RANGE RESOURCES CORP annual report, FY2018

Range Resources Corporation 2018 Form 10-K Summary

Business Context and Reporting Period

Range Resources Corporation is an independent U.S. exploration and production company focused on natural gas, NGLs, crude oil and condensate. Operations are concentrated in the Marcellus Shale in Pennsylvania and the Lower Cotton Valley formation in North Louisiana. The filing covers the fiscal year ended December 31, 2018; fourth-quarter results include significant impairment charges.

Average production was 2,201.1 Mmcfe per day, up 10% from 2017; approximately 85% came from the Marcellus region.
Year-end proved reserves were 18.1 Tcfe, consisting of 67% natural gas, 31% NGLs and 2% crude oil; 94% were located in Appalachia.
The company operates as one reportable segment and had approximately 796 full-time employees at January 1, 2019.

Financial and Operating Metrics

Metric	2018	2017	Change
Natural gas, NGLs and oil sales	$2.851 billion	$2.176 billion	31% increase
Total revenues and other income	$3.283 billion	$2.611 billion	26% increase
Net income (loss)	$(1.746) billion	$333.1 million	Turned to loss
Diluted EPS	$(7.10)	$1.34	Declined
Cash flow from operations	$990.7 million	$816.3 million	21% increase
Capital additions to natural gas and oil properties	$960.9 million	$1.149 billion	16% decrease
Total debt, net of issuance costs	$3.837 billion	$4.109 billion	$271.9 million decrease
Stockholders’ equity	$4.059 billion	$5.774 billion	28% decrease

Net loss margin was approximately 53% of total revenue, driven primarily by non-cash impairment charges; the filing does not present a meaningful recurring profit margin for 2018.
Average realized price including derivatives and third-party transportation costs was $1.99 per mcfe versus $1.95 in 2017. Before third-party transportation costs, the realized price was $3.39 per mcfe versus $2.99.
Transportation, gathering, processing and compression expense increased to $1.118 billion from $761.2 million, reflecting higher production, new infrastructure and the gross presentation of certain contracts under the new revenue standard.
Direct operating expense declined to $0.17 per mcfe from $0.18; general and administrative expense declined to $0.26 per mcfe from $0.32; DD&A declined to $0.79 per mcfe from $0.85.
The company paid $19.9 million in dividends, or $0.02 per share per quarter.

Material Changes Versus the Prior Comparable Period

Production increased 10%, with natural gas production up 12% and NGL production up 7%; crude oil and condensate production declined 12%.
Proved reserves increased 18%, from 15.3 Tcfe to 18.1 Tcfe. PV-10 increased to $13.2 billion from $8.1 billion, and the standardized after-tax measure increased to $11.1 billion from $7.2 billion.
Revenue benefited from higher production and improved realized prices, but derivative fair value results shifted from $213.4 million of income in 2017 to a $51.2 million loss in 2018. Cash settlements on derivatives were a $131.5 million payment in 2018 versus a $13.1 million receipt in 2017.
Range recorded a $1.641 billion goodwill impairment in the fourth quarter, fully impairing goodwill associated with the 2016 Memorial Resource Development merger.
Abandonment and impairment of unproved properties increased to $515.0 million from $269.7 million, including a $436.0 million impairment of MRD-related probable and possible reserve value that Range no longer intended to drill.
Range recorded $22.6 million of proved-property impairment and a $10.7 million pretax loss on asset sales. It sold a proportionately reduced 1% overriding royalty interest in Washington County, Pennsylvania, for $300 million and Northern Oklahoma properties for $23.3 million.
Adoption of ASC 606 increased reported 2018 sales and transportation-related expenses by $172.8 million each, with no impact on net loss.

Liquidity, Debt and Capital Resources

At December 31, 2018, debt consisted of approximately $943.0 million under the bank facility, $2.877 billion of senior notes and $49.0 million of senior subordinated notes.
The amended revolving credit facility has a $4.0 billion maximum facility amount, a $3.0 billion borrowing base, $2.0 billion of lender commitments and an April 13, 2023 maturity. Available borrowing capacity under commitments was $775.6 million after $281.4 million of letters of credit.
Debt represented 48.6% of total capitalization versus 41.6% in 2017, primarily because equity declined following the 2018 net loss and goodwill impairment.
Approximately 75% of debt was fixed-rate and 25% was variable-rate. A one-percentage-point increase in short-term rates would increase annual interest expense by approximately $9.4 million.
Management stated that operating cash flow, committed borrowing capacity, asset-sale proceeds and derivative positions should meet near-term liquidity needs. Cash balances remained minimal at $545,000 because excess cash was generally used to reduce bank debt.

Guidance, Outlook, Commentary and Risks

The 2019 capital budget is $756.0 million, approximately 90% allocated to Appalachia, with expected production growth of approximately 6%. Management expects the program to be funded by internally generated cash flow and intends to limit spending to at or below cash flow.
Range expects to operate approximately three rigs in the Marcellus and less than one rig in North Louisiana on average during 2019.
Management expects continued commodity-price volatility. NYMEX natural gas averaged $3.07 per mcf in 2018 but declined from $4.72 per mcf in December 2018 to $2.95 per mcf in February 2019. Crude oil averaged $65.49 per barrel in 2018 and was $51.55 per barrel in January 2019.
Derivatives covered 554.4 Bcfe of 2019 production and 32.7 Bcfe of 2020 production, excluding basis swaps. Hedging reduces downside exposure but limits benefits from higher prices and creates counterparty and production-volume risk.
Major risks include natural gas, NGL and oil price declines; reserve-estimation uncertainty; high leverage and borrowing-base redeterminations; substantial transportation and gathering commitments; reliance on third-party processing and pipeline infrastructure; drilling and completion risks; environmental, hydraulic-fracturing, water-disposal and methane regulations; and potential additional impairments.
Contractual obligations totaled approximately $14.5 billion, including $10.2 billion of transportation, gathering and processing commitments. The company may incur additional costs if production is insufficient to satisfy minimum-volume commitments.
Range disclosed a Pennsylvania Department of Environmental Protection matter involving alleged methane migration from a Lycoming County well. The company disputes the allegation, but the matter could result in monetary sanctions exceeding $100,000.
Management reported effective disclosure controls and internal control over financial reporting, and Ernst & Young issued unqualified audit opinions.

Important Facts for Investors to Verify

Whether 2019 production growth and the $756 million capital program can be funded from operating cash flow at lower natural gas prices.
The sustainability and quality of the reported 18.1 Tcfe reserve base, including the 8.3 Tcfe of proved undeveloped reserves and the planned $3.3 billion of future development costs.
The effect of the $1.6 billion goodwill impairment and $515 million of unproved-property impairment on future asset values, leverage metrics and covenant headroom.
Upcoming debt maturities, including approximately $498 million in 2021, $929 million in 2022, $1.692 billion in 2023 and $750 million in 2025.
Exposure to minimum-volume transportation and gathering commitments, including contingent agreements for additional natural gas and NGL transportation.
The financial impact of third-party processing outages, regional basis differentials and the company’s derivative settlements and counterparty exposure.
Potential changes in Pennsylvania severance taxation, methane-emissions requirements, hydraulic-fracturing regulation and produced-water disposal rules.