Range Resources Corporation — Form 10-Q Summary
Business context and reporting period
Range Resources explores, develops and acquires oil and gas properties primarily in the Southwestern and Appalachian regions of the United States. This unaudited Form 10-Q covers the three and nine months ended September 30, 2009, with comparisons to the corresponding 2008 periods.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Total revenue | $203.6 million | $622.7 million | $660.5 million | $979.8 million |
| Oil and gas sales | $202.1 million | $347.7 million | $597.8 million | $1,002.7 million |
| Income from operations | $(45.1) million | $457.5 million | $(56.1) million | $414.2 million |
| Net income (loss) | $(29.8) million | $285.0 million | $(37.1) million | $257.4 million |
| Diluted EPS | $(0.19) | $1.81 | $(0.24) | $1.65 |
| Cash flow from operations | Not separately provided | Not separately provided | $443.8 million | $600.4 million |
Production increased 13% in both the quarter and first nine months, reaching 437,091 mcfe per day in the quarter and 428,883 mcfe per day for the nine months. However, average realized price including all derivative settlements declined to $6.35 per mcfe in the quarter from $9.02, and to $6.38 per mcfe for the nine months from $9.19.
Q3 operating margin was approximately negative 22%, compared with approximately 74% in Q3 2008. Nine-month operating margin was approximately negative 8%, compared with approximately 42% in the prior-year period. These margins are calculated from reported operating income and total revenue and are significantly affected by derivative valuation changes.
At September 30, 2009, cash and equivalents were $859,000, total assets were $5.4 billion and stockholders’ equity was $2.4 billion. Total debt was $1.781 billion, consisting of $398.0 million of bank debt and approximately $1.383 billion of subordinated notes and other long-term debt. The debt-to-capitalization ratio was 42.8%.
The revolving credit facility had a $1.5 billion borrowing base, a $1.25 billion facility amount and $852.0 million of available committed capacity at September 30, 2009. The facility matures October 25, 2012. Range was in compliance with its bank and note covenants, including a maximum debt-to-EBITDAX ratio of 4.0 to 1.0 and a minimum current ratio of 1.0 to 1.0.
Material changes versus the prior comparable period
- Total revenue declined 67% in Q3 and 33% for the first nine months. Oil and gas sales declined 42% and 40%, respectively, primarily because commodity prices fell sharply despite higher production.
- Derivative fair value income changed from $272.9 million of income in Q3 2008 to a $482,000 loss in Q3 2009. For the nine months, derivative fair value changed from a $47.6 million loss to $65.2 million of income.
- Production volumes rose 13%, led by natural gas and NGL growth, while crude oil production fell 30% in Q3 and 15% for the nine months, partly because of the sale of West Texas properties.
- Direct operating expense per mcfe improved 25% in Q3 and 16% for the nine months. General and administrative expense increased 10% and 14% per mcfe, respectively.
- Depletion, depreciation and amortization increased 27% in Q3 and 23% for the nine months; DD&A per mcfe increased 13% and 9%, respectively, reflecting shale development costs and production mix.
- Abandonment and impairment expense increased to $24.1 million in Q3 and $84.6 million for the nine months, compared with $5.1 million and $10.7 million in the prior-year periods. The nine-month charge included sizeable Barnett Shale lease expirations.
- Cash flow from operations decreased 26% to $443.8 million. Investing cash use improved to $385.1 million from $1.388 billion, reflecting lower capital and acreage spending and $182.2 million of asset-sale proceeds.
- In May 2009, Range issued $300.0 million of 8.0% senior subordinated notes due 2019 and used $285.2 million of proceeds to repay bank debt. The company also sold West Texas oil properties for approximately $182.0 million.
Outlook, management commentary, risks and unusual items
- Management estimated 2009 capital spending of approximately $740 million, excluding acquisitions, with spending significantly reduced outside the Marcellus Shale. The filing states that near-term obligations were expected to be funded by operating cash flow, unused borrowing capacity and asset sales.
- Management expected an effective tax rate of approximately 36% for 2009.
- Range had hedges covering approximately 27.4 Bcfe of 2009 production and 61.9 Bcfe of 2010 production; approximately 48% of expected 2010 production was hedged. At September 30, derivative contracts had a net unrealized pretax gain of approximately $80.5 million, but basis swaps had a net unrealized pretax loss of $16.9 million.
- Commodity prices remained the principal operating and liquidity risk. Sustained lower oil and gas prices or reduced production and reserves could impair the company’s ability to fund capital expenditures, repay debt and remain profitable.
- Derivative accounting creates significant earnings volatility because certain contracts do not qualify for hedge accounting and changes in fair value are recorded in earnings.
- Range had $70.8 million of capitalized exploratory well costs at September 30, 2009, including $26.3 million capitalized for more than one year. Twelve of the thirteen projects outstanding more than one year were Marcellus wells awaiting pipeline completions.
- Firm transportation commitments totaled $373.6 million, including $34.7 million in 2010 and $207.2 million thereafter. These contracts require minimum gas volumes or deficiency payments.
- The Houston Gulf Coast office was scheduled to close effective November 1, 2009, with $840,000 of severance accrued at September 30. Lease termination and additional severance costs were not expected to be material.
- Prior-period financial statements were revised under SAB 108 for immaterial errors, including expired mineral leases and other corrections. The cumulative adjustment reduced December 31, 2008 retained earnings by $6.5 million.
- Legal actions and claims arose in the ordinary course of business; management did not expect them to have a material adverse effect. Disclosure controls were assessed as effective.
Most important facts for an investor to verify
- Whether production growth and Marcellus development can offset continued commodity-price pressure and elevated DD&A.
- The sustainability and cash-flow impact of the 2010 hedge portfolio, including floors, caps, basis exposure and contracts not receiving hedge accounting treatment.
- Liquidity after considering only $859,000 of cash, $1.781 billion of debt, fixed-rate interest costs and required capital spending.
- Compliance with debt covenants and the outcome of future borrowing-base redeterminations.
- The effect of Barnett and other lease expirations, impairment charges and the $70.8 million of suspended exploratory well costs.
- Whether operating cash flow, asset sales and available credit are sufficient to fund the estimated $740 million 2009 capital program and transportation commitments.
- Actual results under the revised oil and gas reserve disclosure rules beginning with the 2009 Form 10-K.