Range Resources Corporation: Q1 2012 Form 10-Q Summary
Business context and reporting period
Range Resources Corporation is an independent oil and gas company focused on exploration, development and acquisition of natural gas, natural gas liquids and oil properties in the Appalachian and Southwestern United States. The filing covers the unaudited quarter ended March 31, 2012. Results primarily reflect continuing operations; Barnett Shale activities were reported as discontinued operations following the 2011 asset sale.
Financial and operating highlights
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Natural gas, NGL and oil sales | $317.6 million | $252.0 million | +26% |
| Total revenues and other income | $246.9 million | $212.7 million | +16% |
| Derivative fair value loss | $60.8 million | $40.8 million | Higher loss |
| Loss from continuing operations | $41.8 million | $33.4 million | Wider loss |
| Net loss | $41.8 million | $25.0 million | Wider loss |
| Loss per diluted share | $0.26 | $0.16 | Higher loss |
| Cash flow from continuing operations | $156.0 million | $121.2 million | +29% |
| Production | 59.6 Bcfe | 39.2 Bcfe | +52% |
| Average realized price including all derivative settlements and transportation | $4.51 per mcfe | $5.75 per mcfe | Down 22% |
Production increased 52%, including natural gas production growth of 56%, NGL growth of 38% and oil growth of 39%. Appalachian production increased 68%, driven principally by the Marcellus Shale. Natural gas prices were pressured, with average NYMEX gas prices of $2.77 per mcf versus $4.12 in the prior-year quarter, while average NYMEX oil prices increased to $103.13 per barrel from $94.67.
Operating expenses included $100.2 million of depletion, depreciation and amortization, $40.8 million of transportation, gathering and compression costs, $38.7 million of general and administrative expense, and $37.2 million of interest expense. Direct operating expense declined to $0.49 per mcfe from $0.73, and DD&A declined to $1.68 per mcfe from $1.84.
At March 31, 2012, cash and cash equivalents were $122.9 million. Total assets were $6.3 billion, total liabilities were $3.9 billion and stockholders’ equity was $2.4 billion. Total debt was $2.4 billion, consisting entirely of senior subordinated notes; there were no borrowings under the bank credit facility at quarter-end. The company had $1.5 billion of available borrowing capacity and $28.6 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Production growth substantially increased sales and operating cash flow, but lower natural gas prices reduced realized pricing.
- Derivative fair value loss increased by $20.0 million to $60.8 million, primarily due to higher oil and NGL prices affecting non-hedge derivatives.
- A $24.0 million retroactive Pennsylvania unconventional-well impact fee and a $6.2 million current accrual increased production and ad valorem taxes.
- Interest expense increased to $37.2 million from $24.8 million, reflecting higher debt balances and interest costs.
- Transportation, gathering and compression expense increased to $40.8 million from $25.1 million as Marcellus production expanded.
- Deferred compensation plan expense changed from a $30.6 million expense in Q1 2011 to a $7.8 million gain in Q1 2012, primarily due to changes in Range’s stock price.
- In March 2012, Range issued $600.0 million of 5.00% senior subordinated notes due 2022, generating approximately $589.5 million of net proceeds. The company used $350.0 million to repay credit-facility borrowings and used the balance for general corporate purposes.
- Range sold a 75% interest in an East Texas prospect for $8.5 million and recorded a pre-tax loss of $10.3 million.
Guidance, outlook, risks and unusual items
Management’s 2012 capital expenditure budget was approximately $1.6 billion, excluding acquisitions. First-quarter capital expenditures, including acreage acquisitions, were $452.8 million, including $355.9 million for drilling projects and $75.4 million for unproved acreage. Management expected the capital program to be funded by operating cash flow, asset-sale proceeds and available credit capacity, with potential additional debt or equity financing if required.
Management expected an effective tax rate of approximately 40% for the remainder of 2012 and stated that operating cash flow, unused credit capacity, asset-sale proceeds and existing commodity derivatives were expected to satisfy near-term liquidity needs. The filing does not provide a formal production or earnings outlook beyond the capital budget and tax-rate expectation.
Commodity prices remain the principal operating risk. Approximately 73% of projected 2012 production, including approximately 74% of projected natural gas production, was hedged as of March 31, 2012. These contracts reduce downside exposure but also limit the benefit of rising prices and expose Range to counterparty, basis and settlement risks. Net derivative assets had a reported fair value of approximately $275.8 million on a pre-tax liquidation basis.
Other significant risks include lower natural gas, NGL or oil prices; production interruptions; drilling and reserve-replacement risk; rising service and transportation costs; borrowing-base redeterminations; debt covenant restrictions; and the need for future financing. The company noted that ethane disposal capacity in the Appalachian region remains constrained and that failure of planned ethane facilities to become available could require production curtailments.
Capitalized exploratory well costs totaled $133.9 million at March 31, 2012, including $29.7 million capitalized for more than one year across nine projects. Litigation was described as ordinary-course and not expected to have a material adverse effect. The EPA withdrew a prior administrative order and dismissed its related enforcement action effective March 29, 2012.
Most important facts for investors to verify
- Whether production growth can offset sustained low natural gas prices and the resulting pressure on realized prices and profitability.
- The cash-flow impact and ongoing cost of Pennsylvania’s impact fee, including the $24.0 million retroactive charge.
- Whether the $1.6 billion capital program can be funded without materially increasing debt or issuing equity.
- Debt maturity, covenant and refinancing exposure on the $2.4 billion senior subordinated note balance.
- The sensitivity of earnings and liquidity to derivative fair-value changes, hedge settlements and counterparty performance.
- The recoverability of suspended exploratory well costs and unproved acreage, particularly in the lower-price natural gas environment.
- Progress and availability of Appalachian ethane transportation and sales infrastructure.