Business Context and Reporting Period
Range Resources Corporation is an independent natural gas company engaged primarily in the exploration, development and acquisition of natural gas properties in the Southwestern and Appalachian regions of the United States. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenues and other income | $227.0 million | $203.6 million | $800.3 million | $660.5 million |
| Natural gas, NGL and oil sales | $219.6 million | $202.1 million | $663.1 million | $597.8 million |
| Income from operations | $(14.1) million | $(45.1) million | $127.9 million | $(56.1) million |
| Net income (loss) | $(8.2) million | $(29.8) million | $78.5 million | $(37.1) million |
| Net margin | (3.6%) | (14.6%) | 9.8% | (5.6%) |
| Operating cash flow | Not separately provided | Not separately provided | $398.9 million | $443.8 million |
| Capital expenditures and property purchases | Not separately provided | Not separately provided | $851.7 million | $544.1 million |
- Total production increased 15% in the third quarter and 12% for the first nine months, reaching average daily production of 502,865 mcfe and 479,921 mcfe, respectively.
- Q3 realized price including all derivative settlements declined to $4.97 per mcfe from $6.35 per mcfe; nine-month realized price declined to $5.19 from $6.38.
- Direct operating expense per mcfe declined 4% in Q3 and 16% for the nine-month period. DD&A per mcfe declined 18% in Q3 and 10% for the first nine months.
- Cash and equivalents were $2.1 million at September 30, 2010, compared with $0.8 million at December 31, 2009. Total assets were $5.8 billion.
- Total debt was $1.85 billion, including $165.0 million of bank debt and approximately $1.69 billion of subordinated notes. Debt-to-capitalization was 41.8%.
- The bank credit facility had a $1.5 billion borrowing base, a $1.25 billion facility amount, $165.0 million outstanding and approximately $1.1 billion of available capacity at September 30, 2010. The facility matures in October 2012.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 11%, primarily from 15% production growth, higher wellhead prices and a $10.5 million improvement in derivative fair value results. The benefit was partly offset by substantially lower realized hedge gains.
- Q3 net loss improved by $21.7 million, while the nine-month period moved from a $37.1 million loss to $78.5 million of net income. The nine-month improvement includes a $77.4 million gain on the sale of Ohio properties.
- NGL production increased 136% in Q3 and 100% for the first nine months, primarily from liquids-rich Appalachian production. Natural gas production increased 6% in Q3 and 8% year to date, while crude oil production declined 14% and 27%, respectively.
- Realized gas hedge gains fell to $15.6 million in Q3 and $35.2 million for nine months, compared with $54.1 million and $146.6 million in the prior-year periods.
- General and administrative expense increased 22% in Q3 and 20% year to date, reflecting higher community relations costs, salaries, benefits, legal fees and office expenses.
- Operating cash flow declined 10% year over year despite higher production, primarily because of lower realized prices and higher operating costs. Investing cash use increased to $525.8 million from $385.1 million.
- In August 2010, Range issued $500.0 million of 6.75% senior subordinated notes due 2020, redeemed its $200.0 million of 7.375% notes due 2013 and reduced bank borrowings. The refinancing generated a $5.4 million loss on early extinguishment of debt.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2010 capital budget, excluding acquisitions, was approximately $1.2 billion. Management expected capital spending to be funded through operating cash flow, asset sales, bank capacity and capital markets.
- Management expected an effective tax rate of approximately 39% for the remainder of 2010.
- Management reported the 31st consecutive quarter of sequential production growth and continued investment in Marcellus Shale operations. Four projects with $6.1 million of exploratory costs capitalized for more than one year were awaiting pipeline completion.
- Commodity prices remain volatile and materially affect revenue, cash flow, asset values, borrowing capacity and the ability to fund capital expenditures. Management cautioned that sustained lower prices or lower production and reserves could impair profitability, debt repayment and liquidity.
- At September 30, 2010, derivatives covered 209.5 Bcf of gas and 0.8 million barrels of oil through December 2012; the portfolio had a net unrealized pre-tax gain of approximately $201.0 million. Derivative accounting creates earnings volatility, and hedge payments may precede production receipts.
- Range had sold oil call options covering 3.1 million barrels at an average strike price of $81.77, which limits upside participation if oil prices rise above the strike prices.
- The company recorded $6.5 million of proved-property impairment during the first nine months due to declining gas prices, $46.4 million of abandonment and impairment expense for unproved properties, and $7.9 million of termination costs, including Ohio-related severance and accelerated equity vesting.
- Contractual obligations totaled approximately $2.90 billion, including debt, operating leases, drilling commitments, transportation commitments, purchase obligations, derivative obligations and asset retirement obligations. Management stated that litigation matters were not expected to have a material adverse effect.
- Disclosure controls were deemed effective as of September 30, 2010, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify whether production growth and NGL expansion are sufficient to offset lower realized prices and declining hedge contributions.
- Review the sustainability and cash-flow impact of the approximately $1.2 billion 2010 capital program relative to $398.9 million of nine-month operating cash flow.
- Assess refinancing and liquidity requirements surrounding the October 2012 bank facility maturity and the company’s substantial subordinated-note maturities.
- Examine derivative volumes, floors, caps, call-option obligations, counterparty exposure and the sensitivity of derivative fair values to commodity-price changes.
- Evaluate the assumptions supporting reserve growth, depletion rates, impairment testing and the $201.0 million net unrealized derivative gain.
- Confirm the effect of the Ohio property sale, Virginia acquisition and other asset transactions on future production, reserves and operating costs.