RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: Range is engaged in the exploration, development, and acquisition of oil and gas properties primarily in the Southwestern, Appalachian, and Gulf Coast regions of the United States. The company focuses on increasing reserves and production through drilling and acquisitions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 15% to $152.8 million. This was primarily driven by a $66.1 million mark-to-market loss on oil and gas derivatives that did not qualify for hedge accounting, offsetting higher production volumes and realized prices.
• Discontinued Operations: Net income was significantly boosted by $64.8 million from discontinued operations, resulting from the sale of Austin Chalk and Gulf of Mexico properties. In contrast, income from continuing operations dropped 84% to $8.4 million due to the derivative losses.
• Production Growth: Total production increased 21% to 26.4 million mcfe, driven by successful drilling and acquisitions. Average daily production reached 292,930 mcfe.
• Cost Increases: Direct operating costs rose 16% on a per-unit basis due to higher oilfield service costs. Interest expense increased 84% to $18.8 million due to rising rates and new fixed-rate debt issuances.
• Liquidity Improvement: Cash and equivalents surged from $2.4 million to $167.9 million, largely due to $155.0 million in proceeds from the sale of Gulf of Mexico properties.

Guidance, Outlook, and Risks

• Capital Budget: The 2007 capital budget is set at $822.0 million (excluding acquisitions), expected to be funded by internal cash flow and asset sales.
• Subsequent Equity Offering: On April 23, 2007, the company sold 8.05 million shares of common stock for $280.4 million. Proceeds were used to pay down the credit facility and fund a pending acquisition.
• Pending Acquisition: Range entered into an agreement to acquire interests in the Nora field from Equitable Resources, Inc. for approximately $315 million. Closing is expected in May 2007, subject to regulatory clearance.
• Hedging Strategy: As of March 31, 2007, the company held a net unrealized pre-tax gain of $21.6 million on open derivative contracts. However, certain gas hedges are marked-to-market, creating revenue volatility when market prices rise.
• Risks: The company faces risks related to commodity price volatility, the ability to secure capital for development, and the potential failure of the Equitable transaction to close.

Investor Verification Checklist

• Derivative Accounting Impact: Verify the sustainability of earnings given the $66.1 million non-cash mark-to-market loss on derivatives that reduced continuing income.
• Discontinued Operations: Confirm that the $64.8 million gain from asset sales is a one-time event and not indicative of recurring operational performance.
• Debt Covenants: Review the restricted payment baskets under the credit facility and subordinated notes to ensure dividend sustainability ($482.2 million available under the bank facility).
• Equitable Transaction: Monitor the closing status of the $315 million Nora field acquisition and the use of proceeds from the recent $280.4 million equity offering.
• Operating Cost Inflation: Assess the long-term impact of rising direct operating costs (up 16% per unit) on future profit margins.