RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Range Resources is engaged in the exploration, development, and acquisition of oil and gas properties primarily in the Southwestern, Appalachian, and Gulf Coast regions of the United States. The company seeks to increase reserves and production through drilling and acquisitions.

Key Financial Metrics

Note: Figures are in thousands except per share data. Net loss for the six months ended June 30, 2008, excludes discontinued operations which were present in the prior year.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 38% in Q2 2008 compared to Q2 2007. This was driven by a $227.2 million increase in derivative fair value losses, which offset a 63% increase in oil and gas sales.
• Production Growth: Production volumes increased 22% in Q2 2008 and 25% for the six months ended June 30, 2008, compared to the prior year periods, due to successful drilling and acquisitions.
• Commodity Prices: Realized prices were higher by 16% in Q2 2008 compared to Q2 2007. Average wellhead prices for crude oil were $120.26/bbl and natural gas was $10.09/mcf in Q2 2008.
• Derivative Impact: The company reported a non-cash unrealized mark-to-market loss of $164.0 million in Q2 2008 due to rising commodity prices. As of June 30, 2008, the net unrealized pre-tax loss on derivatives was $745.3 million.
• Expense Increases: All expense categories increased on an absolute and per-unit basis due to higher industry costs, increased salaries, and higher levels of activity. Direct operating expenses increased 23% per mcfe in Q2 2008.

Guidance, Outlook, and Risks

• Capital Budget: The 2008 capital budget is set at $1.3 billion (excluding acquisitions), expected to be funded by internal cash flow and asset sales.
• Liquidity: Management believes net cash from operations and unused borrowing capacity ($794 million available) will satisfy near-term obligations. However, long-term cash flows are subject to commodity price volatility.
• Derivative Risk: The company has significant exposure to commodity price volatility. If oil and gas prices continue to rise, the company expects to incur additional realized and non-cash unrealized losses from hedges, which could adversely affect net income.
• Infrastructure Constraints: The company anticipates continued upward pressure on costs due to Marcellus wells being shut-in waiting on pipeline and processing facilities, with initial infrastructure completion expected in Q1 2009.
• Debt Covenants: The company was in compliance with all debt covenants as of June 30, 2008, including a debt-to-EBITDAX ratio of no greater than 4.0 to 1.0.

Key Facts for Investor Verification

• Derivative Valuation: Verify the magnitude of the $745.3 million unrealized derivative loss and its impact on future earnings as contracts settle.
• Cash Position: Note the significant decrease in cash and equivalents from $4.0 million at year-end 2007 to $73,000 at June 30, 2008, despite strong operating cash flow.
• Capital Expenditures: Confirm the $842.9 million spent on capital expenditures (including acquisitions) in the first six months of 2008 against the $1.3 billion annual budget.
• Debt Structure: Review the mix of debt, which includes $206 million in bank debt and $1.1 billion in senior subordinated notes with fixed rates averaging 7.3%.
• Production vs. Revenue: Analyze the divergence between rising production volumes (22% increase) and declining total revenue due to hedging losses.