RRC

Range Resources Corp. 10-Q Summary

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2004
Business Overview: Range Resources 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. A significant event during the period was the acquisition of the remaining 50% interest in Great Lakes Energy Partners L.L.C. on June 23, 2004, for $200 million plus the assumption of $70 million in debt.

Key Financial Metrics (Nine Months Ended Sept 30, 2004)

Material Changes vs. Prior Period

• Production Growth: Average daily production increased 21% year-over-year to 189,635 Mcfe/day, driven by the Great Lakes acquisition and successful drilling programs.
• Revenue Drivers: Oil and gas sales revenue increased to $218.5 million (from $165.3 million) due to higher realized prices ($4.21/Mcfe vs. $3.85/Mcfe) and increased volumes. However, realized prices were significantly lower than spot prices due to hedging activities.
• Acquisitions: Capital spending surged, with $258.5 million allocated to acquisitions (primarily Great Lakes) and $106.4 million for oil and gas property additions, compared to $12.4 million and $65.4 million respectively in 2003.
• Expense Increases: General and administrative expenses rose to $28.3 million (from $15.7 million), largely due to a $13.5 million non-cash mark-to-market adjustment on the deferred compensation plan. Exploration expenses increased to $12.4 million due to higher dry hole costs.
• Hedging Impact: Realized hedging losses reduced oil and gas revenues by $64.5 million for the nine-month period. The company reported a net unrealized pre-tax hedging loss of $132.9 million on the balance sheet.

Guidance, Outlook, and Risks

• Liquidity: The company maintains a $600 million Senior Credit Facility with a borrowing base of $500 million. As of September 30, 2004, $193.1 million was available. Management believes operating cash flow and borrowing capacity are sufficient for near-term obligations.
• Capital Budget: The 2004 capital budget is set at $169.6 million (excluding acquisitions), expected to be funded by internal cash flow.
• Market Risks: The company faces significant exposure to oil and gas price volatility. While hedging programs (swaps and collars) stabilize cash flow, they resulted in substantial unrealized losses as market prices rose above hedge prices. A 10% decline in future prices would reduce the unrealized hedging loss by approximately $57.5 million.
• Contingencies: The company is involved in various legal actions, including a royalty owner class action suit, though management believes these will not have a material adverse effect.

Investor Verification Checklist

• Hedging Exposure: Verify the impact of the $132.9 million unrealized hedging loss on future earnings as contracts settle, particularly given the current upward trend in commodity prices.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the restricted payment baskets under the Senior Credit Facility ($171.9 million available) and 7-3/8% Notes ($156.8 million available).
• Deferred Compensation Volatility: Assess the sustainability of the $13.5 million non-cash mark-to-market expense related to the deferred compensation plan and its impact on reported GAAP earnings.
• Integration Costs: Monitor for additional integration expenses related to the Great Lakes acquisition, which were not fully quantified at the time of filing.
• Reserve Estimates: Review the impact of the Great Lakes acquisition on total proved reserves and the resulting changes in depletion rates.