Range Resources Corporation — FY2014 Form 10-K 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 (NGLs) and oil, primarily in the Appalachian and Midcontinent regions. The filing covers the fiscal year ended December 31, 2014; quarterly information is included, but this is an annual Form 10-K rather than a standalone Q4 filing.
- 2014 average production was 1,162.4 Mmcfe per day, with 81% from the Marcellus Shale and 68% consisting of natural gas.
- Year-end proved reserves were 10.3 Tcfe, 67% natural gas, 52% proved developed and 96% located in Appalachia.
- Range operated approximately 96% of its wells and had approximately 1.4 million net acres leased across its shale plays.
Financial and operating metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Natural gas, NGLs and oil sales | $1.912 billion | $1.716 billion | 11% increase |
| Total revenues and other income | $2.712 billion | $1.863 billion | 46% increase |
| Income before income taxes | $1.031 billion | $150 million | Material increase |
| Net income | $634.4 million | $115.7 million | 448% increase |
| Diluted earnings per share | $3.79 | $0.70 | Material increase |
| Cash flow from operating activities | $954.1 million | $743.5 million | 28% increase |
| Cash flow used in investing activities | $1.245 billion | $983.4 million | Higher investment |
| Debt | $3.073 billion | $3.141 billion | 2% decrease |
| Stockholders’ equity | $3.457 billion | $2.414 billion | 43% increase |
- Total production increased 24% to 424.3 Bcfe. Natural gas production rose 8% to 286.9 Bcf; NGL production more than doubled to 18.8 Mmbbls; and crude oil production increased 6% to 4.1 Mmbbls.
- Average realized price including all derivative settlements and third-party transportation costs declined to $3.64 per mcfe from $4.16 per mcfe. NGL and oil prices also declined year over year.
- Direct operating expense decreased to $0.35 per mcfe from $0.37, while DD&A decreased to $1.30 per mcfe from $1.44.
- Derivative fair value income was $383.5 million, compared with a $61.8 million loss in 2013. This gain was largely mark-to-market and created significant earnings volatility rather than representing current-period operating cash flow.
- Capital spending included $1.200 billion for natural gas and oil properties and $212.0 million for acreage purchases. Net cash used in investing activities exceeded operating cash flow by approximately $291 million.
- Year-end cash was only $448,000, consistent with the company’s practice of using available funds to reduce bank debt and relying on its revolving facility for liquidity.
- The company declared quarterly dividends of $0.04 per share, or $0.16 for the year.
Material changes versus the prior comparable period
- Production increased 24%, driven primarily by Marcellus development; Appalachian production rose 30%, while Midcontinent production declined 18%.
- Proved reserves increased 26% to 10.3 Tcfe from 8.2 Tcfe. Drilling additions were approximately 2.4 Tcfe, partially offset by production, property sales and the reclassification of 611 Bcfe of PUDs to unproved because development moved beyond the five-year horizon.
- Range completed the Conger Exchange, selling West Texas assets for Virginia producing properties, other assets and approximately $145 million of cash before closing adjustments. The transaction generated a pre-tax gain of approximately $282.7 million in management’s discussion and analysis; the financial statement note reports a related gain of $272.7 million after selling expenses and a separate $10 million remeasurement gain.
- Range issued approximately 4.56 million common shares and received $396.6 million of net proceeds, using the proceeds in part to redeem all $300 million of its 8% senior subordinated notes due 2019.
- General and administrative expense fell to $213.4 million from $291.2 million, primarily because 2013 included approximately $88.9 million of lawsuit settlements. The 2014 period included $5.9 million of Pennsylvania water-related fines and penalties.
- Debt to capitalization improved to 47.1% from 56.5%. The company’s $4.0 billion credit facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments and approximately $1.2 billion of available borrowing capacity after outstanding debt and letters of credit.
- Income tax expense increased to $396.5 million from $33.9 million, primarily because of higher pre-tax income. The effective tax rate was 38.5% versus 22.6% in 2013, and substantially all 2014 tax expense was deferred.
Guidance, outlook, commentary, risks and unusual items
- Management reduced the 2015 capital budget from $1.3 billion to approximately $870 million in response to sharply lower natural gas and crude oil prices. The budget may be adjusted during the year based on prices, drilling results and market conditions.
- Management expects 2015 DD&A of approximately $1.25 per mcfe and an effective tax rate of approximately 39%, before discrete tax items.
- Range plans to drill more than 130 net Marcellus wells in 2015 and expects to operate an average of seven rigs in the Marcellus, compared with approximately nine rigs during 2014.
- At December 31, 2014, hedging agreements covered 229.7 Bcfe of 2015 production and 46.1 Bcfe of 2016 production. Subsequent to year-end, additional 2015-2017 natural gas and NGL hedges were entered into.
- Commodity prices fell materially after year-end: February 2015 NYMEX natural gas was cited at $2.87 per mcf and January 2015 crude oil at $47.33 per barrel. Approximately 97% of proved reserves were natural gas and NGLs, making the company especially sensitive to gas and NGL prices.
- Range announced the closure of its Oklahoma City office by mid-2015, affecting approximately 100 employees. The 2014 financial statements included $8.4 million of accrued termination and accelerated equity-award costs; additional 2015 costs were expected.
- Transportation and gathering commitments totaled approximately $3.547 billion through the contract terms, with additional contingent commitments tied to pipeline construction or modifications. These arrangements generally require minimum volumes or demand payments.
- Mariner East propane and ethane operations were expected to be fully functional by the end of the third quarter of 2015. Delays or insufficient ethane processing, transportation or market access could require production curtailments or create additional costs.
- Asset retirement obligations increased to $287.5 million from $230.1 million, including a $48.3 million increase in estimates for plugging and abandonment costs.
- The filing identifies material risks from commodity-price volatility, reserve estimation, drilling performance, borrowing-base reductions, leverage, transportation and processing constraints, environmental and hydraulic-fracturing regulation, water availability, litigation, counterparty performance and derivative mark-to-market volatility.
- Pending litigation was described as arising in the ordinary course of business, with management stating that any ultimate liability was not expected to materially affect consolidated financial position, liquidity or annual results. The filing text does not identify a material accrued contingent liability.
- Management and Ernst & Young concluded that internal control over financial reporting was effective as of December 31, 2014, and the audit opinion on the financial statements was unqualified.
Important facts for investors to verify
- Reconcile reported earnings to operating cash flow, particularly the $383.5 million derivative fair value gain and the approximately $285.6 million gain on asset sales.
- Assess the sustainability of growth after the 2015 capital-budget reduction and under lower gas, NGL and oil prices.
- Review the borrowing-base mechanics, $1.2 billion of available credit capacity, covenant compliance and the $723 million bank debt maturity in 2019.
- Analyze fixed transportation, gathering, ethane and propane commitments against expected production and infrastructure completion dates.
- Evaluate the concentration of reserves and production in the Marcellus and the impact of PUD reclassifications, reserve revisions and future development spending.
- Review derivative volumes, hedge prices, counterparty exposure and the effect of mark-to-market accounting on reported earnings and balance-sheet assets.
- Verify the final cost and timing of the Oklahoma City office closure, environmental compliance initiatives, asset retirement obligations and any legal or regulatory contingencies.