RRC

Range Resources Corp. 10-Q Summary (Period Ended June 30, 2002)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Range Resources Corporation for the period ended June 30, 2002. Range is an independent oil and gas company engaged in development, acquisition, and exploration primarily in the Southwestern, Gulf Coast, and Appalachian regions. The company also operates Independent Producer Finance (IPF), a subsidiary financing small producers. The financial statements are unaudited but reflect all necessary adjustments. Notably, the company recently replaced its auditor (Arthur Andersen) with KPMG, LLP, triggering a restatement of prior periods regarding a 1999 joint venture transaction and a voluntary reaudit of the three years ended December 31, 2001.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 26% year-over-year, driven by lower average realized prices for oil (down 14% to $22.46/bbl) and gas (down 15% to $3.42/mcf) and a 1% decline in production volumes.
• Profitability Drop: Net income fell 61% to $13.9 million. This was exacerbated by a $2.6 million increase in IPF valuation allowances and a $1.2 million writedown of marketable securities.
• Expense Management: Direct operating expenses decreased 21% to $19.1 million due to lower production taxes and workover costs. Interest expense dropped 31% to $11.8 million due to debt reduction and lower rates.
• Debt Reduction: Total debt decreased by $18.9 million through cash repayments and the exchange of $8.4 million of fixed-income securities for common stock.
• Restatement Impact: The filing includes restated figures for 2001 and prior periods due to a change in accounting principles regarding the Great Lakes joint venture formation gain, reducing the 1999 recognized gain from $39.8 million to $31.0 million.

Guidance, Outlook, and Risks

• Capital Budget: The company announced a $100 million capital budget for 2002, intending to fund it entirely with internal cash flow to increase production and reserves.
• Production Outlook: Production interruptions in Q1 2002 may prevent a full-year increase over 2001, but management expects quarterly growth by year-end.
• Hedging Strategy: As of June 30, 2002, the company had hedges covering approximately 70% of anticipated production for the remainder of 2002, 55% for 2003, 30% for 2004, and 5% for 2005. These hedges resulted in a net unrealized pre-tax gain of $6.8 million.
• Liquidity: Management believes current cash flow and liquidity are sufficient for the next 12 months. Available borrowing capacity was approximately $74 million across parent, Great Lakes, and IPF facilities.
• Risks: Key risks include the volatility of oil and gas prices, the high depletion, depreciation, and amortization (DD&A) rate ($1.31/mcfe) which pressures profitability if prices fall, and the potential for further adjustments upon completion of the three-year reaudit.

Investor Verification Checklist

• Reaudit Completion: Verify the final adjustments resulting from the KPMG reaudit of the three years ended December 31, 2001, expected by September 30, 2002.
• IPF Valuation: Monitor the Independent Producer Finance (IPF) portfolio, which recorded significant valuation allowance increases ($2.5 million in H1 2002) due to lower commodity prices and operator performance.
• Debt Covenants: Confirm continued compliance with debt covenants, particularly the restricted payment basket under the Parent Facility which limits further debt-for-equity exchanges.
• Production Recovery: Track the status of the damaged Matagorda Island 519 well and other Gulf Coast assets to assess if production targets for late 2002 are achievable.
• Enron Exposure: Note the write-off of a $1.6 million unsecured claim against Enron; verify if any recovery is reported in future periods.