Business Context and Reporting Period
Range Resources Corporation is an independent natural gas and natural gas liquids company focused primarily on exploration, development and acquisition activities in the Appalachian region. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods.
Financial and Operating Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Total revenues and other income | $376.5 million | $851.4 million | $1.070 billion | $1.600 billion |
| Natural gas, NGL and oil sales | $349.3 million | $563.6 million | $781.4 million | $1.235 billion |
| Net income (loss) | $(146.6) million | $115.2 million | $(1.6) million | $116.6 million |
| Diluted EPS | $(0.61) | $0.46 | $(0.01) | $0.46 |
| Cash flow from operations | $78.8 million | $184.9 million | $203.3 million | $445.5 million |
| Average daily production | 2.349 Bcfe | 2.287 Bcfe | 2.322 Bcfe | 2.272 Bcfe |
| Realized price including derivatives and transportation | $0.89/Mcfe | $1.42/Mcfe | $1.03/Mcfe | $1.68/Mcfe |
Revenue and earnings were heavily affected by lower commodity prices. Q2 natural gas, NGL and oil sales declined 38%, while six-month sales declined 37%. Average realized prices including derivative settlements and third-party transportation costs fell 37% in Q2 and 39% for the six-month period.
Cost reductions partially offset pricing pressure. Q2 direct operating expense declined 31% per Mcfe, general and administrative expense declined 25% per Mcfe, interest expense declined 8% per Mcfe and DD&A declined 28% per Mcfe.
At June 30, 2020, cash and cash equivalents were $0.6 million, total assets were $6.5 billion and stockholders' equity was $2.3 billion. Gross debt was $3.256 billion, including $639.0 million outstanding under the bank facility and approximately $2.6 billion of senior and senior subordinated notes. Debt net of issuance costs was $3.224 billion.
Liquidity, Capital Allocation and Debt
- The revolving credit facility had a $3.0 billion borrowing base, $2.4 billion of lender commitments, $639.0 million drawn and $336.4 million of undrawn letters of credit, leaving approximately $1.4 billion of committed availability plus $600 million of additional borrowing-base capacity.
- Range was in compliance with applicable debt covenants at June 30, 2020, including the required EBITDAX-to-cash-interest and current-ratio tests.
- In January 2020, Range issued $550 million of 9.25% senior notes due 2026 and used the proceeds primarily to redeem $500 million of notes and repay bank borrowings.
- During the first six months, Range repurchased $158.1 million face value of senior and senior subordinated notes at a discount and recognized a $21.9 million gain on early extinguishment of debt.
- Capital expenditures, including acreage acquisitions, were approximately $270.4 million in the first six months. The 2020 capital budget was reduced from $520 million to $430 million.
- The quarterly dividend was suspended in January 2020. Range repurchased approximately 8.2 million shares during the first six months under its $100 million repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Q2 2020 changed from $115.2 million of net income to a $146.6 million net loss, primarily because of lower realized prices and the absence of the large 2019 derivative fair-value gain.
- Six-month operating cash flow fell $242.2 million, or approximately 54%, to $203.3 million.
- Derivative fair-value results were a $6.3 million loss in Q2 2020 versus $195.2 million of income in Q2 2019, although six-month derivative fair-value income increased to $226.9 million from $133.5 million. These results are volatile and substantially non-cash.
- Production increased 3% in both Q2 and the first six months, but the commodity mix and prices were unfavorable. Marcellus production increased while North Louisiana production declined.
- Transportation, gathering, processing and compression expense declined 7% in both the quarter and six-month period.
- Range recorded a $77.0 million North Louisiana proved-property impairment in Q1 2020 and a $121.7 million gain on asset sales, primarily from the Northwest Pennsylvania legacy-asset disposition.
Outlook, Commentary, Risks and Unusual Items
Management emphasized disciplined capital spending, cost reductions, asset sales, hedging and balance-sheet management. Range expects to fund near-term needs through operating cash flow, available credit capacity, asset-sale proceeds and derivative settlements, but noted that future liquidity depends on commodity prices, production, reserves and access to capital.
- COVID-19 created significant economic and commodity-market uncertainty. As of the filing date, Range had not experienced a significant operational disruption, but identified risks involving demand, supply chains, employee availability, customer credit, borrowing costs, property valuations and future financing availability.
- As of June 30, 2020, more than 60% of projected remaining-2020 production and more than 70% of projected natural gas production were hedged. Net derivative fair value was approximately $139.3 million, with contracts extending through December 2021; basis swaps extend through December 2024.
- On July 18, 2020, Range agreed to sell its North Louisiana assets for $245 million in cash, subject to closing adjustments, plus up to $90 million of contingent proceeds through 2023. Closing was expected in early August. Range retained certain long-term gathering and processing deficiency obligations through 2029, for which the accrued liability was still being determined.
- North Louisiana deficiency charges were approximately $18.2 million in Q2 2020. Transportation capacity releases in Pennsylvania generated $10.4 million of termination costs.
- Range agreed to pay a $50,000 fine and $100,000 to a local conservation organization to resolve certain Pennsylvania environmental matters. A separate Pennsylvania groundwater-related matter could result in penalties exceeding $100,000.
- Commodity prices remain the principal operating risk. Q2 2020 average NYMEX prices were $1.72 per Mcf for natural gas, $27.09 per barrel for oil and $0.30 per gallon for the NGL composite, all materially below 2019 levels.
Most Important Facts for Investors to Verify
- Closing mechanics, final proceeds and contingent earn-out terms for the North Louisiana asset sale, including the amount and timing of retained deficiency obligations.
- Debt maturities beginning in 2021, refinancing requirements, credit-facility borrowing-base redeterminations and compliance with financial covenants.
- Whether operating cash flow and hedging proceeds can fund the $430 million capital program while reducing debt in a sustained low-price environment.
- The sensitivity of earnings and cash flow to natural gas, NGL and oil prices, basis differentials, derivative settlements and counterparty performance.
- Potential additional impairments, environmental penalties, litigation exposure and COVID-19-related operational or credit impacts.
- The filing presents differing six-month effective-tax-rate descriptions: the notes label the rate as not meaningful, while the MD&A reports 129.8%; investors should reconcile this presentation.