RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: Range 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 (Nine Months Ended Sept 30, 2006)

Note: All figures are in thousands unless otherwise noted. Net income includes a loss from discontinued operations of $13.5 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 61% to $595.6 million compared to $369.4 million in the prior year period. This was driven by a 15% increase in production volumes and higher realized oil and gas prices.
• Profitability: Net income rose 132% to $158.3 million from $68.3 million. Income from continuing operations increased 151% to $171.8 million.
• Acquisitions: The company acquired Stroud Energy, Inc. in June 2006 for approximately $465 million (cash, stock, and assumed debt), significantly expanding its Barnett Shale presence.
• Discontinued Operations: Austin Chalk properties acquired with Stroud were classified as "held for sale" and reported as discontinued operations, resulting in a $13.5 million net loss due to a $30.4 million impairment charge.
• Derivative Gains: A favorable mark-to-market adjustment on oil and gas derivatives contributed $83.7 million to revenue in the nine-month period, as certain hedges no longer qualified for hedge accounting.
• Debt Levels: Total debt increased by $365.2 million to $981.4 million, primarily due to the issuance of $250 million in 7.5% Senior Subordinated Notes and increased bank borrowings to fund acquisitions.

Guidance, Outlook, and Risks

• Capital Budget: The 2006 capital budget is set at $588 million (excluding acquisitions), expected to be funded by internal cash flow, bank borrowings, and asset sales.
• Hedging Strategy: As of September 30, 2006, the company had open swap and collar contracts covering significant volumes of gas and oil through 2008. These contracts held a net unrealized pre-tax gain of $108.4 million.
• Liquidity: Management believes operating cash flow, asset sales, and unused borrowing capacity are adequate to satisfy near-term obligations. However, long-term cash flows remain subject to commodity price volatility.
• Risks:
  • Commodity Prices: Revenue is highly dependent on oil and gas prices. A 10% reduction in prices (excluding hedged amounts) would have reduced revenue by $55.2 million in the first nine months.
  • Interest Rates: With $384.7 million in floating-rate debt, a 1% change in short-term rates would impact interest expense by approximately $3.8 million.
  • Regulatory/Accounting: The company is evaluating the impact of FASB Interpretation No. 48 (FIN 48) regarding uncertainty in income taxes, effective for fiscal years beginning after December 15, 2006.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent of the $30.4 million impairment on Austin Chalk assets and the timeline for their sale.
• Derivative Accounting: Confirm the sustainability of the $83.7 million mark-to-market gain resulting from hedges no longer qualifying for hedge accounting.
• Debt Covenants: Review compliance with debt covenants, specifically the restricted payment baskets for dividends ($449.1 million available under bank facility).
• Capital Expenditures: Assess the ability to fund the $588 million capital budget given the high level of debt and reliance on commodity prices.
• Stock-Based Compensation: Note the adoption of FASB Statement No. 123(R) and its impact on reported expenses ($8.0 million in G&A for the nine months).