Range Resources Corporation: 2017 First-Quarter Form 10-Q Summary
Business context and reporting period
Range Resources Corporation is an independent U.S. exploration and production company focused primarily on natural gas, NGLs and oil properties in the Appalachian and North Louisiana regions. The filing covers the unaudited three months ended March 31, 2017, compared with the same period in 2016. The September 2016 Memorial Resources Development Corp. merger contributed approximately 396.8 Mmcfe per day of North Louisiana production during the quarter and materially increased the share count and debt profile.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Natural gas, NGL and oil sales | $559.5 million | $209.5 million | +167% |
| Total revenues and other income | $776.7 million | $331.4 million | +134% |
| Income before income taxes | $282.5 million | $(135.7) million | Improved |
| Net income | $170.1 million | $(93.8) million | Improved |
| Diluted earnings per share | $0.69 | $(0.56) | Improved |
| Operating cash flow | $225.9 million | $90.8 million | +149% |
| Total production | 173.9 Bcfe | 125.8 Bcfe | +38% |
| Average realized price including derivatives and third-party transportation | $2.17 per Mcfe | $1.54 per Mcfe | +41% |
Net margin was approximately 21.9% of total revenues and other income, compared with a loss margin in the prior-year quarter. The effective tax rate was 39.8%, versus 30.9% in Q1 2016. Derivative fair-value income was $165.6 million, including $169.7 million of non-cash fair-value gains, while net cash settlements on derivatives were a $4.2 million payment.
Production increases included natural gas of 116.3 million Mcf, NGLs of 8.5 million barrels and crude oil of 1.1 million barrels. Average daily production increased 40% on an Mcfe basis. Management reported reductions in direct operating expense per Mcfe of 16%, general and administrative expense per Mcfe of 16%, interest expense per Mcfe of 10% and DD&A expense per Mcfe of 10%.
Liquidity, capital expenditures and debt
- Cash and cash equivalents were $0.5 million at March 31, 2017, compared with $0.3 million at year-end 2016.
- Total debt was $3.77 billion before unamortized premiums and issuance costs; debt net of those items was $3.74 billion. Debt included $846.0 million of bank debt, $2.88 billion of senior notes and $49.0 million of senior subordinated notes.
- The revolving credit facility had a $3.0 billion borrowing base and $2.0 billion of lender commitments. Outstanding borrowings were $846.0 million, with $279.7 million of letters of credit and $874.3 million of committed borrowing capacity available.
- Operating cash flow and asset-sale proceeds funded approximately $217.0 million of capital expenditures, including acreage purchases. Capital additions included $186.7 million for natural gas and oil properties and $28.7 million for acreage.
- The 2017 capital budget was $1.15 billion. Management stated that operating cash flow, committed borrowing capacity, asset-sale proceeds and derivative contracts were expected to satisfy near-term obligations and liquidity needs.
- The quarterly dividend remained $0.02 per share, with $5.0 million paid during the quarter.
Material changes versus the prior comparable period
- Higher commodity prices and 38% production growth drove the significant increase in sales, revenue and operating cash flow. Average NYMEX natural gas, oil and Mont Belvieu NGL prices increased 57%, 54% and 69%, respectively.
- Results benefited from the Memorial merger, which increased production, assets, debt and the weighted-average share count. Basic weighted-average shares increased to 244.7 million from 166.8 million.
- Q1 2017 included a $22.6 million pretax gain on asset sales, primarily from Western Oklahoma properties. Q1 2016 included a $1.6 million pretax loss on asset sales.
- No proved-property impairment was recorded in Q1 2017, compared with a $43.0 million impairment charge in Q1 2016.
- Deferred compensation plan expense changed from a $16.1 million expense in Q1 2016 to a $13.2 million gain in Q1 2017, primarily reflecting changes in Range’s stock price.
- Termination costs increased to $4.2 million from $0.2 million due to workforce reductions, severance and accelerated vesting of equity awards.
- Transportation, gathering, processing and compression expense increased 42% to $177.6 million, reflecting production growth and additional third-party costs in Appalachia and North Louisiana.
- Transportation and gathering commitments increased by approximately $437.4 million over the next 22 years, primarily from contract extensions and pricing changes.
Guidance, outlook, risks and unusual items
- Management expected an effective tax rate of approximately 38% for the remainder of 2017 before tax items.
- More than 65% of projected total production for the remainder of 2017, including more than 80% of projected natural gas production, was hedged as of March 31, 2017. Derivative contracts extended through December 2019.
- Management emphasized that future revenue, profitability, liquidity and borrowing capacity remain highly sensitive to natural gas, NGL and oil prices, production volumes, reserves and development costs.
- Derivative gains reduce current-period commodity price exposure but can limit the benefit of higher prices and create earnings volatility through mark-to-market accounting. The net derivative position was an approximate $8.8 million pretax asset at March 31, 2017; natural gas basis swaps had a $20.4 million fair-value loss.
- A 1% increase in short-term interest rates on floating-rate debt outstanding at quarter-end was estimated to increase annual interest expense by approximately $8.5 million.
- Range was in compliance with its credit-facility covenants at March 31, 2017. The facility requires, among other matters, minimum EBITDAX-to-cash-interest and current ratios and a proved-reserves-to-total-debt ratio.
- Management stated that no material changes occurred in previously disclosed risk factors. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect, although a Pennsylvania environmental matter could result in monetary sanctions exceeding $100,000.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commodity prices and production growth support the 2017 capital budget while maintaining covenant compliance and liquidity.
- The sustainability of operating-cost reductions and the extent to which merger-related production and synergies offset higher gathering, transportation, G&A and interest costs.
- The sensitivity of cash flow and debt repayment capacity to commodity prices, hedge settlements, basis differentials and derivative counterparty performance.
- The final purchase-price allocation and any changes to goodwill, deferred taxes, reserves, liabilities or operating assumptions related to the Memorial merger.
- The effect of the additional $437.4 million of long-term transportation and gathering commitments on future fixed costs and financial flexibility.
- Potential future impairment, abandonment, environmental, litigation and asset-retirement obligations, including assumptions regarding commodity prices and reserves.