Range Resources Corporation — Form 10-Q Summary
Business Context and Reporting Period
Range Resources explores, develops and acquires oil and gas properties primarily in the Southwestern, Appalachian and Gulf Coast regions of the United States, with emphasis on shale development. This unaudited filing covers the quarter and six months ended June 30, 2009. Comparative 2008 results were restated for certain immaterial prior-period errors.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total revenue | $180.4 million | $456.9 million |
| Oil and gas sales | $192.5 million | $395.7 million |
| Loss from operations | $62.4 million | $11.0 million |
| Net loss | $39.9 million | $7.3 million |
| Loss per diluted share | $0.26 | $0.05 |
| Operating cash flow | Not separately provided | $268.4 million |
| Capital expenditures and acreage purchases | Not separately provided | $398.8 million |
- Production increased 14% in the second quarter and 13% for the six-month period, reaching 433.5 MMcfe per day and 424.7 MMcfe per day, respectively.
- Average realized price including all derivative settlements declined to $6.18 per Mcfe in the quarter and $6.39 per Mcfe for six months, versus $9.03 and $9.28 in the comparable 2008 periods.
- Direct operating expense per Mcfe declined 18% in the quarter and 11% for six months. DD&A expense per Mcfe increased 8% in both periods.
- Cash and equivalents were $2.2 million at June 30, 2009. Total assets were $5.4 billion and stockholders’ equity was $2.4 billion.
- Total debt was $1.8 billion, including $403.0 million of bank debt and approximately $1.4 billion of senior subordinated notes. Debt-to-capitalization was 42.2%.
- The bank facility had a $1.25 billion committed facility amount, $1.5 billion borrowing base and $847.0 million of available capacity at June 30, 2009. The filing reported $810.0 million of availability as of July 20, 2009.
- Quarterly and six-month net margins were negative, with net loss representing approximately 22% and 2% of revenue, respectively.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 19% despite a 45% decline in oil and gas sales, primarily because derivative fair-value losses improved from $196.7 million to $9.9 million.
- Six-month revenue increased from $357.1 million to $456.9 million, while oil and gas sales declined 40% because of sharply lower commodity prices.
- Quarterly net loss increased from $32.4 million to $39.9 million. Six-month net loss improved from $27.5 million to $7.3 million, benefiting from improved derivative results and lower exploration costs.
- Abandonment and impairment expense increased to $41.0 million in the quarter and $60.5 million for six months, compared with $3.5 million and $5.6 million, respectively. The quarterly charge included expiration of significant Barnett Shale leases.
- Interest expense increased 24% in the quarter and 20% for six months, reflecting higher debt balances and refinancing into higher-rate fixed debt.
- In May 2009, Range issued $300.0 million of 8.0% senior subordinated notes due 2019 and used $285.2 million of proceeds to repay bank debt and improve credit availability.
- Range sold West Texas oil properties for approximately $182.0 million in the second quarter, with no material gain or loss recognized.
- Operating cash flow declined from $344.9 million to $268.4 million, while investing cash use improved substantially from $778.8 million to $215.0 million.
Guidance, Outlook, Commentary and Risks
- Management estimated 2009 capital spending of up to $740.0 million, excluding proved property acquisitions, with reduced spending in most areas except the Marcellus Shale.
- Management expected operating cash flow, asset sales and unused bank capacity to satisfy near-term obligations, while noting that sustained low prices or lower production could impair capital funding, debt repayment and profitability.
- Less than 40% of expected 2010 production was hedged at the filing date. At June 30, 2009, derivatives covered 61.7 Bcfe for 2009 and 25.4 Bcfe for 2010 and had a net unrealized pretax gain of approximately $169.4 million.
- Commodity prices remained the principal market risk. Second-quarter unhedged prices were $54.62 per barrel for oil and $2.72 per Mcf for natural gas, versus $120.26 and $10.09, respectively, in 2008.
- Derivative accounting created significant earnings volatility because certain economic hedges did not qualify for hedge accounting and were marked to market through revenue.
- The company was in compliance with bank and senior-note covenants at June 30, 2009. The bank facility required debt-to-EBITDAX of no more than 4.0 to 1.0 and a current ratio of at least 1.0 to 1.0.
- Future minimum transportation commitments totaled $382.5 million, including $17.8 million for the remainder of 2009 and $207.2 million thereafter.
- Management identified no expected material adverse effect from ordinary-course litigation. A significant disclosed regulatory risk involved possible federal regulation of hydraulic fracturing, which could increase costs, permitting requirements and operating delays.
- The company expected an effective tax rate of approximately 37% for the remainder of 2009.
Important Facts for Investors to Verify
- Reconcile reported revenue and earnings with the substantial realized and unrealized effects of commodity derivatives.
- Assess liquidity after considering only $2.2 million of cash, $1.8 billion of debt, planned capital spending and available credit capacity.
- Monitor semiannual borrowing-base redeterminations and compliance with debt covenants.
- Evaluate whether production growth and operating-cost reductions can offset lower commodity prices and higher DD&A, interest and corporate costs.
- Review the $60.5 million impairment charge, Barnett lease expirations and the recoverability of unproved shale acreage.
- Confirm the effect of the planned SAB 108 restatement of 2006–2008 results and the related $6.5 million reduction in year-end 2008 retained earnings.
- Track the extent and effectiveness of 2009–2010 hedging, including counterparty, basis and mark-to-market risks.
- Evaluate exposure to hydraulic-fracturing regulation and the company’s significant firm transportation commitments.