Range Resources Corporation: Form 10-Q Summary
Business Context and Reporting Period
Range Resources Corporation is an independent U.S. exploration and production company focused on natural gas, natural gas liquids and oil properties in the Appalachian and Southwestern regions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012. Prior-period Barnett Shale results are presented as discontinued operations following the 2011 asset sale.
Financial Performance and Key Metrics
| Metric | Third Quarter 2012 | Third Quarter 2011 | Nine Months 2012 | Nine Months 2011 |
|---|---|---|---|---|
| Natural gas, NGL and oil sales | $337.0 million | $304.2 million | $953.0 million | $841.5 million |
| Total revenues and other income | $294.9 million | $370.6 million | $984.2 million | $918.6 million |
| Income before taxes from continuing operations | $(82.9) million | $55.7 million | $(57.9) million | $80.9 million |
| Net income | $(53.8) million | $34.8 million | $(40.0) million | $61.0 million |
| Diluted earnings per share | $(0.34) | $0.21 | $(0.25) | $0.38 |
| Cash flow from operating activities | Source text does not provide a quarterly cash flow figure | Source text does not provide a quarterly cash flow figure | $461.1 million | $448.3 million |
| Total debt at period end | $2.85 billion | Not presented | $2.85 billion | $1.97 billion at December 31, 2011 |
- Production increased 48% in the third quarter and 50% for the first nine months, driven primarily by the Marcellus Shale. Nine-month production totaled 197.8 billion cubic feet equivalent.
- Average realized price, including all derivative settlements and third-party transportation costs, declined to $4.17 per mcfe in the quarter and $4.24 per mcfe year to date, from $5.75 and $5.80, respectively.
- Natural gas, NGL and oil sales increased 11% in the quarter and 13% year to date, but total revenue declined in the quarter because of a $40.7 million derivative fair-value loss versus a $65.8 million gain in the prior-year quarter.
- Operating cash flow from continuing operations increased to $461.1 million year to date from $428.9 million, while investing cash outflows rose to $1.31 billion.
- Capital expenditures and acreage purchases totaled approximately $1.33 billion in the first nine months, including $1.15 billion of additions to natural gas and oil properties and $175.0 million of acreage purchases.
- Direct operating expense per mcfe declined 33% in the quarter and 35% year to date. DD&A per mcfe declined 11% and 9%, respectively.
- Transportation, gathering and compression expense increased to $51.6 million in the quarter and $137.2 million year to date, reflecting production growth and third-party Marcellus infrastructure costs.
Balance Sheet, Debt and Liquidity
- September 30, 2012 assets were $6.66 billion, stockholders’ equity was $2.28 billion and cash was only $151,000. Current assets totaled $270.5 million versus current liabilities of $545.7 million.
- Total debt was $2.85 billion, consisting of $461.0 million under the bank facility and approximately $2.39 billion of senior subordinated notes.
- Range issued $600.0 million of 5.00% senior subordinated notes due 2022 in March 2012 and used $350.0 million of the proceeds to repay bank borrowings.
- The secured revolving credit facility had a $1.75 billion facility amount, a $2.0 billion borrowing base, $62.1 million of undrawn letters of credit and approximately $1.2 billion of available capacity. The facility matures February 18, 2016.
- Range was in compliance with its bank and subordinated-note covenants at September 30, 2012. The bank facility requires a debt-to-EBITDAX ratio no greater than 4.25 to 1.0 and a current ratio of at least 1.0 to 1.0.
- The quarterly dividend remained $0.04 per share; $19.5 million was paid during the first nine months.
Material Changes Versus the Prior Comparable Period
- Higher production and sales were more than offset in reported earnings by lower commodity prices, derivative volatility, higher transportation costs, increased interest expense and higher impairment and abandonment charges.
- Third-quarter net income changed from $34.8 million of profit to $53.8 million of loss. Nine-month net income changed from $61.0 million of profit to $40.0 million of loss.
- Interest expense rose to $44.0 million in the quarter and $124.1 million year to date, primarily because of higher debt balances.
- Abandonment and impairment of unproved properties increased to $40.1 million in the quarter and $104.0 million year to date, compared with $16.6 million and $52.1 million, respectively.
- Production and ad valorem taxes included a $24.7 million retroactive Pennsylvania impact fee for wells drilled before 2012, plus an additional $18.0 million accrued for impact fees payable in April 2013.
- Deferred compensation plan expense was $20.1 million in the quarter, versus $8.7 million in the prior-year quarter, reflecting mark-to-market changes tied primarily to Range’s share price.
Guidance, Outlook, Risks and Unusual Items
- Management expected the 2012 capital program, excluding proved-property acquisitions, to total approximately $1.6 billion. The program was expected to be funded through operating cash flow, debt issuance, asset sales and credit-facility borrowings.
- Management expected an effective tax rate of approximately 40% for the remainder of 2012.
- On October 9, 2012, Range agreed to sell certain southern Oklahoma properties, including approximately 45 producing wells, for $135.0 million subject to adjustments and buyer diligence. Closing was expected November 19, 2012, but completion was not assured.
- Commodity prices remained the principal operating risk. Average NYMEX natural gas prices declined to $2.81 per mcf in the quarter from $4.18, while oil prices increased modestly to $92.58 per barrel from $89.54.
- At September 30, 2012, derivatives had an estimated net unrealized pretax gain of approximately $139.3 million. Hedging reduced downside exposure but limited the benefit of higher commodity prices and introduced counterparty, basis and mark-to-market volatility.
- Range had firm transportation and gathering commitments totaling approximately $1.50 billion, primarily extending beyond 2016. Drilling-rig commitments totaled $41.2 million, with potential early termination penalties of up to $30.0 million.
- Management stated that litigation was ordinary-course and not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Ethane handling remains a risk in the Appalachian region. If planned sales or transportation facilities are delayed or unavailable, Range may need to curtail production.
Investor Verification Priorities
- Verify the sustainability of production growth and whether lower natural gas prices support the planned capital program and drilling returns.
- Reconcile reported revenue and earnings with cash operating performance, separating realized hedge settlements from unrealized derivative gains and losses.
- Assess leverage, covenant headroom, borrowing-base sensitivity and the company’s ability to fund capital expenditures with limited cash on hand.
- Review the timing and economics of the southern Oklahoma asset sale and the use of proceeds.
- Evaluate exposure to Pennsylvania impact fees, long-term transportation commitments, ethane constraints and additional unproved-lease impairments.