Range Resources Corporation — Q3 2013 Form 10-Q Summary
Business Context and Reporting Period
Range Resources is an independent oil and gas company focused on exploration, development and acquisition of natural gas, NGL and oil properties, primarily in the Appalachian and Southwestern regions of the United States. The filing covers the three and nine months ended September 30, 2013. The interim financial statements are unaudited.
Financial and Operating Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenues and other income | $442.0 million | $299.8 million | $1.435 billion | $999.7 million |
| Natural gas, NGL and oil sales | $431.2 million | $337.0 million | $1.267 billion | $953.0 million |
| Income from operations before taxes | $31.0 million | $(82.9) million | $149.7 million | $(57.9) million |
| Net income | $19.2 million | $(53.8) million | $87.6 million | $(40.0) million |
| Diluted EPS | $0.12 | $(0.34) | $0.53 | $(0.25) |
| Operating cash flow | Not separately provided in the cash flow statement | Not separately provided | $502.9 million | $461.1 million |
| Total production | 88.3 Bcfe | 72.7 Bcfe | 249.9 Bcfe | 197.8 Bcfe |
| Average realized price, including derivatives and transportation | $4.11/Mcfe | $4.17/Mcfe | $4.20/Mcfe | $4.24/Mcfe |
Q3 2013 total revenues increased 47%, while natural gas, NGL and oil sales increased 28%. Nine-month total revenues increased 44%, and natural gas, NGL and oil sales increased 33%. Production increased 21% in the quarter and 26% year to date, led by Marcellus development. Based on reported figures, Q3 net margin was approximately 4.3% versus negative 18.0% in the prior-year quarter; nine-month net margin was approximately 6.1% versus negative 4.0%.
Operating costs included $130.3 million of depletion, depreciation and amortization in Q3 and $365.4 million year to date. DD&A per Mcfe declined 12% in Q3 and 13% year to date. Direct operating expense per Mcfe declined 15% in Q3 and 12% year to date. Interest expense was $44.3 million in Q3 and $131.6 million year to date.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $255,000 at September 30, 2013, compared with $252,000 at December 31, 2012.
- Total assets were $7.031 billion and stockholders’ equity was $2.391 billion at September 30, 2013.
- Total debt was $3.067 billion, consisting of $427.0 million of bank debt and $2.640 billion of senior subordinated notes.
- The company issued $750.0 million of 5.00% senior subordinated notes due 2023 and redeemed $250.0 million of 7.25% notes due 2018. It recognized a $12.3 million loss on extinguishment of debt.
- The revolving credit facility had a $2.0 billion borrowing base, a $1.75 billion facility amount, $427.0 million drawn, $84.9 million of undrawn letters of credit and approximately $1.2 billion of available borrowing capacity. The facility matures February 18, 2016.
- Range reported compliance with its bank facility and subordinated note covenants at September 30, 2013.
- Capital expenditures and acreage purchases totaled approximately $982.2 million during the first nine months, including $907.8 million of property additions and $70.2 million of acreage purchases.
Material Changes Versus the Prior Comparable Period
- Higher production volumes and commodity prices increased sales, although realized prices including all derivatives and transportation declined modestly.
- Marcellus production increased 32% in Q3 and 44% for the first nine months; total oil production increased 43% in Q3 and 44% year to date.
- Derivative fair-value loss was $40.4 million in Q3, broadly comparable with the prior-year loss, but year-to-date derivative fair-value results declined to a $2.5 million loss from $47.0 million of income.
- Effective March 1, 2013, Range discontinued hedge accounting prospectively, causing realized and unrealized derivative gains and losses to flow through earnings and increasing earnings volatility.
- Gain on asset sales was $89.1 million year to date versus a $12.7 million loss in the prior-year period, primarily due to the sale of Delaware and Permian Basin properties.
- General and administrative expense increased 82% year to date, primarily because of an $87.5 million Oklahoma lawsuit settlement, higher compensation and increased legal and office costs.
- Transportation, gathering and compression expense increased to $189.4 million from $137.2 million year to date, reflecting production growth and additional Marcellus-related commitments.
- Cash flow from operations increased to $502.9 million despite the $87.5 million settlement payment and lower realized prices.
Guidance, Outlook, Risks and Unusual Items
- Management set the 2013 capital expenditure budget at $1.35 billion, excluding proved property acquisitions, and expected the program to be funded through operating cash flow, asset-sale proceeds, debt proceeds and credit-facility borrowings.
- Management expected an effective tax rate of approximately 40% for the remainder of 2013.
- Range stated that existing operating cash flow, unused credit capacity, asset sales and derivative contracts were expected to satisfy near-term obligations and liquidity needs.
- At September 30, 2013, approximately 76% of projected production for the remainder of 2013 was hedged. Derivatives had an estimated net unrealized pretax gain of approximately $66.0 million and expire monthly through December 2015.
- Key risks include commodity-price volatility, production and reserve performance, drilling and development costs, gathering and transportation capacity, derivative-counterparty performance, basis risk, interest-rate exposure and access to capital markets.
- A 1% increase in short-term interest rates on floating-rate debt would increase annual interest expense by approximately $4.3 million.
- Transportation and gathering commitments increased by approximately $150.0 million over the next 10 years. Management also disclosed $12.9 million of exploratory well costs capitalized for more than one year, relating to four Pennsylvania wells.
- The Oklahoma class-action settlement was approved in September 2013 and was paid into escrow in June 2013. Management stated that other pending or threatened matters were not expected to have a material adverse effect, although litigation outcomes remain uncertain.
- Range recorded a $7.0 million impairment on certain South Texas oil and gas properties in Q3 due to reduced reserves following a failed well recompletion.
Important Facts for Investors to Verify
- Reconcile production growth with realized pricing, derivative settlements and the effect of discontinued hedge accounting on reported earnings.
- Assess leverage, fixed-versus-floating-rate debt, maturities and continued covenant compliance.
- Evaluate whether the $1.35 billion capital program can be funded by operating cash flow and available liquidity under different commodity-price scenarios.
- Review Marcellus production growth against gathering, transportation and ethane-processing capacity and related long-term commitments.
- Monitor future impairment, abandonment and exploratory-well charges, including the suspended Pennsylvania well costs.
- Review the Oklahoma settlement and remaining legal contingencies, as well as the potential impact of other claims.
- Consider the effect of commodity-price declines, derivative-counterparty risk and the limitation of hedges on future cash flows.