Range Resources Corporation — FY2012 Form 10-K Summary
Business context and reporting period
Range Resources Corporation is a U.S. independent natural gas, NGL and oil exploration and production company operating primarily in the Appalachian and Southwestern regions. The filing covers the fiscal year ended December 31, 2012. Range reports one operating segment and presents continuing operations separately from the Barnett Shale properties sold in 2011.
- 2012 average production was 752.6 Mmcfe per day, up 45% from 2011; production was 79% natural gas.
- Appalachia represented 83% of production and 88% of proved reserves. The Marcellus Shale accounted for approximately 77% of total proved reserves.
- Year-end proved reserves were 6.5 Tcfe, up 29%, with 74% natural gas, 53% proved developed and a reported 21-year reserve life index.
Financial and operating metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Natural gas, NGL and oil sales | $1.352 billion | $1.173 billion | 15% increase |
| Total revenues and other income | $1.458 billion | $1.231 billion | 18% increase |
| Income from continuing operations | $13.0 million | $42.7 million | 69% decrease |
| Net income | $13.0 million | $58.0 million | 78% decrease |
| Diluted EPS | $0.08 | $0.36 | Decrease |
| Cash flow from operating activities | $647.1 million | $631.6 million | Increase |
| Net cash used in investing activities | $1.529 billion | $548.0 million | Higher investment |
| Total debt | $2.878 billion | $1.975 billion | Increase |
| Debt to capitalization | 55.0% | 45.2% | Higher leverage |
Reported total-revenue margin was approximately 1.7% before taxes and net margin was approximately 0.9%. Profitability was pressured by lower commodity prices, higher transportation and gathering costs, interest expense, impairment and unproved-property charges, and other development-related costs.
- Average realized price including derivative settlements and third-party transportation costs declined to $4.35 per mcfe from $5.68 per mcfe.
- Natural gas wellhead price declined to $2.83 per mcf from $4.21; NGL price declined to $38.05 per barrel from $50.23.
- Direct operating expense improved to $0.42 per mcfe from $0.60, while DD&A improved to $1.62 per mcfe from $1.80.
- Transportation, gathering and compression expense increased to $192.4 million from $120.8 million, reflecting production growth and third-party infrastructure commitments.
- Interest expense increased to $168.8 million from $125.1 million.
- Cash and cash equivalents were only $252,000 at year-end, compared with current liabilities of $455.1 million; liquidity therefore depended primarily on operating cash flow, asset sales, hedges and the revolving credit facility.
- Year-end proved-reserve PV-10 was $4.0 billion, compared with $6.1 billion in 2011; the after-tax standardized measure was $3.2 billion, compared with $4.5 billion.
Material changes versus the prior comparable period
- Production increased 45%, driven principally by an 80% increase in Marcellus production; total proved reserves increased 29%.
- Range drilled 298 gross wells, all productive, and reported 773% production replacement through drilling.
- Capital spending increased materially: continuing-operations investing cash outflows were $1.529 billion, including $1.499 billion of property additions and $191.1 million of acreage and proved-property purchases.
- Debt increased by approximately $903.2 million. Range issued $600.0 million of 5.00% senior subordinated notes due 2022, increased its bank facility amount to $1.75 billion, and redeemed $250.0 million of 7.5% notes due 2017.
- The Pennsylvania impact fee increased production and ad valorem taxes; 2012 included a $25.2 million retroactive charge and a $24.0 million accrued charge payable in 2013.
- Unproved-property abandonment and impairment expense increased to $125.3 million from $79.7 million. Proved-property and other impairment charges were $35.6 million.
- Range sold Southern Oklahoma properties for $135.0 million and recorded a $55.2 million pretax gain. It also announced a planned sale of Permian and Delaware properties for $275.0 million after year-end, subject to closing conditions.
Guidance, outlook, commentary and risks
- Management set an initial 2013 capital budget of approximately $1.3 billion, excluding proved-property acquisitions, funded by operating cash flow, asset-sale proceeds and borrowings as needed.
- Approximately 68% of expected 2013 natural gas, NGL and oil production was hedged at year-end 2012. Management expected 2013 DD&A to be approximately $1.50 per mcfe and the effective tax rate to be approximately 40% before discrete items.
- The company stated that near-term obligations and liquidity needs were expected to be met through operating cash flow, unused committed borrowing capacity, asset sales and derivatives.
- The bank facility had a $1.75 billion facility amount, $739.0 million outstanding, $84.7 million of letters of credit and approximately $926.3 million of remaining capacity under the facility amount. It matures in February 2016 and is subject to borrowing-base redeterminations.
- Commodity prices remained the principal risk: 2012 average NYMEX natural gas was $2.82 per mcf, while approximately 74% of proved reserves were natural gas.
- Other material risks include leverage and refinancing, borrowing-base reductions, derivative counterparty or hedge basis risk, transportation and processing constraints, ethane marketing and infrastructure availability, drilling and reserve-estimation uncertainty, environmental and hydraulic-fracturing regulation, and potential impairment charges.
- An Oklahoma royalty-owner class action alleged improper post-production deductions and damages estimated by plaintiffs’ counsel at more than $140 million. The company stated that exposure could not reasonably be estimated and intended to appeal class certification.
- Management reported effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified audit opinions.
Investor verification priorities
- Verify whether the $1.3 billion 2013 capital program can be funded without materially increasing debt, particularly under lower natural gas prices.
- Reconcile debt maturities, borrowing-base capacity, covenant headroom and the February 2016 bank-facility maturity.
- Assess realized prices and cash flow after hedges, including the timing and composition of the $236.3 million of 2012 hedge gains.
- Review Marcellus gathering, processing, ethane and propane commitments, including the risk of production curtailment if planned infrastructure is delayed.
- Evaluate reserve quality, proved undeveloped development costs and the sensitivity of PV-10 to commodity prices and development timing.
- Monitor the Oklahoma royalty litigation, the proposed Permian and Delaware asset sale, and any related impairment or contingent-liability disclosures.