RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: Range Resources is engaged in the development, acquisition, and exploration of oil and gas properties in the Southwestern, Gulf Coast, and Appalachian regions. It also operates Independent Producer Finance (IPF), a subsidiary providing financing to small producers. Following a period of retrenchment and debt reduction post-1998, the company has stabilized its financial position and refocused on increasing production and reserves.

Key Financial Metrics

Note: Recurring net income excludes extraordinary gains on debt retirement and other non-recurring items.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues for the nine months ended September 30, 2001, increased to $175.5 million from $129.0 million in the prior year period. This was driven by a 38% increase in average realized prices per mcfe ($3.91 vs. $2.83) and a 1% increase in production volumes.
• Profitability: Net income for the nine months rose to $39.9 million from $20.8 million. However, on a recurring basis (excluding extraordinary gains), net income increased to $34.5 million from $4.4 million.
• Debt Reduction: Total debt (including Trust Preferred) decreased by $48.5 million during the nine-month period, primarily through cash repayments and exchanges of common stock for fixed-income securities.
• Operating Expenses: Direct operating expenses increased to $34.5 million (nine months) due to higher production taxes and workover costs. DD&A increased 8% due to lower proved reserves raising the depletion rate to $1.33 per mcfe.
• Hedging Impact: The adoption of SFAS 133 in 2001 resulted in the recording of a $52.8 million unrealized hedging gain on the balance sheet. Realized hedging losses reduced oil and gas revenues by $20.2 million for the nine months ended September 30, 2001.

Guidance, Outlook, and Risks

• Outlook: Management expects to continue retiring debt with internal cash flow. While full reserve replacement is not expected in 2001, current projects aim to accelerate production growth by year-end and increase reserves in 2002.
• Liquidity: The company believes it has sufficient liquidity to meet obligations for the next 12 months. Available borrowing capacity as of October 31, 2001, totaled approximately $46.4 million across parent, Great Lakes, and IPF facilities.
• Capital Structure: The company continues a program of exchanging common stock for fixed-income securities to reduce leverage. This may result in material dilution to existing shareholders.
• Risks:
  • Commodity Prices: A material decline in oil and gas prices would reduce the ability to fund capital expenditures and meet financial obligations.
  • High DD&A Rate: The current depletion rate of $1.33-$1.34 per mcfe makes profitability sensitive to price declines.
  • Legal Proceedings: Ongoing litigation regarding royalty accounting and merger terms, though management does not expect a material adverse effect.

Investor Verification Checklist

• Debt Covenants: Verify compliance with restrictive covenants, particularly regarding dividend payments and financial ratios under the Parent Facility.
• Hedging Exposure: Confirm the extent of production hedged (approx. 70% of Q4 2001, 50% of 2002, 20% of 2003) and the impact of unrealized gains on future earnings volatility.
• Reserve Replacement: Monitor progress on reserve replacement ratios, as the company does not expect to achieve full replacement in 2001.
• Dilution Impact: Assess the potential dilution from ongoing exchanges of common stock for subordinated notes, debentures, and preferred stock.
• IPF Valuation: Review the $15.3 million valuation allowance on IPF receivables and its sensitivity to further declines in oil prices.