Range Resources Outperforms

| About: Range Resources (RRC)

Range Resources Corp. (NYSE:RRC) reported better-than-expected fourth-quarter 2010 earnings of 19 cents per share, compared with the Zacks Consensus Estimate of 7 cents. The outperformance was mainly attributable to a record production level in the quarter. However, the reported quarter’s figure was down from the year-earlier earnings of 32 cents. Earnings plunged to 56 cents per share in 2010 from the prior-year level of $1.04, but surpassed our expectation of 31 cents.

Revenue in the quarter decreased 3.3% year over year to $238.7 million, and remained well below the Zacks Consensus Estimate of $266 million. For 2010, revenue of $1,039 million surpassed the Zacks Consensus Estimate of $988 million and improved 14.5% from the year-earlier level.

Operational Performance

Range Resources reported a record production volume of 541.0 million cubic feet equivalent per day (MMcfe/d) in the fourth quarter, beating its own guided range of 535-540 MMcfe/d. The quarter's volume jumped 18% from the year-earlier level and 8% from the prior quarter. This marks the 32nd consecutive quarter of sequential production growth for the company.

Full-year 2010 production expanded 14% to 495.3 MMcfe/d, representing the company’s seventh consecutive year of double-digit growth. After adjusting for asset sales, however, the 2010 production growth would have been 19%.

Out of the total production volume in the reported quarter, natural gas accounted for nearly 76%, while natural gas liquids ((NGLs)) and oil contributed 18% and 6%, respectively. Natural gas and NGLs production increased 9% and 116% year over year, respectively. However, oil production dropped 11%.

Range Resources’ total price realization for the fourth quarter averaged $5.33 per Mcfe, down 19% year over year but up 7% sequentially. The average realized gas price was $4.38 per Mcf, down 29% from the prior-year quarter. NGLs were sold at $42.09 a barrel, up 9% year over year. The average oil price rose 8% year over year to $72.41 a barrel.


At the end of the quarter, long-term debt stood at $1.96 billion, representing a debt-to-capitalization ratio of 46.9% compared with 41.8% in the prior quarter.

The company set its capital budget at $1.38 billion with 86% apportioned for the Marcellus Shale play and the remaining toward Midcontinent, Appalachian and the Southwest divisions. Total capex comprises $1.13 billion for drilling and recompletions, $160 million for land, $55 million for seismic and $35 million for pipelines and facilities.


For each of the first three quarters of 2011, Range has hedged 408,200 million British thermal units per day (MMbtu/d) of natural gas production at an average floor price of $5.56. For the fourth quarter of 2011, the company has hedged 438,200 MMbtu/d of natural gas at an average price of $5.47, while for 2012, Range has hedged 119,641 MMbtu/d at an average floor price of $5.50.

Asset Sale

Notably, the company also announced that it has decided to divest its 52,000 acres of Barnett Shale properties in Texas for $900 million. The sale comprises 390 producing wells with a capacity of 113 million cubic feet per day. While the company did not disclose the buyer’s name, it pointed out that it retained some acreage valued at about $50 million.

The sale is expected to close in late April 2011, subject to customary closing conditions and purchase price adjustments.

Additionally, Range has also recognized diverse properties, valued between $200 million and $250 million, to be sold within the next 12 months.


The company expects 2011 production growth of 10% (including its asset sale program). For 2012, Range Resources anticipates production growth in the 25-30% range on an annualized basis, with finding and development costs being less than or equal to $1.00 per Mcfe.


We believe that the company’s large acreage holdings will support several years of oil and gas drilling in fast-growing fields. In a low natural gas price environment, the company’s record production and declining unit costs, along with the sale of non-core properties, will be beneficial over time. In 2010, proved reserves increased 42% year over year to 4.4 trillion cubic feet equivalent (Tcfe) from the year-ago level and the company replaced 931% of its total production.

Although we appreciate Range Resources’ increasing focus on liquids, which inched up by a percent to 24% in the fourth quarter, its natural gas weighted production and reserve will weigh on the stock.

Competition from peers such as Petrohawk Energy Corp. (NYSE:HK) and SM Energy Co. (NYSE:SM) is also a concern. Our long-term Neutral recommendation for the company remains unchanged. Range Resources holds a Zacks #2 Rank, which is equivalent to a short-term Buy rating.