RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
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. The company seeks to increase reserves and production through drilling and acquisitions.

Key Financial Metrics

Production: Total production increased 28% to 33.7 million Mcfe (average daily production of 370,605 Mcfe).
Realized Price: Average realized price (including all derivative settlements) was $9.55 per Mcfe, compared to $8.23 per Mcfe in Q1 2007.

Material Changes vs. Prior Period

• Revenue Composition: While oil and gas sales increased 59% due to higher volumes (28% increase) and prices (16% increase), total revenue growth was dampened by a 190% increase in derivative fair value losses.
• Profitability: Net income dropped significantly from $73.1 million to $1.7 million. This decline is primarily attributed to the absence of $64.8 million in income from discontinued operations (Gulf of Mexico and Austin Chalk properties sold in 2007) and the massive non-cash mark-to-market loss on derivatives.
• Derivative Impact: The company reported a $135.2 million non-cash unrealized mark-to-market loss on oil and gas derivatives that do not qualify for hedge accounting. This was driven by rising commodity prices against fixed-price hedges.
• Debt Levels: Total debt increased by $289 million to $1.44 billion, driven by increased borrowings on the credit facility to fund acquisitions and capital expenditures.
• Acquisitions: The company spent $333.4 million on acquisitions in Q1 2008, including a $281.6 million purchase of Barnett Shale properties in January 2008.

Guidance, Outlook, and Risks

• Capital Budget: The 2008 capital budget is set at $1.1 billion (excluding acquisitions), expected to be funded by internal cash flow and asset sales.
• Effective Tax Rate: Management expects the effective tax rate to be approximately 38% for the remainder of 2008, following a Q1 rate of 81.1% which included discrete tax charges.
• Liquidity: As of March 31, 2008, the company had $307.5 million of borrowing capacity available under its $900 million credit facility. On April 1, 2008, the facility amount was increased to $1.0 billion with a borrowing base of $1.5 billion.
• Market Risk: The company faces significant exposure to commodity price volatility. As of March 31, 2008, outstanding derivatives resulted in a net unrealized pre-tax loss of $300.1 million. Management notes that if commodity prices continue to rise, additional realized and non-cash unrealized losses are expected, which could adversely affect net income.
• Dividends: A quarterly dividend of $0.04 per share was declared and paid in March 2008.

Investor Verification Checklist

• Derivative Accounting: Verify the impact of the $135.2 million mark-to-market loss on derivatives not qualifying for hedge accounting and its effect on reported earnings versus cash flow.
• Discontinued Operations: Confirm that the Q1 2007 net income included $64.8 million from discontinued operations, making year-over-year comparisons of continuing operations more relevant.
• Debt Covenants: Review compliance with the debt-to-EBITDAX ratio (max 4.0:1) and current ratio covenants under the credit facility, especially given the increased debt load.
• Capital Expenditure Funding: Assess the sustainability of the $1.1 billion capital budget given the current cash burn and reliance on the credit facility.
• Asset Sales: Monitor the execution of asset sales (e.g., East Texas properties sold for $64.4 million in Q1) as a key component of the liquidity strategy.