Range Resources Corporation — Q1 2016 Form 10-Q Summary
Business Context and Reporting Period
Range Resources Corporation is an independent natural gas, natural gas liquids and oil exploration and production company focused primarily on the Appalachian region, including the Marcellus Shale. The company reports one operating segment. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues and other income | $331.4 million | $462.8 million | Down 28% |
| Natural gas, NGL and oil sales | $209.5 million | $325.5 million | Down 36% |
| Derivative fair value income | $86.9 million | $122.8 million | Down 29% |
| Loss before income taxes | $(135.7) million | $50.1 million income | Unfavorable change |
| Net loss | $(91.7) million | $27.7 million income | Unfavorable change |
| Diluted loss/income per share | $(0.55) | $0.16 | Unfavorable change |
| Net margin | Approximately (27.7%) | Approximately 6.0% | Down approximately 33.7 percentage points |
| Cash flow from operations | $87.4 million | $210.6 million | Down 59% |
| Capital expenditures and acreage purchases | Approximately $126.5 million cash paid | Approximately $387.9 million cash paid | Down substantially |
| Total debt at March 31 | $2.589 billion | Not separately presented in the filing excerpt | Down from $2.651 billion at Dec. 31, 2015 |
Commodity prices were materially lower year over year. Average NYMEX natural gas, oil and Mont Belvieu NGL prices declined 30%, 31% and 26%, respectively. Average realized price including derivative settlements and third-party transportation costs declined 45% to $1.54 per mcfe.
Production increased 5% to 125.8 bcfe, or approximately 1.382 bcfe per day. Natural gas production increased 5%, NGL production increased 11% and crude oil production declined 26%. Marcellus production increased 19% year over year to approximately 1.3 bcfe per day.
Cost reductions partly offset commodity-price pressure. Direct operating expense per mcfe declined 39% to $0.19, general and administrative expense per mcfe declined 20% to $0.32, interest expense per mcfe declined 9% to $0.30, and DD&A expense per mcfe declined 22% to $0.96. Transportation, gathering and compression expense increased to $125.3 million from $89.4 million, primarily due to Marcellus growth, new gathering and transportation arrangements, and NGL pipeline-related costs.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $529,000 at March 31, 2016.
- Cash provided by operating activities was $87.4 million. Investing activities used $14.9 million, including $107.0 million for natural gas and oil properties and $19.5 million for acreage, partly offset by $113.1 million of asset-sale proceeds.
- Financing activities used $72.5 million. Range borrowed $358.0 million and repaid $422.0 million under its revolving credit facility.
- Debt consisted of approximately $31.0 million of bank debt, $750.0 million of 4.875% senior notes due 2025 and approximately $1.9 billion of senior subordinated notes due 2021, 2022 and 2023.
- The revolving facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments and approximately $1.7 billion of committed borrowing capacity after $230.8 million of undrawn letters of credit.
- Range was in compliance with applicable bank facility and senior subordinated note covenants at March 31, 2016, including the stated EBITDAX-to-cash-interest requirement, current-ratio requirement and reserve-value-to-debt requirement.
- The quarterly dividend was reduced from $0.04 to $0.02 per share. The company paid $3.4 million of dividends during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because realized commodity prices fell sharply, despite 5% production growth.
- Range reported a $91.7 million net loss compared with $27.7 million of net income in Q1 2015.
- Operating cash flow fell by $123.2 million, largely reflecting lower realized prices.
- Capital spending and acreage purchases were substantially lower than in Q1 2015, consistent with the lower commodity-price environment.
- Average debt outstanding declined 17% to approximately $2.678 billion, while interest expense declined modestly to $37.7 million.
- Range recorded a $43.0 million non-cash impairment charge related to certain Western Oklahoma oil and gas properties. No comparable proved-property impairment was recorded in Q1 2015.
- Range sold non-operated interests in Northeast Pennsylvania wells and gathering facilities for $111.5 million of proceeds and recorded a $2.1 million pretax loss on the transaction.
- Deferred compensation plan expense was a $16.1 million loss, compared with a $5.6 million gain in Q1 2015, reflecting an increase in Range’s share price during the quarter.
- Transportation and gathering commitments increased by approximately $12.7 million over the next nine years, and the company entered into new natural gas delivery commitments of 1,500 to 15,000 Mmbtu per day for one to five years.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2016 capital budget was $495.0 million. Management expected operating cash flow, unused borrowing capacity, asset-sale proceeds and derivative contracts to satisfy near-term liquidity needs.
- Management expected an effective tax rate of approximately 39% for the remainder of 2016 before discrete tax items.
- As of March 31, 2016, Range had hedged more than 65% of projected total production for the remainder of 2016 and more than 80% of projected natural gas production. Derivative contracts extended through December 2018 and had an aggregate net fair value of approximately $262.0 million.
- Commodity prices remained depressed because of oversupply. Further declines in natural gas, NGL and oil prices or reductions in production and reserves could reduce cash flow, borrowing capacity and the ability to fund capital expenditures.
- Derivative contracts reduce downside price exposure but also limit the benefit of rising commodity prices and expose Range to counterparty and basis risk.
- Appalachian infrastructure and local demand constraints, particularly for ethane, could require production curtailments or alternative handling arrangements if contracted transportation or sales facilities become unavailable.
- Range recorded a $44.0 million deferred tax benefit in Q1 2016. The tax result included valuation allowance changes and tax expense associated with excess equity-compensation deductions.
- A Pennsylvania Department of Environmental Protection matter involving alleged methane and other substances from a Lycoming County well could result in monetary sanctions exceeding $100,000, although Range disputes the allegations.
- Management stated that disclosure controls were effective as of March 31, 2016, with no material change in internal control over financial reporting during the quarter.
Investor Verification Priorities
- Verify the sustainability of production growth and Marcellus volumes relative to lower commodity prices and higher transportation and gathering costs.
- Reconcile cash flow, capital spending, asset-sale proceeds and borrowing activity against the company’s $495.0 million 2016 capital budget.
- Review debt maturities, covenant calculations, borrowing-base redeterminations and the availability of the revolving credit facility.
- Assess the sensitivity of liquidity and asset values to further commodity-price declines, including the potential for additional impairments.
- Evaluate the fair value, settlement timing and counterparty exposure of the company’s derivative portfolio.
- Monitor the Pennsylvania environmental proceeding and the new long-term transportation, gathering and delivery commitments.
- Confirm the effect of the reduced dividend and management’s projected approximately 39% effective tax rate for the remainder of 2016.