Range Resources Corporation — Q1 2013 Form 10-Q Summary
Business context and reporting period
Range Resources Corporation is an independent oil and gas producer focused on exploration, development and acquisition activities in the Appalachian and Southwestern United States. The filing covers the three months ended March 31, 2013. Results are unaudited and are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Natural gas, NGL and oil sales | $398.2 million | $317.6 million | 25% increase |
| Total revenues and other income | $319.2 million | $251.0 million | 27% increase |
| Derivative fair value loss | $99.9 million | $60.8 million | Higher loss |
| Loss from operations before taxes | $122.8 million | $69.6 million | Wider loss |
| Net loss | $75.6 million | $41.8 million | Wider loss |
| Basic and diluted loss per share | $0.47 | $0.26 | Wider loss |
| Cash flow from operating activities | $201.2 million | $156.0 million | 29% increase |
| Capital additions to oil and gas properties | $259.6 million | $376.9 million | Lower spending |
Based on reported total revenues, the operating margin was approximately negative 38.5% and the net margin approximately negative 23.7% in Q1 2013. These margins were affected materially by derivative mark-to-market losses, a $35.0 million Oklahoma litigation accrual and a $42.4 million deferred compensation plan expense.
- Production increased 32% to 78.8 billion cubic feet equivalent, including natural gas production growth of 33%, NGL growth of 21% and crude oil growth of 50%.
- Average realized price including all derivative settlements and third-party transportation costs declined to $4.26 per mcfe from $4.51 per mcfe.
- Direct operating expense declined to $0.38 per mcfe from $0.49 per mcfe, while DD&A declined to $1.46 per mcfe from $1.68 per mcfe.
- General and administrative expense increased to $84.1 million from $38.7 million, primarily because of the litigation accrual, higher compensation and stock-based compensation.
- Cash and cash equivalents were $194,000 at March 31, 2013, compared with $252,000 at December 31, 2012. Total assets were $6.87 billion.
- Total debt was $2.94 billion, consisting of $47.0 million of bank debt and approximately $2.89 billion of senior subordinated notes.
- The company declared and paid a quarterly dividend of $0.04 per share.
Material changes versus the prior comparable period
- Production growth drove a 25% increase in commodity sales, despite a 5% decrease in realized prices.
- Derivative fair value losses increased by approximately $39.0 million. Effective March 1, 2013, Range discontinued hedge accounting prospectively, causing subsequent realized and unrealized derivative gains and losses to flow directly through earnings.
- Range issued $750.0 million of 5.00% senior subordinated notes due 2023 and used the net proceeds of approximately $738.8 million to reduce borrowings under its revolving credit facility.
- Bank debt declined from $739.0 million at year-end 2012 to $47.0 million at March 31, 2013.
- Transportation, gathering and compression expense rose to $62.4 million from $40.8 million, reflecting higher Marcellus production and related third-party agreements.
- Deferred compensation plan expense changed from $7.8 million of income in Q1 2012 to $42.4 million of expense in Q1 2013, principally because Range’s share price increased from $62.83 to $81.04 during the quarter.
- Q1 2012 included a $24.0 million retroactive Pennsylvania unconventional-well impact fee, making the year-over-year decrease in production and ad valorem taxes unusually large.
Guidance, outlook, risks and unusual items
- Management’s 2013 capital expenditure budget was approximately $1.3 billion, excluding proved property acquisitions. Management expected the program to be funded by operating cash flow, debt proceeds, asset-sale proceeds and credit-facility borrowings.
- Range closed the sale of certain Permian and Delaware Basin properties on April 1, 2013 for approximately $275.0 million, subject to post-closing adjustments, and expected to recognize an approximately $84.0 million gain in Q2 2013.
- On April 2, 2013, Range called its $250.0 million of 7.25% senior subordinated notes due 2018 for redemption on May 2, 2013.
- At March 31, 2013, the revolving facility had a $1.75 billion facility amount, a $2.0 billion borrowing base, $47.0 million outstanding borrowings, $84.7 million of undrawn letters of credit and approximately $1.6 billion of available capacity. The company was in compliance with its debt covenants.
- Range had hedged approximately 73% of projected production for the remainder of 2013, including approximately 75% of projected natural gas production. Discontinuation of hedge accounting is expected to increase earnings volatility without directly changing cash flow from market-value adjustments.
- Commodity prices, production volumes, reserve development, transportation capacity, basis differentials and derivative-counterparty performance remain key risks. Management stated that a sustained lower-price environment could reduce cash flow, capital availability and profitability.
- Ethane takeaway and sales infrastructure in the Marcellus region was expected to become available beginning in mid-to-late 2013 through early 2015. If capacity did not become available, Range stated that it might have to curtail production.
- An Oklahoma royalty-owner lawsuit was certified as a class action. Plaintiffs increased their damages claim to $160.0 million; Range accrued $35.0 million and stated that additional accruals could be required.
- Range increased transportation and gathering commitments by approximately $63.0 million over ten years and extended hydraulic-fracturing commitments by $24.0 million into 2014.
Important facts for investors to verify
- Reconcile the effect of the March 1, 2013 hedge-accounting discontinuation on reported revenue, earnings, accumulated other comprehensive income and future earnings volatility.
- Assess whether production growth and operating-cost reductions can offset lower realized prices and rising transportation, gathering and compression costs.
- Review liquidity after the April 1 asset sale and May 2013 note redemption, including the remaining borrowing-base capacity and debt maturities.
- Monitor the Oklahoma royalty litigation, the $35.0 million accrual and the potential exposure relative to the plaintiffs’ $160.0 million claim.
- Verify the timing and sufficiency of ethane takeaway arrangements and the risk of production curtailments.
- Evaluate the sustainability of the approximately $1.3 billion capital program relative to operating cash flow, commodity prices and hedge coverage.
- Review derivative volumes, strike prices, collateral requirements and counterparty exposure, particularly because the filing reports significant gross derivative assets and liabilities despite a near-zero net fair value.