Business Context and Reporting Period
Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
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 utilizes the successful efforts method of accounting and actively employs commodity derivatives to manage price volatility.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2004 |
|---|---|---|---|
| Total Revenues | $141,845 | $369,489 | $218,443 |
| Net Income | $24,665 | $68,329 | $27,688 |
| Diluted EPS | $0.28 | $0.80 | $0.40 |
| Operating Cash Flow | N/A | $222,403 | $142,849 |
| Capital Expenditures (Investing) | N/A | ($344,916) | ($357,338) |
| Total Debt | $626,673 | $626,673 | $620,556 |
| Cash and Equivalents | $1,388 | $1,388 | $501 |
Production Volumes (Nine Months 2005): Total production was 64.2 million mcfe (169,832 mcfe/day average), representing a 24% increase over the prior year. Average realized sales price (including hedging) was $5.73 per mcfe.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 65% for the quarter and 69% for the nine-month period compared to 2004. This was driven by a 16% (quarter) and 24% (nine-month) increase in production volumes and higher realized commodity prices.
- Profitability: Net income increased significantly, rising from $12.9 million to $24.7 million for the quarter and from $27.7 million to $68.3 million for the nine-month period.
- Cost Increases: Direct operating expenses increased 12% on a unit basis ($0.08/mcfe) for the quarter due to higher oilfield service costs and workover expenses. Non-cash stock compensation expense surged to $20.1 million for the quarter (up from $4.8 million in 2004) primarily due to mark-to-market adjustments on deferred compensation plans.
- Debt Structure: In March 2005, the company issued $150 million of 6-3/8% Senior Subordinated Notes due 2015. Total debt increased slightly to $626.7 million, with $279.8 million outstanding on the bank credit facility.
Guidance, Outlook, Risks, and Unusual Items
- Hedging Impact: The company maintains significant hedging positions. As of September 30, 2005, there was a net unrealized pre-tax loss of $361.2 million on open commodity contracts. Realized hedging losses reduced oil and gas revenues by $84.6 million for the nine months ended September 30, 2005. Approximately $260.4 million of the unrealized loss is expected to be reclassified to earnings over the next 12 months if prices remain constant.
- Capital Requirements: The 2005 capital budget is set at $311.0 million (excluding acquisitions), expected to be funded by internal cash flow. The company has $320.2 million of available borrowing capacity under its $600 million credit facility.
- Operational Risks: The company noted 13 Mmcfe per day of production was shut-in as of October 24, 2005, due to Hurricanes Katrina and Rita. While no material long-term damage is currently believed to exist, impairment charges cannot be ruled out.
- Accounting Changes: The company adopted FASB Staff Position FAS 19-1 regarding suspended well costs effective July 1, 2005. It also plans to adopt SFAS 123(R) for stock-based compensation using the modified prospective method on January 1, 2006.
- Legal Contingencies: The company is involved in a class-action suit (Jack Freeman, et al.) regarding royalty payments and a contract dispute with Equitable Production Company. Management believes these will not have a material adverse effect.
Investor Verification Checklist
- Hedge Exposure: Verify the impact of the $361.2 million unrealized hedging loss on future earnings as contracts settle, particularly given the current market price environment.
- Stock Compensation Volatility: Review the sensitivity of net income to stock price fluctuations due to the significant mark-to-market expense ($29.5 million for nine months) associated with deferred compensation plans and stock appreciation rights.
- Capital Expenditure Funding: Confirm the ability to fund the $311 million capital budget solely through internal cash flow, considering the high level of debt service ($28.0 million interest expense for nine months).
- Production Shut-ins: Monitor updates regarding the 13 Mmcfe/day of production shut-in due to hurricanes and any potential impairment charges related to Gulf Coast assets.
- Debt Covenants: Ensure continued compliance with debt covenants, specifically the restricted payment baskets which currently allow approximately $350.5 million for dividends under the bank facility.