RRC

Business Context and Reporting Period

Company: Range Resources Corporation (Range)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Range is an independent oil and gas company engaged in exploration, development, and acquisition of properties in the Southwestern, Gulf Coast, and Appalachian regions of the United States. The company operates through three divisions and holds a 50% interest in Great Lakes Energy Partners L.L.C. (Great Lakes), which is consolidated in its financial statements. The company's strategy focuses on internally generated drillbit growth coupled with complementary acquisitions.

Key Financial Metrics

Note: Net Income includes a $4.5 million gain from the cumulative effect of a change in accounting principle (SFAS 143) and a $19.0 million gain on the retirement of securities.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 26% to $249.2 million, driven by a 6% increase in production volumes and a 12% increase in average realized prices (including hedging) to $3.90 per mcfe.
• Profitability: Net income increased 37% to $35.4 million. This was significantly aided by a $19.0 million gain on the retirement of debt and convertible securities and a $4.5 million accounting change benefit.
• Reserve Growth: Proved reserves increased 18% to 685 Bcfe. The company replaced 286% of production through drilling and acquisitions.
• Capital Expenditures: Total oil and gas related capital expenditures increased 86% to $206.9 million, including $95.3 million for producing property acquisitions (notably the $87.1 million Conger Field acquisition in December 2003).
• Hedging Impact: The company realized a $60.4 million hedging loss in 2003 compared to a $17.8 million gain in 2002, reducing oil and gas revenues. However, the company maintained a working capital deficit of $40.9 million, largely due to a $54.2 million unrealized hedging liability.

Guidance, Outlook, and Risks

• 2004 Capital Budget: Management announced a $126.0 million capital budget for 2004 (excluding acquisitions), targeting 409 gross wells and 35 gross recompletions. The budget is expected to be funded by internal cash flow.
• Production Outlook: Production is projected to increase in 2004 due to the Conger Field acquisition and ongoing drilling programs.
• Hedging Strategy: The company utilizes swaps and collars to reduce price volatility. As of year-end 2003, hedges covered 52.6 Bcf of gas, 1.4 million barrels of oil, and 0.7 million barrels of NGLs. The fair value of these hedges represented a net pre-tax unrealized loss of $70.6 million.
• Key Risks:
  • Commodity Prices: Volatility in oil and gas prices significantly impacts revenue and reserve values.
  • Reserve Estimates: Uncertainties in estimating proved reserves could lead to future write-downs.
  • Financing: The company relies on credit facilities and capital markets; a drop in prices could limit access to capital.
  • Environmental: Operations are subject to stringent federal, state, and local regulations regarding pollution and waste disposal.

Investor Verification Checklist

• Hedging Exposure: Verify the impact of the $70.6 million unrealized hedging loss on future earnings as contracts settle, particularly if market prices remain above hedged prices.
• Debt Covenants: Review compliance with the Senior Credit Facility and 7.375% Notes covenants, specifically regarding restricted payments and dividend limitations.
• Acquisition Integration: Assess the production performance and reserve additions from the December 2003 Conger Field acquisition ($87.1 million).
• Reserve Revisions: Monitor future reserve reports for potential downward revisions given the high percentage of undeveloped reserves (28%) and the reliance on drilling success.
• Accounting Changes: Understand the ongoing impact of SFAS 143 (Asset Retirement Obligations) on depreciation, depletion, and amortization (DD&A) expenses.