Range Resources Corporation — Q1 2010 Form 10-Q Summary
Business context and reporting period
Range Resources explores, develops and acquires oil and gas properties primarily in the Southwestern and Appalachian regions of the United States. This unaudited report covers the three months ended March 31, 2010, compared with the three months ended March 31, 2009. The company had 159.4 million common shares outstanding on April 23, 2010.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenues | $348.5 million | $276.4 million | 26% |
| Oil and gas sales | $236.8 million | $203.2 million | 17% |
| Income from operations | $126.5 million | $51.4 million | 146% |
| Net income | $77.6 million | $32.6 million | 138% |
| Diluted EPS | $0.48 | $0.21 | 129% |
| Operating margin | 36.3% | 18.6% | Improved |
| Net margin | 22.3% | 11.8% | Improved |
| Cash flow from operations | $152.9 million | $149.2 million | 2% |
| Capital expenditures and acreage purchases | $186.1 million | $243.6 million | Lower |
| Cash and equivalents | $286.5 million | $0.8 million at Dec. 31, 2009 | Increased |
Production increased 12% to 41.8 Bcfe, including a 10% increase in natural gas, a 96% increase in NGLs and a 29% decline in crude oil. Average realized prices including all derivative settlements decreased to $5.57 per mcfe from $6.62 per mcfe, while production growth more than offset the lower realized price.
Direct operating expense declined 22% to $0.74 per mcfe, and DD&A declined 6% to $2.12 per mcfe. Income tax expense was $48.9 million, representing a 38.7% effective tax rate versus 36.6% in the prior-year quarter.
Liquidity, debt and cash flow
- Cash flow from operations was $152.9 million. Investing activities provided $108.1 million, primarily because of approximately $301.6 million of asset-sale proceeds. Financing activities provided $24.8 million.
- Total debt was $1.738 billion at March 31, 2010, consisting of $354.0 million of bank debt and approximately $1.384 billion of senior subordinated notes.
- The bank facility had a $1.5 billion borrowing base, a $1.25 billion facility amount and $895.9 million of available committed capacity at March 31. Availability was $845.9 million on April 23, 2010.
- Management estimated 2010 capital spending of approximately $950 million, excluding acquisitions, expected to be funded with operating cash flow and property sales.
- The company reported a debt-to-capitalization ratio of 40.7% and stated that it was in compliance with its bank and note covenants, including the maximum 4.0-to-1 debt-to-EBITDAX covenant and minimum 1.0-to-1 current-ratio covenant.
- The quarterly dividend remained $0.04 per share; $6.4 million was paid on March 31, 2010.
Material changes versus the prior comparable period
- Revenue and profitability benefited substantially from the sale of Ohio tight gas sand properties. Approximately 90% of the transaction closed March 30, 2010, generating approximately $300 million of proceeds and a $67 million gain. Total proceeds were expected to approximate $323 million, with the remaining sale expected to close in Q2 2010.
- Derivative fair value income declined to $42.3 million from $75.5 million. Realized hedging gains included in oil and gas sales fell to $1.2 million from $51.3 million.
- Production growth was concentrated in Appalachia, while Southwestern production declined 9% and crude oil volumes declined primarily because of the 2009 West Texas asset sale.
- Interest expense increased to $30.3 million from $26.6 million, partly because of the issuance of 8.0% senior subordinated notes in May 2009.
- Q1 2010 included a $6.5 million proved-property impairment charge related to Gulf Coast properties because of declining gas prices.
- Termination costs were $7.9 million, including $5.1 million of Ohio severance and approximately $2.8 million of non-cash accelerated stock-compensation expense.
- Deferred compensation plan results changed from $12.4 million of expense in Q1 2009 to $5.7 million of non-cash income in Q1 2010.
Outlook, risks and unusual items
Management expected the 2010 effective tax rate to be approximately 38.5% and believed operating cash flow, available credit and asset-sale proceeds would satisfy near-term obligations and liquidity needs. Management also stated that no significant incremental borrowing from 2009 levels was expected for 2010, assuming capital plans remained unchanged.
- Commodity prices remain the principal market risk. Sustained lower oil or gas prices, lower production or reduced reserves could impair profitability, liquidity, debt-servicing capacity and the ability to fund capital expenditures.
- Approximately 65% of expected 2010 production was subject to hedging agreements. At March 31, collars covered 129.1 Bcf of gas and 0.3 million barrels of oil, with a net unrealized pre-tax fair-value gain of $156.6 million. Basis swaps had a net unrealized pre-tax loss of $16.3 million.
- Hedge accounting and mark-to-market treatment create significant earnings volatility; Q1 2010 derivative fair value income included substantial unrealized gains.
- Capitalized exploratory well costs were $19.8 million, including $7.7 million capitalized for more than one year. All five projects in that category were Marcellus Shale wells awaiting pipeline completion.
- The company entered into additional 2011 derivative contracts on April 26, 2010, covering 51.1 Bcf of gas and 1.9 million barrels of oil.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. No material changes to contractual obligations or previously disclosed risk factors were reported.
- Disclosure controls and procedures were considered effective as of March 31, 2010, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Completion and final proceeds of the remaining Ohio asset sale, including post-closing adjustments and use of the like-kind exchange funds.
- Whether the $950 million 2010 capital-spending plan is funded by operating cash flow and asset sales without materially increasing debt.
- Production growth, realized commodity prices and hedge settlements, particularly as hedging gains were materially lower year over year.
- Commodity-price sensitivity, including the reported approximately $51 million hypothetical change in collar fair value for a 10% commodity-price movement.
- Progress on Marcellus pipeline infrastructure and the timing of converting suspended exploratory costs into proved reserves.
- Potential effects of Gulf Coast property impairments, continued low gas prices, basis risk and counterparty exposure on future results.