Range Resources Corporation (NYSE:RRC)
Company Conference Presentation
December 12, 2013 9:40 am ET
Ray Walker – Senior Vice President, Chief Operating Officer
As we transition, we’ll have Ray Walker come up. Ray is with Range. Ray is the Senior Vice President and Chief Operating Officer, and I think David Amend is also here joining him. So Ray, we’ll hand it over to you to give us a little color on Range and what’s going on. Appreciate it.
Thanks very much. Good morning. Good to be with you. The Range story is pretty simple. It’s been consistent over the years and we’ve had a real proven track record of performance really based around three core values: focused on production and reserve growth per share on a debt-adjusted basis, maintaining a real simple, strong financial balance sheet, and then operating safely and being good stewards. We’re currently in Texas, Virginia and Appalachia, and of course the crown jewel is the Marcellus and we’ll talk a lot about that as I go through the presentation.
The story is pretty consistent. We see 20% to 25% line-of-sight production growth for many, many years. Of course, that’s based around our position in the Marcellus and Pennsylvania. Our cash flow is expected to outpace our production growth going forward based on a high return, high value, large scale repeatable asset base that we have. We’ll talk certainly a lot more about that. We’ve been real successful for a lot of years in driving our low cost structure even lower. We have huge resource potential – 9 to 13 times, great technical teams, and a really strong financial position.
It’s based around bank debt, subordinated notes, common stock. We’ve got available liquidity of $1.2 billion. Twenty-eight banks in our facility with no bank owning more than 9%. I think Roger and our financial team has done an excellent job there. Recently upgraded on the credit rating and a really solid hedge position. We are very active hedgers going forward to protect our CAPEX budget.
Really strong track record, we believe one of the best metrics for share prices, production per share growth, and reserves per share growth on a debt-adjusted basis, so you can see there what we’ve been able to accomplish over the last several years. We do expect similar growth in 2013.
We’ve had 10 years of double-digit production growth. At the same time, since 2004 we’ve sold $2.3 billion worth of assets, so this is net of all of that and we do expect to reach our production guidance in the fourth quarter, which will put us right at the high end of our 20% to 25% growth rate for 2013. So 19% year-over-year for the last 10 years, pretty attractive, again in spite of selling $2.3 billion worth of assets.
Reserves, resource potential – that’s kind of the track record over the last five, six years. I think the biggest and most important bullet point on here is the one in blue towards the bottom there, that we’ve moved 4.7 Tcf equivalent of resource potential into proved reserves in the last three years, so have been very successful there.
We’ll move on to the Appalachian Basin and talk about the Marcellus. This is a representation of Range’s acreage position in Appalachia, in Pennsylvania – about a million acres, some legacy assets, and of course we’ll talk mostly about southwest Pennsylvania there, but that’s where we have 540,000 net acres. When you look at the potential that we have in the stacked pay areas there and you look at all three of those areas – northwest, northeast, and southwest PA – and sum up what we believe is prospective for upper Devonian Marcellus and into Utica/Point Pleasant, that’s almost essentially 2 million net acres of potential there, so a huge resource base. I believe that’s one of the things that helps differentiate Range, is our ability to grow for many, many years with such a large asset base at attractive returns.
Recently we put out hydrocarbon in place maps, and we did this to show what we believe we—are lease positions are now pretty solid. This is some information we’ve been working on since we discovered the Marcellus, really, back in 2004, and before that actually. But when you look at the upper Devonian shale and the gas in place, of course, the bright red colors are the most and then it tapers down from there. You see that southwest PA is clearly where most of the gas in place, or hydrocarbon in place is for the upper Devonian, and you may not be able to read it but that grey hockey arena or football field looking, depending on which sports you like, is the greater Pittsburgh area, which I don’t think many people are going to be able to drill in that area, and we’ll talk about that later if you want to.
If you look at the Marcellus, today I think there’s well over 7,000 wells that have either been drilled, completed, or in some phase of waiting to come online. It’s an unbelievable story – in 2004, with the discovery well; in 2007, Range had a little bit less than a million today. Today, I think the field is by last account a little over 13 Bcf a day, largest gas-producing field in North America and a lot of people, including me, think it could be one of the largest fields in the world in not too many years in the future. So unbelievable play, there’s no doubt where the sweet spots are in the Marcellus. Clearly there’s one in northeast PA and then clearly there’s another one in southwest PA for lots of different reasons. These maps show you hydrocarbon in place. It’s based on a lot of different parameters, but there are still lots of other things that aren’t in there like permeability and liquids, and different things like that.
