RANGE RESOURCES CORP quarterly report, Q2 FY2019

Business Context and Reporting Period

Range Resources Corporation is an independent natural gas, natural gas liquids and oil exploration and production company focused primarily on the Appalachian and North Louisiana regions. The company reports one operating segment. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019, filed July 25, 2019.

Key Financial Metrics

Metric	Three Months Ended June 30, 2019	Three Months Ended June 30, 2018	Six Months Ended June 30, 2019	Six Months Ended June 30, 2018
Total revenues and other income	$851.4 million	$656.2 million	$1.600 billion	$1.399 billion
Natural gas, NGLs and oil sales	$563.6 million	$661.4 million	$1.235 billion	$1.358 billion
Income before taxes	$155.3 million	$(108.4) million	$162.4 million	$(16.4) million
Net income (loss)	$115.2 million	$(79.8) million	$116.6 million	$(30.6) million
Diluted earnings (loss) per share	$0.46	$(0.32)	$0.46	$(0.13)
Operating cash flow	$184.8 million	$174.9 million	$445.5 million	$545.5 million

Second-quarter production increased 4% to 2.287 billion mcfe, and six-month production increased 4% to 4.117 billion mcfe. Average realized price including derivative settlements and third-party transportation costs declined to $1.42 per mcfe in the quarter from $1.88, and to $1.68 per mcfe for the six months from $2.11.

Second-quarter operating expenses were $696.1 million versus $764.5 million in the prior-year quarter. Six-month expenses were $1.437 billion versus $1.415 billion.
Second-quarter derivative fair value income was $195.2 million, compared with a $103.3 million loss in 2018. Six-month derivative fair value income was $133.5 million, compared with a $117.3 million loss.
Transportation, gathering, processing and compression expense increased 12% in the quarter and 17% for the six months, primarily from Marcellus production growth, new pipelines and higher NGL-related costs.
Direct operating expense per mcfe declined 11% to $0.16 for both the quarter and six months. DD&A per mcfe declined 15% in the quarter and 16% for the six months.
Capital expenditures, including acreage acquisitions, were approximately $413.3 million in the first six months, against a 2019 capital budget of $756.0 million.

Balance Sheet, Debt and Liquidity

Cash and cash equivalents were $0.5 million at June 30, 2019, compared with $0.5 million at December 31, 2018.
Total debt was $3.821 billion before premiums and issuance costs, or $3.792 billion net, down from $3.869 billion before adjustments at December 31, 2018.
Debt consisted of $895.0 million drawn on the bank facility, approximately $2.877 billion of senior notes and $49.0 million of senior subordinated notes.
The revolving credit facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments and $822.3 million of committed availability after $282.7 million of undrawn letters of credit. An additional $1.0 billion of borrowing-base capacity was available for potential increases in lender commitments.
Range was in compliance with its applicable debt covenants, including the EBITDAX-to-cash-interest, current-ratio and proved-reserves-to-debt requirements.
Stockholders’ equity was $4.182 billion at June 30, 2019, compared with $4.059 billion at year-end 2018. The company paid a quarterly dividend of $0.02 per share.

Material Changes Versus the Prior Comparable Period

Profitability improved materially from the prior-year loss, primarily because of favorable non-cash derivative fair value changes, lower impairment charges and higher production.
Commodity sales declined 15% in the quarter and 9% for the six months because lower realized prices more than offset 4% production growth. NGL sales declined 26% in the quarter and 15% for the six months; oil sales declined 31% and 34%, respectively.
Operating cash flow declined $100.0 million for the six months, despite higher production and improved working-capital inflows, because of lower realized prices and the effect of prior asset sales.
No proved-property impairment was recorded in 2019, compared with $15.3 million in the second quarter of 2018 and $22.6 million for the first six months of 2018.
Range recorded $2.2 million of severance costs related to a workforce reduction announced during the second quarter.
Range adopted the new lease accounting standard in the first quarter of 2019, recognizing operating lease right-of-use assets of $48.9 million and long-term operating lease liabilities of $39.9 million at June 30, 2019, with no material earnings impact.

Outlook, Management Commentary and Risks

Management’s objective is to achieve production growth within operating cash flow, maintain capital discipline, reduce debt over time and continue hedging commodity exposure. Management stated that operating cash flow, available credit capacity, asset-sale proceeds and derivative contracts should satisfy near-term obligations and liquidity needs. The company expects an effective tax rate of approximately 25% for the remainder of 2019 before discrete items.

More than 65% of projected production for the remainder of 2019 and more than 80% of projected natural gas production were hedged as of June 30, 2019. Derivative contracts had an estimated net unrealized pretax gain of approximately $162.7 million and expire monthly through December 2020.
In mid-July 2019, Range closed agreements to sell a proportionately reduced 2% overriding royalty interest in certain Pennsylvania leases for gross proceeds of $600.0 million. Management did not expect a gain or loss from the transactions.
Commodity prices remain the primary risk to revenue, cash flow, reserve values, borrowing capacity and profitability. Derivatives reduce downside exposure but limit some benefit from price increases and expose the company to counterparty and basis risk.
Approximately $2.9 billion of debt was fixed-rate debt and $895.0 million was floating-rate debt. A 1% increase in short-term interest rates would increase annual interest expense by approximately $9.0 million.
Other risks include high transportation and gathering commitments, limited Appalachian ethane infrastructure, production and reserve declines, leasehold impairments, environmental and regulatory matters, and litigation. A Pennsylvania environmental proceeding could result in monetary sanctions exceeding $100,000, although management disputes the allegations.
Management reported effective disclosure controls and no material changes to internal control over financial reporting.

Investor Verification Items

Verify the sustainability of earnings excluding the $195.2 million second-quarter and $133.5 million six-month derivative fair value gains, which are largely non-cash and volatile.
Reconcile production growth with the decline in realized prices and assess sensitivity to natural gas, NGL and oil prices, basis differentials and transportation costs.
Review the post-quarter $600.0 million overriding royalty transaction, including final proceeds, ownership retained and any effect on future production economics.
Assess debt reduction capacity, covenant headroom, credit-facility availability and refinancing requirements through the 2021–2025 senior-note maturities.
Evaluate whether the $756.0 million capital budget can be funded from operating cash flow while maintaining production and reserves in a lower-price environment.
Review derivative volumes, hedge prices, counterparty exposure and the effect of future settlements on cash flow and realized commodity prices.