Range Resources Corporation — Q1 2015 Form 10-Q
Business context and reporting period
Range Resources is an independent oil and gas producer focused primarily on natural gas, NGLs and oil properties in the Appalachian and Midcontinent regions. The filing reports unaudited results for the three months ended March 31, 2015, compared with the same period in 2014.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues and other income | $462.6 million | $457.3 million | Up $5.3 million |
| Natural gas, NGLs and oil sales | $325.5 million | $572.0 million | Down 43% |
| Derivative fair value income/(loss) | $122.8 million | $(146.9) million | Favorable $269.7 million |
| Net income | $27.7 million | $32.5 million | Down 15% |
| Diluted earnings per share | $0.16 | $0.20 | Down $0.04 |
| Cash flow from operating activities | $210.6 million | $181.2 million | Up 16% |
| Capital additions to natural gas and oil properties | $357.8 million | $226.3 million | Up $131.4 million |
Production increased 26% to 119.5 Bcfe, including 80.5 million Mcf of natural gas, 5.4 million barrels of NGLs and 1.1 million barrels of crude oil. Average realized price including derivatives and third-party transportation costs declined to $2.79 per Mcfe from $4.14 per Mcfe.
Operating expenses included $147.3 million of depletion, depreciation and amortization, $89.4 million of transportation, gathering and compression expense, $48.3 million of general and administrative expense, and $39.2 million of interest expense. The reported effective tax rate was 44.7%, compared with 36.8% in the prior-year quarter.
At March 31, 2015, cash and cash equivalents were $0.5 million, total assets were $8.8 billion, total debt was $3.3 billion and stockholders’ equity was $3.5 billion. Bank debt was $912.0 million, and senior subordinated notes totaled $2.35 billion.
Material changes versus the prior comparable period
- Commodity prices fell sharply: average NYMEX natural gas declined 39%, oil declined 51% and the Mont Belvieu NGL composite declined 53%.
- Production growth, particularly in the Marcellus, partly offset lower prices. Marcellus production increased 32% to 100.7 Bcfe.
- Commodity derivative results shifted from a $146.9 million loss to a $122.8 million gain, including $97.5 million of net cash derivative settlements in 2015 versus $104.6 million of net cash payments in 2014.
- Transportation, gathering and compression expense increased 21% because of higher Marcellus production and related third-party agreements.
- Direct operating expense per Mcfe declined 26%, general and administrative expense per Mcfe declined 23% and DD&A expense per Mcfe declined 9%.
- The company recorded $6.0 million of termination costs related to closing its Oklahoma City office and additional workforce reductions.
- Bank debt increased by $189.0 million from December 31, 2014, while the company invested approximately $388.6 million in capital expenditures and acreage acquisitions.
Liquidity, debt and cash flow
Operating cash flow of $210.6 million, borrowings and asset-sale proceeds funded $377.7 million of investing cash uses. Financing activities provided $167.1 million, including net bank-facility borrowings of $189.0 million and $6.8 million of dividends.
The revolving credit facility had a $3.0 billion borrowing base, $2.0 billion of lender commitments, $912.0 million outstanding and $108.0 million of undrawn letters of credit, leaving $980.0 million of committed borrowing capacity. The facility matures October 16, 2019. Range was in compliance with its debt covenants, including the required EBITDAX-to-cash-interest ratio, current ratio and reserve-to-debt ratio.
Management stated that operating cash flow, available credit capacity, asset-sale proceeds and existing derivative contracts should be adequate for near-term obligations and liquidity needs. However, management noted that a further material decline in commodity prices or production and reserves could reduce the company’s ability to fund capital expenditures, meet obligations and remain profitable.
Guidance, outlook, risks and unusual items
- The 2015 capital budget was approximately $870.0 million.
- Management expected an effective tax rate of approximately 39% for the remainder of 2015, excluding discrete tax items.
- Approximately 81% of projected production for the remainder of 2015, including approximately 86% of projected natural gas production, was hedged as of March 31, 2015. Derivative contracts extended through December 2017 and had an aggregate net unrealized pretax gain of approximately $430.1 million.
- Hedging reduces downside price exposure but limits the benefit of rising commodity prices and creates counterparty, basis and mark-to-market risks.
- Approximately 97% of proved reserves at December 31, 2014 were natural gas and NGLs, leaving results particularly sensitive to gas and NGL pricing, regional basis differentials and infrastructure availability.
- New firm transportation contracts increased commitments by approximately $52.9 million over the next nine years. New gas delivery commitments were expected to begin in the second quarter of 2015.
- Asset retirement obligations increased to $300.6 million, primarily due to revised abandonment-cost estimates and well-life changes.
- The company reported no material changes to previously disclosed risk factors, no significant off-balance-sheet arrangements and no material litigation expected to adversely affect its financial position or liquidity.
- Ethane takeaway and sales arrangements remain dependent on infrastructure projects, including the expected Mariner East start-up; inability to sell ethane could require production curtailments or gas blending.
Important facts for investors to verify
- Whether production growth and operating-cost reductions can offset persistently lower realized commodity prices.
- The sustainability of cash flow after approximately $870.0 million of planned 2015 capital spending and the resulting effect on bank borrowings.
- Borrowing-base and covenant compliance as commodity prices, reserves and derivative values change.
- The timing and effectiveness of Marcellus infrastructure and ethane takeaway projects.
- Future unproved-property impairments, abandonment costs, termination costs and other restructuring charges.
- The extent to which derivative gains are non-cash or represent future price protection rather than recurring operating performance.