Then you go to Utica-Point Pleasant, which of course is gaining some notoriety here lately, and when you look at the hydrocarbon in place in the Utica, it also centers around southwest Pennsylvania. Now, most of the activity has been to the west over in Ohio, of course, where the liquids are, and of course that’s where it got started, but you’re seeing people move further and further towards the most hydrocarbon in place. That tends to be where the formation is thickest, pour pressures are the greatest, and thermal maturity happens to be in the right range and so forth. So we’re really excited about the Utica. We do plan to drill a test well in the sweet spot of the core underneath our acreage there in Washington County in 2014, so we’ll be anxiously awaiting the results of that.
So if you layer all those together, if you stack them all, I think it’s clear to everybody why Range has quietly been putting together our position in southwest Pennsylvania, really consolidating that acreage spot, working on infrastructure, takeaway projects, and all that sort of thing, and clearly the most gas in place, or most hydrocarbon in place is in southwest PA, and that’s where we are today.
What recently at last quarter, we put out our top 10 super-rich Marcellus wells, and this was just to show what they look like compared to other wells in the basin. If you look at them on an absolute basis, we have five of the top 10 wells in the basin, including the Utica and Point Pleasant operations to the west of us. If you look at it on a normalized per-thousand foot or lateral length basis, in other words kind of normalized into the same lateral length, we have eight of the top 10 wells, so we’ve had some really, really great success in our super-rich area.
Over the last several quarters, we’ve been talking about 17—the original sort of 17 super-rich wells that we did that we’re starting to work on RCS completions and better targeting, and all of the different technologies that we’ve talked about. We’ve been tracking those wells and they are still clearly 40% to 50% above the type curve that we were using in 2012, so we’ve since adjusted our type curve up and we’re expecting see further improvement as we go forward; but these are really great wells.
If you look at what we’ve done over the past couple of years, we’ve put together a real simple comparison looking at lateral length, number of stages, the EUR per thousand foot, and then the absolute EUR by year, just showing you the improvements that we’ve been able to make year-after-year as we gradually applied these new technologies to these completions.
Going forward, we’re looking at about 4,500-foot laterals with 22 stages on average. It’s important to say we will drill some pretty long laterals over the next year or so, but our average we expect to be in that 4,500-foot range with 22 stages, half a million pounds of frac sand per stage. When you look at that, the economics are very impressive – close to 100%, and net present value at $15 million a wall, so this is really attractive stuff, lots of liquids, lots of condensate. Our costs today are about $6.4 million. That’s where we are today, and we expect those to go down as we get into more and more improvements and pad drilling as we go forward.
The wet area of the Marcellus is about 220,000 acres in that southwest PA area. This, of course, is where we started back in 2004. These wells have also seen really good improvement year-after-year, and you can kind of see the same metrics there. But these wells on an EUR per thousand foot basis are some of the best wells in the basin when you look at that way. About 12.3 Bcf equivalent going forward. We expect them to be average of, again, around 4,200 feet lateral length with 21 stages and about 400,000 pounds of frac sand per stage. About $6.1 million – again, over 100% rate of return, and about $15 million present value, so these are again really attractive wells, lots of liquids.
If you look at the dry area of the Marcellus, in southwest PA we haven’t done as many wells there. Of course, some of that acreage was HBP from some of our legacy assets, and of course when you look at what we’ve done recently in the dry areas, again applying some of those same technologies, you’ve seen some real drastic improvements in what we going forward there. When you look at the economics in the dry gas area and what we expect to average – about 5,000 foot laterals there in 25 stages, those wells are also close to 100% rate of return. So when you look at all of them together, all of the three areas – the super-rich, wet and dry – are all really close to 100% rate of return in southwest PA, so that’s going to be the lion’s share of our activity for the next couple of years for sure.
