RRC

Business Context and Reporting Period

Company: Range Resources Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
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 seeks to increase reserves and production through drilling and complementary acquisitions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 75% year-over-year, driven by a 12% increase in production volumes and a 46% increase in realized oil and gas prices. A favorable mark-to-market adjustment of $11.3 million on derivatives that no longer qualified for hedge accounting also contributed.
• Profitability: Net income rose 152% to $55.4 million. This was primarily due to higher realized prices and volumes, partially offset by increased operating costs, exploration expenses, and interest expense.
• Production: Average daily production increased to 257,118 Mcfe (up from 228,827 Mcfe in Q1 2005). Crude oil production averaged 8,552 bbls/day and natural gas 188,001 Mcf/day.
• Pricing: Average realized sales price (including hedging) was $7.62 per Mcfe, compared to $5.22 per Mcfe in the prior year. Unhedged prices were $59.80/bbl for oil and $8.29/Mcf for gas.
• Costs: Direct operating expenses increased 17% on a unit basis ($0.12/Mcfe increase) due to higher oilfield service costs and inflation. Exploration expenses more than doubled to $9.5 million due to seismic expenditures and dry hole costs.
• Accounting Change: The company adopted FASB Statement No. 123(R) effective January 1, 2006, resulting in a $2.8 million increase in non-cash stock compensation expense and a cumulative effect charge of $279,000 (net of tax).

Guidance, Outlook, and Risks

• Capital Budget: The 2006 capital budget is set at $429.0 million (excluding acquisitions), expected to be funded by internal cash flow.
• Liquidity: The company maintains a $600.0 million revolving credit facility with $353.9 million available at March 31, 2006. Management believes operating cash flow and borrowing capacity are adequate for near-term obligations.
• Hedging Strategy: As of March 31, 2006, the company had a net unrealized pre-tax loss of $134.9 million on open commodity derivatives. Hedges cover significant portions of 2006, 2007, and 2008 production. A 10% decline in unhedged prices would reduce revenue by approximately $19.5 million.
• Risks: Key risks include volatility in oil and gas prices, inflationary pressure on operating costs (services and personnel), and the inherent risks of exploration and development. The company is also subject to interest rate risk on its floating-rate bank debt.
• Legal Contingencies: A pending class-action lawsuit (Jack Freeman, et al.) has a negotiated settlement of $725,000 pending judicial review. Management does not expect any litigation to have a material adverse effect.

Investor Verification Checklist

• Derivative Exposure: Verify the impact of the $134.9 million unrealized loss on derivatives and the extent of production hedged through 2008.
• Cost Inflation: Monitor the trend of direct operating costs per Mcfe, which rose 17% year-over-year, and its impact on future margins.
• Capital Allocation: Confirm the ability to fund the $429 million capital budget solely through internal cash flow given the high capital intensity of the industry.
• Debt Covenants: Review compliance with debt covenants, specifically the restricted payment baskets for dividends ($398.8 million available under the credit facility).
• Accounting Impact: Assess the ongoing impact of FASB 123(R) adoption on reported earnings and non-cash compensation expenses.