Range Resources Corp. 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Range Resources Corp. for the period ended September 30, 2002. The Company is engaged in the development, acquisition, and exploration of oil and gas properties in the Southwestern, Gulf Coast, and Appalachian regions. It also operates a subsidiary, Independent Producer Finance (IPF), which provides financing to small producers. The financial statements for the three years ended 2001 have been restated following a reaudit by KPMG LLP.
Key Financial Metrics (Nine Months Ended Sept 30, 2002)
- Revenue: Total revenues were $143.9 million, a decrease from $175.6 million in the prior year period. Oil and gas sales were $141.0 million.
- Net Income: Net income was $20.9 million, compared to $45.2 million in the prior year. Net income available to common shareholders was $20.9 million.
- Earnings Per Share (Diluted): $0.38 (after extraordinary items) compared to $0.90 in the prior year.
- Cash Flow: Net cash provided by operations was $79.1 million. Net cash used in investing activities was $65.8 million. Net cash used in financing activities was $16.3 million.
- Liquidity: Cash and equivalents totaled $463,000 at period end. Available borrowing capacity across parent, Great Lakes, and IPF facilities was approximately $81.8 million (excluding the near-zero availability at IPF as of November 2002).
- Debt: Total debt (including Trust Preferred) was $364.7 million. This includes $101.6 million in parent senior debt, $87.1 million in non-recourse debt, $91.2 million in subordinated notes, and $84.8 million in Trust Preferred.
- Capitalization: Debt-to-capitalization ratio was 63% (including Trust Preferred) or 56% (excluding Trust Preferred).
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased primarily due to lower average realized prices ($3.44/mcfe vs. $3.91/mcfe) and a 1% decline in production volumes (150.4 Mmcfe/day vs. 152.3 Mmcfe/day). Tropical storm Isidore negatively impacted Gulf Coast volumes.
- Profitability Drop: Net income fell significantly due to lower revenues, higher exploration expenses ($9.3M vs. $3.7M), and increased general and administrative expenses ($12.3M vs. $8.1M). The prior year included a $1.9M favorable IPF receivable adjustment not present in 2002.
- IPF Performance: IPF income dropped to $3.5 million from $7.2 million, driven by a smaller portfolio and a $2.7 million increase in valuation allowances due to disappointing property performance.
- Debt Reduction: Total debt decreased by $27.5 million during the period through cash repurchases and exchanges of common stock for debt securities.
- Restatements: Prior year figures were restated to reflect changes in accounting for the Great Lakes joint venture formation, deferred compensation plans, and derivative hedging.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The Company spent $72.5 million on capital expenditures in the first nine months, funded entirely by internal cash flow. The full-year 2002 budget is expected to be $90.0-$95.0 million.
- Hedging: The Company has hedged approximately 70% of anticipated production for the remainder of 2002, 60% for 2003, 30% for 2004, and 10% for 2005. At period end, open contracts resulted in a net unrealized pre-tax loss of $6.8 million.
- Liquidity Risks: Management believes liquidity is sufficient for the next 12 months. However, a material drop in oil and gas prices or production could impair the ability to fund capital expenditures and meet obligations. The IPF borrowing base was reduced to $16.9 million in November 2002, with only $100,000 available.
- Internal Controls: Following the reaudit, KPMG identified a potential material weakness in internal accounting controls. Management has formed a committee to address these issues and ensure compliance.
- Accounting Changes: New accounting rules (SFAS 84, EITF 02-15) regarding induced conversions of debt to equity may make future debt-for-equity exchanges less attractive from an accounting perspective.
Investor Verification Checklist
- Verify the impact of the IPF valuation allowance increases ($2.7M in 9 months) on future earnings, given the concentration of receivables with small operators.
- Confirm the status of the IPF borrowing base redetermination (reduced to $16.9M) and its effect on liquidity.
- Review the restatement details (Note 2) to understand the full impact on historical comparability, particularly regarding the Great Lakes joint venture and deferred compensation.
- Assess the hedging portfolio ($6.8M unrealized loss) and the risk of reclassifying these losses to earnings as contracts settle.
- Monitor the internal control remediation efforts following the identified material weakness.
- Check the debt covenant compliance, specifically the restricted payment basket under the Parent Facility, which limits further debt repurchases or dividends.