Range Resources Corp. (RRC) reported better-than-expected third-quarter earnings of 12 cents per share, compared with the Zacks Consensus Estimate of 4 cents, mainly attributable to the record production level. However, the reported quarter’s figure was down from the year-earlier earnings of 26 cents.

Revenue in the quarter increased 11.5% year over year to $227 million, compared with the Zacks Consensus Estimate of $243 million.

Operational Performance

Third-quarter production volume was a record 503 million cubic feet equivalent per day (MMcfe/d), up 15% from the comparable quarter last year and 7% from second quarter 2010.The Marcellus Shale play as well as the Mid-continent and Permian Basin regions drove the production growth. This marks the 31st consecutive quarter of sequential production growth for the company.

Of the total production, natural gas accounted for 77%, while natural gas liquids and oil contributed 17% and 6%, respectively. Natural gas and natural gas liquids production increased 6% and 136% year over year, respectively. However, oil production dropped 14%.

Overall, realized price in the reported quarter declined 22% year over year to $4.97 per Mcfe. The average realized gas price was $4.34 per Mcf, down 28% from the prior-year quarter. The natural gas liquids price increased 9% to $34.04 a barrel. The average oil price rose 5% to $66.84 a barrel.

At the end of the quarter, long-term debt stood at $1.85 billion, representing a debt-to-capitalization ratio of 41.8%.

Hedging

For the fourth quarter, Range has hedged its 335,000 MMbtu per day of natural gas production at an average floor price of $5.56. For 2011 and 2012, these figures are 408,200 and 119,641 at an average floor price of $5.56 and $5.50, respectively.

Asset Sale

The company announced that it has decided to divest its Barnett shale properties in Texas. However, the company also confirmed that the sale will not affect its per-share production and reserve growth outlook. The Barnett shale properties are expected to produce 120–130 Mmcfe/d in the fourth quarter.

Outlook

The company expects its fourth quarter production to exceed or meet the target range of 200–210 MMcfe/d, as its Marcellus division exited the third quarter with average production of 191 Mmcfe/d.

The company’slarge 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 facilitate in increasing value for shareholders.

Although we appreciate Range’s increasing focus on liquids, more than three fourth of its production was natural gas in the third quarter. We believe that Range’s natural gas weighted reserves will weigh on the stock. Consequently, our Underperform recommendation for Range remains unchanged at this stage and the company holds a Zacks #4 Rank (short-term Sell rating).

 
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