RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
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 focuses on increasing reserves and production through drilling and acquisitions.

Key Financial Metrics

All figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 10% in the third quarter and 12% for the nine months ended September 30, 2007, compared to the prior year periods. This was driven by a 19% increase in production volumes and higher realized oil and gas prices.
• Derivative Income Volatility: Derivative fair value income decreased significantly to $25.0 million in Q3 2007 from $65.3 million in Q3 2006. For the nine months, it dropped to $10.6 million from $119.9 million. This variance is largely due to changes in commodity prices and the loss of hedge accounting treatment for certain contracts following the sale of Gulf of Mexico assets.
• Discontinued Operations: The company sold its Gulf of Mexico properties and Austin Chalk properties in the first quarter of 2007. These are reported as discontinued operations, resulting in a net gain of $63.6 million for the nine months ended September 30, 2007, compared to a loss of $9.9 million in the prior year period.
• Expense Increases: Direct operating expenses increased due to higher oilfield service costs and volumes. General and administrative expenses rose due to higher salaries, benefits, and professional fees. Interest expense increased due to higher debt balances and the refinancing of floating-rate debt to fixed-rate notes.

Guidance, Outlook, and Risks

• Capital Budget: The 2007 capital budget is set at $890.0 million (excluding acquisitions), expected to be funded by internal cash flow and asset sales.
• Liquidity: The company maintains a $900.0 million revolving bank credit facility. As of September 30, 2007, $634.0 million was available. On October 22, 2007, the borrowing base was redetermined to $1.5 billion.
• Hedging Strategy: As of September 30, 2007, the company had swaps and collars covering significant portions of its 2007, 2008, and 2009 production. However, certain gas hedges no longer qualify for hedge accounting and are marked to market, introducing revenue volatility.
• Risks: Key risks include exposure to oil and gas price volatility, the impact of indebtedness on operations, and the potential for production declines. The company notes that a material drop in prices could reduce the ability to fund capital expenditures and meet financial obligations.

Investor Verification Checklist

• Derivative Accounting: Verify the impact of mark-to-market accounting on non-hedge derivatives and its effect on reported earnings volatility.
• Debt Structure: Review the terms of the new $250 million 7.5% Senior Subordinated Notes due 2017 issued in September 2007 and the associated interest rate exposure.
• Capital Expenditures: Confirm the company's ability to fund the $890 million capital budget given the high cash usage in investing activities ($798 million for the nine months).
• Discontinued Operations: Ensure the separation of discontinued operations (Gulf of Mexico and Austin Chalk) is clearly understood when analyzing continuing operational performance.
• Production Volumes: Validate the 19% production increase in Q3 2007 against the company's drilling success and acquisition strategy.