Operating Metrics

Metric	2013	2012	Change
Natural gas, NGLs and oil sales	$1.716 billion	$1.352 billion	27% increase
Total revenues and other income	$1.863 billion	$1.458 billion	28% increase
Income from continuing operations	$115.7 million	$13.0 million	Substantial increase
Diluted EPS	$0.70	$0.08	Substantial increase
Net cash from operating activities	$743.5 million	$647.1 million	15% increase
Net cash used in investing activities	$983.4 million	$1.529 billion	Lower use of cash
Net cash from financing activities	$240.0 million	$881.6 million	Lower financing inflow
Total debt	$3.141 billion	$2.878 billion	9% increase
Stockholders’ equity	$2.414 billion	$2.357 billion	2% increase
Debt-to-capitalization	56.5%	55.0%	Higher leverage

Income from continuing operations before taxes was $149.6 million, implying an approximate 8.0% pretax margin on total revenues and other income. Net income margin was approximately 6.2%. Direct operating expense declined to $0.37 per mcfe from $0.42, while DD&A declined to $1.44 per mcfe from $1.62. General and administrative expense increased to $291.2 million from $173.8 million, primarily because of an $87.5 million Oklahoma legal settlement and higher compensation costs.

2013 production volumes were 264.5 Bcf of natural gas, 9.3 million barrels of NGLs and 3.8 million barrels of crude oil and condensate.
Average realized price including derivatives and transportation costs was $4.16 per mcfe, compared with $4.35 in 2012.
Proved reserves increased 26% to 8.2 Tcfe. Reserve additions and revisions totaled approximately 2.2 Tcfe, more than offsetting 343 Bcfe of production and 142 Bcfe of property sales.
Pre-tax PV-10 of proved reserves was $7.9 billion, versus $4.0 billion in 2012; the after-tax standardized measure was $5.9 billion, versus $3.2 billion.

Liquidity, Debt and Capital Resources

Cash and cash equivalents were only $348,000 at year-end; current assets were $248.3 million versus current liabilities of $495.6 million.
Range had $500.0 million outstanding under its secured bank credit facility and $84.9 million of undrawn letters of credit.
The facility amount was $1.75 billion, with approximately $1.2 billion of available borrowing capacity; the broader facility borrowing base was $2.0 billion. Maturity was February 18, 2016.
Senior subordinated notes totaled $2.641 billion, with maturities from 2019 through 2023. Approximately 84% of debt carried fixed interest rates.
Range issued $750.0 million of 5.00% senior subordinated notes due 2023 and redeemed $250.0 million of 7.25% notes due 2018.
2013 capital expenditures included $1.159 billion for property additions and $132.1 million for acreage. Operating cash flow did not fully fund investing expenditures before asset-sale proceeds and financing.
Range stated that operating cash flow, available credit capacity, asset-sale proceeds and derivative positions should meet near-term liquidity requirements. Debt agreements limited dividends and other restricted payments; the company reported compliance with all covenants.

Material Changes Versus the Prior Comparable Period

Production rose 25%, driven principally by Marcellus development; Appalachian production increased 31%, while Southwestern production declined 4%.
Sales increased 27% despite a lower all-in realized price per mcfe, reflecting volume growth and higher realized prices on certain products.
Derivative fair-value results shifted from $41.4 million of income in 2012 to a $61.8 million loss in 2013. Effective March 1, 2013, Range discontinued hedge accounting prospectively, increasing earnings volatility because unrealized changes were recorded immediately in earnings.
Transportation, gathering and compression expense increased to $256.2 million from $192.4 million as Marcellus production expanded and third-party infrastructure commitments increased.
General and administrative expense increased 68%, principally because of the $87.5 million Oklahoma settlement, higher employee costs and accelerated stock-based compensation.
Cash flow from operations increased, while investing cash use declined because capital spending was lower and asset-sale proceeds increased.
Range sold Delaware Basin and Permian Basin properties for $275.0 million and recorded a pre-tax gain of approximately $79.1 million after selling expenses. It also received $40.5 million from other asset sales.
Asset retirement obligations increased to $230.1 million from $146.5 million, including a $67.6 million increase in estimated plugging and abandonment costs.

Guidance, Outlook, Risks and Unusual Items

Management set an initial 2014 capital budget of approximately $1.52 billion, subject to adjustment for commodity prices, drilling results and market conditions.
Approximately 80% of expected 2014 production was hedged at December 31, 2013. Management expected 2014 DD&A of approximately $1.40 per mcfe and an effective tax rate of approximately 38% before discrete tax items.
Range continued targeting annual production growth of 20% to 25%, with planned 2014 Marcellus drilling of approximately 161.9 net wells and an average of nine rigs.
Major risks include natural gas, NGL and oil price volatility; dependence on the Appalachian region and third-party gathering, processing and transportation infrastructure; substantial capital requirements; leverage and the 2016 bank facility maturity; hedging and counterparty risk; drilling and reserve-estimation uncertainty; hydraulic-fracturing and environmental regulation; and potential cost increases.
Transportation and gathering commitments totaled approximately $2.577 billion, primarily for Appalachian volumes, with commitments extending through 2030. Minimum-volume obligations could require payments even if production or throughput is lower than expected.
Range had announced a potential sale of approximately 90,000 gross acres in the Permian Basin, but stated that completion was uncertain.
The Oklahoma litigation settlement was completed in 2013. Other ordinary-course litigation was not expected by management to have a material adverse effect, although claims remain subject to uncertainty.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of December 31, 2013.

Important Facts for Investors to Verify

Reconcile production growth and reserve additions with the $1.52 billion 2014 capital budget and expected operating cash flow.
Review the detailed 2014–2016 derivative volumes, prices, fair values and sensitivity to commodity-price changes, particularly after the discontinuation of hedge accounting.
Assess refinancing and borrowing-base risk associated with the $500 million bank facility maturity in 2016 and the company’s low cash balance.
Evaluate the economics and minimum-volume exposure of the $2.577 billion transportation and gathering commitments.
Test reserve sensitivity to natural gas and NGL prices, development pace, infrastructure availability and the conversion of proved undeveloped reserves.
Review the $87.5 million Oklahoma settlement, the increase in asset retirement obligations and potential future environmental, regulatory or hydraulic-fracturing liabilities.
Confirm the status and proceeds of the proposed Permian Basin asset sale and any subsequent changes in leverage or liquidity.