Range Resources Operating Update: Total Production In Line, Liquids Growth Lags

| About: Range Resources (RRC)

Range Resources (NYSE:RRC) on Thursday released its second quarter 2012 operating update in advance of its earnings call scheduled for July 24.

Range's strong production growth rates continue unabated and highlight the superb quality of the Company's Marcellus assets. Total production came in slightly above the Company's earlier guidance, which remains unchanged for the year and targets 30%-35% year-on-year growth in 2012. On an equivalent basis, production volumes averaged 719 MMcfe/d net, a 42% increase over the prior-year quarter and 10% greater than the first quarter 2012.

The natural gas volumes were particularly strong. Company-wide production was 80% natural gas, 14% natural gas liquids and 6% crude oil. However, the relative lag of the crude oil and liquids growth comes as a surprise and a disappointment. Year-over-year natural gas production increased 48% while oil production rose only 23% and NGL production increased 20%.

Taking into account Range's well advertised operating shift towards the "super-rich" portion of the Marcellus and the horizontal Mississippian oil play, these statistics seem counterintuitive. The Company's brief comment in the press release stating that "Oil and NGLs volumes varied from the amounts anticipated for the quarter due to the timing of when certain wells were brought on production" provides little real clarity on this issue. With its current rate of capital spending, the Company is adding, in my estimate, over 50 gross wells per quarter and timing variations would seem to even themselves out statistically.

Range also released its updated hedging summary. During the quarter the Company has layered in additional 70 MMBtu/d in natural gas swaps for 2013 at a price of approximately $3.40/Btu. This implies that Range's development program in the Marcellus should remain economical even at this relatively weak price level for natural gas. The Company's hedging strategy is of course not free of the obvious possible future side effects. In order to protect itself from the downward price movements, Range is now forced to lock in a relatively unattractive price for a portion of its next year's production.

This year, the favorable hedges have helped Range to weather the extreme natural gas price weakness with relatively little damage. During the second quarter, Range realized approximately $90 million in hedging gains (a significant amount when compared to the Company's total cash flow from operations of $156 million reported in the first quarter). In addition, at June 30, 2012 Range also had mark-to-market future hedging gains of approximately $340 million (with approximately 50% to be recognized in the second half of 2012, 45% in 2013 and 5% in 2014). As Range gradually uses up its in-the-money hedges that were put in place during the more favorable price environment, the cash flow impact of the new natural gas price paradigm will become more obvious.

The press release also highlights the weakness in the second quarter pricing for the light end of the NGL barrel, propane (C3) and ethane (C2). The press release states:

Propane prices are soft due to mild winter demand for a product which is primarily used as a consumer heating fuel. Ethane demand and prices have been weak due in part to crackers being down for maintenance and expansion projected to handle an additional 150,000 barrels per day of future ethane capacity at the same time that supplies have increased.

The anticipated increase in the NGLs supply as a result of the recent massive capital infusions into the liquids-driven plays across the industry has been one of the major investor concerns for some time. While Range's Marcellus wells are among the industry's most economic, the Company's profitability strongly depends on the price uplift from the NGLs component of its production and on the Company's ability to find a market for its rapidly increasing NGLs volumes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.