RANGE RESOURCES CORP quarterly report, Q2 FY2011

Range Resources Corporation — Form 10-Q Summary

Business context and reporting period

Range Resources Corporation is an independent natural gas, NGL and oil exploration, development and acquisition company focused primarily on the Appalachia and Southwest regions of the United States. This unaudited Form 10-Q covers the three and six months ended June 30, 2011. Results include the Barnett Shale assets as discontinued operations following the sale of substantially all those assets in the second quarter.

Financial results and key metrics

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Total revenues and other income	$306.6 million	$191.2 million	$494.2 million	$489.6 million
Natural gas, NGL and oil sales	$256.7 million	$173.2 million	$483.6 million	$360.8 million
Income from continuing operations	$45.8 million	$17.6 million	$12.3 million	$95.4 million
Net income	$51.3 million	$9.1 million	$26.3 million	$86.6 million
Diluted earnings per share	$0.32	$0.06	$0.16	$0.54
Cash flow from operating activities	Not separately provided	Not separately provided	$313.6 million	$260.4 million

Q2 net margin was approximately 16.7%, compared with approximately 4.7% in Q2 2010; six-month net margin was approximately 5.3%, compared with approximately 17.7% in the prior-year period.
Q2 derivative fair-value income was $53.0 million versus $6.5 million in Q2 2010. Six-month derivative fair-value income was $12.2 million versus $48.9 million in 2010, creating significant period-to-period earnings volatility.
Q2 income from continuing operations before taxes was $78.5 million, and the effective tax rate was 41.7%. The six-month effective tax rate was 50.9%.
Production increased 33% year over year in Q2 and 29% for the first six months. Average daily production reached 475.3 mmcfe in Q2 and 455.6 mmcfe for the six months.
Q2 natural gas, NGL and oil sales increased 48%; six-month sales increased 34%. NGL production increased 73% in Q2 and 77% for the six months.
Six-month cash flow from continuing operations was $276.8 million, compared with $208.7 million in 2010. Capital spending on oil and gas properties was $535.3 million, and total continuing-operations investing cash outflow was $590.0 million.
Cash and cash equivalents were $288.8 million at June 30, 2011, compared with $2.8 million at December 31, 2010.

Debt, liquidity and capitalization

Total debt was $1.787 billion at June 30, 2011, compared with $1.961 billion at December 31, 2010. Debt consisted entirely of senior subordinated notes; bank debt was zero.
Range issued $500 million of 5.75% senior subordinated notes due 2021 and used proceeds partly to retire all outstanding 6.375% notes due 2015 and 7.5% notes due 2016. The refinancing produced an $18.6 million loss on extinguishment of debt.
The revolving credit facility had a $2.0 billion borrowing base, a $1.5 billion facility amount and approximately $1.5 billion of unused capacity after $13.9 million of letters of credit.
Range was in compliance with its debt covenants, including a maximum debt-to-EBITDAX ratio of 4.25 to 1.0 and a minimum current ratio of 1.0 to 1.0.
Net debt to net book capitalization was 40.0% at June 30, 2011, compared with 46.9% at December 31, 2010.
The 2011 capital budget, excluding acquisitions, was approximately $1.38 billion. Management expected funding from operating cash flow, asset-sale proceeds and credit-facility capacity.

Material changes versus the prior comparable period

Growth was driven by higher production, higher oil and NGL prices, and increased liquids-rich production in Appalachia. Realized price including all derivative settlements increased to $5.91 per mcfe in Q2 from $5.65 per mcfe.
Q2 natural gas, NGL and oil sales increased $83.5 million, while derivative fair-value income increased $46.5 million. The six-month comparison was affected by the reversal of a large 2010 derivative gain.
Direct operating expense increased 2% per mcfe in Q2 and 1% for the six months. General and administrative expense declined 18% per mcfe in Q2 and 11% for the six months, while DD&A declined 13% and 12% per mcfe, respectively.
Six-month income from continuing operations declined sharply because of higher exploration and unproved-property impairment costs, higher interest expense, unfavorable deferred-compensation mark-to-market expense, and the absence of the $77.4 million 2010 gain on Ohio asset sales.
Cash flow and balance-sheet liquidity benefited from the approximately $877 million gross sale proceeds from substantially all Barnett Shale properties. Remaining properties were expected to close in the third quarter of 2011.

Guidance, outlook, risks and unusual items

Management expected an effective tax rate of approximately 40% for the remainder of 2011.
Management expected 2011 capital spending of approximately $1.38 billion, excluding acquisitions, and stated that spending could be adjusted based on commodity prices, cash flow and projected returns.
Commodity prices were expected to remain volatile because of weather, economic conditions, regulation, technology, production levels and geopolitical conditions. Lower prices could reduce realized prices, borrowing-base capacity and the availability or attractiveness of future hedges.
At June 30, 2011, derivatives had a net unrealized pretax gain of approximately $61.1 million. Contracts covered portions of 2011 through 2013 production, but non-hedge derivatives generated mark-to-market volatility in reported revenue and earnings.
Range had approximately $904.6 million of transportation commitments, $100.0 million of drilling-rig commitments and total contractual obligations of approximately $3.039 billion.
Asset retirement obligations for continuing operations increased to $74.4 million, including an $11.3 million change in estimate.
Range reported ordinary-course litigation and regulatory proceedings. Management did not expect a material adverse effect, but an unfavorable ruling could materially affect income in the period of resolution.
Disclosure controls and procedures were deemed effective as of June 30, 2011, and no material changes to internal control over financial reporting were reported.

Most important facts for investors to verify

Reconcile reported earnings with cash earnings by separating realized operating results from derivative fair-value gains and losses, deferred-compensation mark-to-market items and the debt-extinguishment charge.
Confirm the final proceeds, post-closing adjustments and remaining closings related to the Barnett Shale divestiture.
Assess whether production growth and the $1.38 billion capital program can be funded through operating cash flow and available liquidity under the relevant commodity-price environment.
Review the timing, pricing and economic effects of the outstanding gas, NGL and oil hedges through December 2013.
Monitor borrowing-base redeterminations, covenant compliance, debt maturities and the effect of fixed-rate debt on interest expense.
Evaluate transportation, drilling, asset-retirement and other contractual obligations together with litigation and regulatory contingencies.