RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Range Resources is engaged in the exploration, development, and acquisition of oil and gas properties primarily in the Southwestern, Appalachian, and Gulf Coast regions of the United States. The company focuses on increasing reserves and production through drilling and acquisitions, with a significant expansion into the Marcellus Shale play.

Key Financial Metrics

Production: Total production increased 11% to 37.4 million mcfe (million cubic feet equivalent).
Realized Price: Average realized price (including all derivatives) was $6.62 per mcfe, down from $9.55 per mcfe in Q1 2008.

Material Changes vs. Prior Period

• Revenue Composition: While total revenue increased 35%, this was driven primarily by a $199.3 million swing in derivative fair value income (from a $123.8 million loss in 2008 to a $75.5 million gain in 2009). Conversely, oil and gas sales revenue decreased 34% ($104.2 million) due to a 31% drop in realized commodity prices, despite a 12% increase in production volumes.
• Impairment Charges: Abandonment and impairment of unproved properties increased significantly to $19.6 million from $1.4 million in the prior year, attributed to lease expirations and economic conditions impacting drilling plans.
• Debt Levels: Total debt increased by $114.1 million to $1.9 billion. Bank debt rose to $807.0 million, while the borrowing base was reaffirmed at $1.5 billion.
• Capital Spending: Net cash used in investing activities decreased by 48% to $250.1 million, reflecting a strategic reduction in capital spending and acquisitions compared to the prior year.

Guidance, Outlook, and Risks

• Capital Budget: Management announced a $700.0 million capital budget for 2009, reflecting reduced spending in most areas except for the Marcellus Shale play. The company expects to fund this primarily through internal cash flow.
• Cost Management: The company is implementing initiatives to reduce capital spending and operating costs. While some cost savings have been realized, operating costs have not decreased at the same rate as commodity prices. Management anticipates further cost reductions in 2009 as industry spending declines.
• Hedging Strategy: As of March 31, 2009, the company had hedged 92.3 Bcfe for 2009. There are currently no oil or gas derivative contracts in place for 2010 or beyond, except for limited basis swaps. The company holds a net unrealized pre-tax derivative gain of $274.6 million.
• Liquidity: The company maintains a $1.25 billion credit facility with $443.0 million of available committed borrowing capacity. Management believes current liquidity is adequate for near-term obligations but notes that sustained lower prices could impact the ability to fund capital expenditures.
• Risks: Key risks include volatility in oil and gas prices, the ability to access capital markets, and the impact of economic conditions on lease expirations and impairment charges.

Investor Verification Checklist

• Derivative Valuation: Verify the sustainability of the $75.5 million derivative gain and the $274.6 million unrealized gain, as these are non-cash items driven by falling commodity prices and may reverse if prices stabilize or rise.
• Impairment Trends: Monitor the $19.6 million impairment charge for unproved properties to assess if lease expirations and drilling delays will continue to impact earnings.
• Debt Covenants: Confirm continued compliance with the debt-to-EBITDAX ratio (max 4.0:1) and current ratio (min 1.0:1) covenants under the bank credit facility.
• Capital Allocation: Review the execution of the $700 million 2009 capital budget, specifically the allocation to the Marcellus Shale versus other regions.
• Production Growth vs. Price: Assess whether the 12% production increase is sufficient to offset the 31% decline in realized prices to maintain profitability without further hedging.