RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2004
Business Overview: Range Resources is engaged in the exploration, development, and acquisition of oil and gas properties primarily in the Southwestern, Gulf Coast, and Appalachian regions of the United States. The company operates a 50% owned joint venture, Great Lakes Energy Partners L.L.C., for its Appalachian assets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 13.7% to $63.5 million, driven by a 15% increase in production volumes (177.4 Mmcfe/day vs. 154.0 Mmcfe/day) and a 3% increase in average realized prices ($4.05/mcfe vs. $3.92/mcfe).
• Net Income Decline: Net income decreased 30% to $6.6 million. This decline is primarily attributable to a $4.5 million one-time gain in Q1 2003 related to the cumulative effect of adopting SFAS 143 (Asset Retirement Obligations), which did not recur in 2004.
• Expense Increases: General and administrative expenses rose $4.0 million, largely due to a $4.4 million non-cash mark-to-market adjustment on the deferred compensation plan. Exploration expenses increased $1.1 million due to higher dry hole and seismic costs.
• Debt Reduction: Total debt decreased by $9.6 million to $348.6 million, funded by excess operating cash flows.
• Hedging Impact: Realized hedging losses reduced oil and gas revenues by $16.9 million in Q1 2004, compared to $25.9 million in Q1 2003. However, the company reported a net unrealized pre-tax hedging loss of $96.3 million on its balance sheet as of March 31, 2004.

Guidance, Outlook, and Risks

• Capital Budget: The 2004 capital budget is approximately $126.0 million (excluding acquisitions). Management expects to fund this entirely through internal cash flow.
• Production Outlook: Management anticipates continued production growth driven by a successful drilling program and the full quarter of production from the December 2003 Conger Field acquisition.
• Hedging Strategy: The company maintains significant hedging positions to manage price volatility. As of March 31, 2004, hedges covered 44.4 Bcf of gas, 1.1 million barrels of oil, and 0.6 million barrels of NGLs through 2006. A 10% decline in unhedged oil and gas prices would reduce revenue by approximately $8.2 million.
• Liquidity: Available borrowing capacity was $68.9 million on the Senior Credit Facility and $90.0 million on the Great Lakes Credit Facility. Management believes current cash flows and borrowing capacity are adequate for near-term obligations.
• Risks: Key risks include volatility in oil and gas prices, the inherent risks of exploration and drilling (dry holes), and the potential for significant earnings volatility due to the ineffective portion of hedging contracts and mark-to-market adjustments on deferred compensation.

Investor Verification Checklist

• Deferred Compensation Impact: Verify the sustainability of earnings given the $4.4 million non-cash mark-to-market expense related to the deferred compensation plan included in G&A.
• Hedging Exposure: Assess the impact of the $96.3 million unrealized hedging loss on future earnings as these contracts settle, particularly if market prices remain below hedge prices.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the restricted payment baskets under the Senior Credit Facility and 7-3/8% Notes, which limit dividend payments.
• IPF Receivables: Review the valuation of Independent Producer Finance (IPF) receivables, which carry a significant valuation allowance ($5.5 million) due to the non-recourse nature of the investments.
• Subsequent Acquisition: Note the $22.5 million acquisition of Permian Basin properties announced on April 30, 2004, and its potential impact on future capital allocation.