RANGE RESOURCES CORP quarterly report, Q1 FY2019

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Range Resources Corporation — Q1 2019 Form 10-Q Summary

Business Context and Reporting Period

Range Resources is an independent producer of natural gas, natural gas liquids and oil, focused primarily on the Appalachian and North Louisiana regions. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company operates as one reportable segment.

Key Financial and Operating Metrics

  • Revenue and income: Total revenues and other income were $748.1 million, compared with $742.6 million in Q1 2018. Net income was $1.4 million, or $0.01 diluted earnings per share, versus $49.2 million, or $0.20 per share. Net income margin was approximately 0.2% versus approximately 6.6%.
  • Production: Total production increased 3% to 203.0 Bcfe, or 2.26 Bcfe per day. Natural gas production increased 4%, NGL production increased 4%, and crude oil production decreased 24%.
  • Realized pricing: Average realized price including derivative settlements and third-party transportation costs declined 17% to $1.94 per mcfe from $2.34 per mcfe. Excluding derivative settlements, total realized price declined 6% to $3.31 per mcfe.
  • Cash flow: Operating cash flow was $260.7 million, down from $370.6 million. Capital expenditures and acreage purchases totaled approximately $214.2 million, producing positive operating cash flow after these expenditures of approximately $46.5 million before other uses.
  • Margins and costs: Transportation, gathering, processing and compression expense increased 24% to $302.7 million. Direct operating expense declined to $0.16 per mcfe from $0.19, general and administrative expense declined to $0.23 per mcfe from $0.35, and DD&A declined to $0.68 per mcfe from $0.82.
  • Debt and liquidity: Gross debt was $3.82 billion, including $895.0 million drawn on the revolving credit facility, $2.88 billion of senior notes and $49.0 million of senior subordinated notes. Cash was only $0.5 million. Available committed borrowing capacity was $825.2 million after $279.8 million of letters of credit, with an additional $1.0 billion of borrowing-base capacity.
  • Balance sheet: Total assets were $9.64 billion and stockholders’ equity was $4.06 billion at March 31, 2019. Operating lease right-of-use assets and related liabilities were recognized under the new lease standard.
  • Dividends: The company paid a quarterly dividend of $0.02 per share, or $5.0 million.

Material Changes Versus the Prior Comparable Period

  • Natural gas, NGL and oil sales declined 4% to $671.7 million, primarily because of lower realized prices, partially offset by 3% production growth.
  • Derivative fair value loss increased substantially to $61.7 million from $14.0 million. The loss was primarily non-cash; derivative cash settlements provided $24.8 million in Q1 2019 versus $8.9 million in Q1 2018.
  • Brokered natural gas, marketing and other revenue increased to $138.2 million from $60.0 million, while related expense increased to $132.3 million. Net brokered margin increased to approximately $5.6 million from $3.1 million.
  • Transportation and processing costs rose $58.0 million, reflecting Marcellus production growth, new pipelines, higher NGL-related costs and capacity commitments.
  • General and administrative expense decreased $21.8 million to $46.6 million, primarily due to lower stock-based compensation, legal, consulting, salary and technology costs.
  • Interest expense declined modestly to $51.5 million from $52.4 million as average debt declined, although the average interest rate increased slightly.
  • There was no proved-property impairment in Q1 2019, compared with a $7.3 million impairment charge in Q1 2018.
  • Cash flow from operations declined by $109.9 million, reflecting lower net realized prices, asset sales and less favorable working-capital changes.

Guidance, Outlook, Commentary and Risks

  • Management’s 2019 capital budget was $756.0 million and its stated objective was to fund production growth within operating cash flow.
  • Management expected an effective tax rate of approximately 25% for the remainder of 2019, before discrete items. The Q1 effective tax rate was unusually high at 80.0%, principally due to state taxes, equity compensation and valuation allowance changes.
  • More than 65% of projected production for the remainder of 2019 was hedged, including more than 80% of projected natural gas production. The company had also entered into derivative contracts covering 2019 and 2020 production.
  • Management stated that operating cash flow, available credit capacity, asset-sale proceeds and derivative contracts were expected to satisfy near-term obligations and liquidity needs, while noting that commodity prices and production materially affect this assessment.
  • Key risks include volatile natural gas, NGL and oil prices, transportation and gathering costs, substantial leverage, floating-rate exposure, reserve and production declines, derivative counterparty performance and the ability to access capital markets.
  • Appalachian ethane infrastructure remains a risk. The Mariner East facility had been shut down for most of 2019 because of subsidence issues; inability to sell or transport ethane could require production curtailments or diversion of gas.
  • The company reported an unresolved Pennsylvania Department of Environmental Protection matter concerning alleged methane and other substance releases from a Lycoming County well. Monetary sanctions could exceed $100,000, although the company disputes the allegations.
  • The company was in compliance with its credit-facility covenants at March 31, 2019. A 1% increase in short-term interest rates was estimated to increase annual interest expense by approximately $9.0 million.

Investor Verification Items

  1. Verify the sustainability of positive operating cash flow after the company’s $756.0 million annual capital budget and required debt service.
  2. Assess commodity-price sensitivity, including the effect of derivative settlements and mark-to-market losses on reported earnings and future cash receipts.
  3. Review debt maturities, refinancing requirements, borrowing-base redeterminations and available credit after letters of credit.
  4. Evaluate whether higher Marcellus production can offset lower realized prices and rising transportation, gathering and processing costs.
  5. Monitor ethane takeaway capacity, the Mariner East shutdown and any resulting production curtailment or additional transportation costs.
  6. Reconcile the company’s hedging percentages, contract volumes, hedge prices and counterparty exposure with current production forecasts.
  7. Follow the Pennsylvania environmental proceeding, potential sanctions and any other litigation or regulatory contingencies.