One of the real innovative things that Range has been able to do, in 2007 we recognized that we had these liquids-rich wells and decided that we were going to have to do something with the ethane, with the liquids. We were going to have develop customers and markets, and hats off to the marketing team, Chad Stephens and the guys there in Pittsburgh that have been working on some of these projects since 2007, and they’ve culminated with three really big ethane projects that a lot of other things have developed around. We’ve got Mariner West in ATEX systems, which are actually all coming online as we speak; and then Mariner East, the propane part of that will be in operation next year, and then the ethane part of Mariner East will come online in early 2015 - again, the real innovative projects.
What’s important about these is once these projects are all three up and running, at today’s cost this is a significant revenue upgrade or uplift for Range. This is a unique position that Range is in compared to other people in the industry and how they have to handle their ethane products. If you took all three of these projects and did the math on it, and they were at today’s current strip prices—actually this is about a month old, so about a month ago when prices were actually a little bit lower, that would net out to $4.13 equivalent gas price. If you take into account once we start running the de-ethanizers that MarkWest has at Houston and Majorsville, we’re going to also get 8% more propane. When you add all that in, that’s about a 4.50 to 4.60 type gas price in an environment where it was less than 3.50 at the time. So significant revenue uplift for us, and I think that’s one of the things that’s unique about our ability. We wanted not only diverse operational outlets for our liquids, we wanted diverse pricing indexes for our liquids, so I’m real proud of the effort the team has made on that.
Looking at Utica-Point Pleasant, again there’s been a lot of activity. A lot of people now seem to be pushing towards the east into drier gas areas. The wells are becoming really prolific. Some recent wells have been announced. We’re certainly going to be planning our well—well, I’m not going to quote what time next year it will be drilled, but we definitely will get one done next year, and we’ve had people drill enough of these wells now to confirm all of the information that we put out in the hydrocarbon in place maps, and so we’re really confident in what we see and really excited about that test.
Upper Devonian, of course, every time we drill a Marcellus well we get a look at that. Mapped out really well. We’d cracked the code on it previously last year, made a 10 million a day well, not too many stages, so that’s another resource that’s just loaded and ready. There are some potential benefits out there from multiple development of all of these layers at the same time, some of the stress shadowing and different things that we’re talking about, but we’ll be looking forward to those things as we go forward in the future. Again, all that being said, it’s just more enhancements to the story as we go forward.
Additional upside we see in the horizontal Mississipian. The horizontal Mississipian, we’re still very encouraged by some of the new techniques we’ve tried up on the Nemaha Uplift in the chat interval. We’re seeing the last four wells that we’ve done, these big high-impact jobs on 45% above the type curves due to some great work by the operations team there in Oklahoma. They’ve been able to do these wells at essentially the same cost, so we’re pretty excited about that. It’s emerging technology. It’s new, it’s early. We don’t have a ton of production time on these wells, but we’re really encouraged by that and we see that as very encouraging going forward into 2014 and ’15.
In the Permian Basin, of course we have put our Conger properties up for sale and marketing process, and that’s going pretty good; but we did recently drill a 7,000 foot Cline lateral and a 7,000 foot upper Wolfcamp lateral, and of course we’ll putting out data on that in the near future.
So in summary, the story is really based around 20% to 25% line-of-sight growth for many years. What’s exciting about that is although the numbers don’t sound that big, me as an operations guy, those numbers sound really big because what that means is if you’re growing at the high end of that level, you’re doubling in size every three years. Low end of that level is doubling every four years essentially, so you’re looking at—if we exit this year at Bcf equivalent per day, we’re going to be at 2; three or four years out, we’re going to be at 4. That’s an aggressive schedule. We’ve very confident in it. We have ethane commitments, for example, starting in early 2015 of 55,000 barrels a day for 15 years. We would not be comfortable saying that or executing those deals unless we had everything else taken care of that goes with it, and confidence in the reservoir and the resource to be able to deliver that. So we are very confident going forward. It truly is line-of-sight. We believe our cash flow growth is going to outpace that. Because of the high return projects that we’re doing, we’re seeing improvements in G&A, LOE, all our unit costs are coming down, our credit ratings are improving. Interest rates will go down in the future, so we’re real excited about the story going forward.
We don’t think there’s many other companies with resource potential of that size, so we hope that that differentiates us, makes us a little bit unique and a great long-term story. Big resource potential, great teams, a great management team, and we really look forward to many years going forward. So that’s my story, and I’m sticking to it. Thank you.
Question and Answer Session
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