Range Resources Corp.‘s (RRC) first-quarter 2012 results were aided by a higher production level and lower unit costs, partly mitigated by lower realized prices. The company posted adjusted earnings of 15 cents a share, comprehensively beating the Zacks Consensus Estimate of 6 cents. However, results decreased almost 32% from the year-earlier profit of 22 cents a share.

First quarter total revenue of $246.9 million failed to reach our $309 million projection but grew 16% year over year. The annualized growth is attributable to the 20% production increment.

Operational Performance

The company’s first quarter production averaged 655.5 million cubic feet equivalent per day (MMcfe/d), comprising 78% natural gas, 16% natural gas liquids (NGLs) and 6% oil. Total production volume experienced a 20% improvement from the year-earlier period, mainly on the back of sustained accomplishment from the company’s drilling program.

Oil production expanded 36%, NGL rose 20% and natural-gas production increased 19% on a year-over-year basis. Range’s high liquid-rich spending level led to the relative increase in oil and natural-gas liquids production.

In April last year, Range sold all of its 52,000 acre Barnett Shale properties for $900 million in order to focus on its Marcellus Shale assets. Excluding the impact of the sale, production would have risen 50% in the reported quarter.

For the first quarter, Range’s total price realization (including the effects of hedges and derivative settlements) averaged $5.19 per Mcfe, down 14% year over year. The overall price comprised NGL at $46.20 per barrel (down 5.0% year over year), crude oil at $83.54 a barrel (up 5.3%) and natural gas at $4.01 per Mcf (down 25.7%).

Financials

At the end of the quarter, long-term debt was $2,388.3 million, representing a debt-to-capitalization ratio of 49.9% (versus 45.2% in the preceding quarter).

Hedging

For two consecutive quarters starting first quarter 2012, Range has hedged 189,641 million British thermal units per day (MMbtu/d) of natural gas production at an average floor price of $5.32. For the third and fourth quarters of 2012, the company has hedged 279,641 MMbtu/d of natural gas production at an average floor price of $4.76.

The company has also hedged 240,000 MMbtu/d of natural gas at an average price of $4.73 for 2013 and 90,000 MMbtu/d at an average floor price of $4.25 for 2014.

Guidance

The company had earlier set its 2012 production growth guidance in the range of 30% to 35% and capital budget guidance at $1.6 billion, comprising $1.3 billion for drilling and recompletions, $215 million for leasehold, $47 million for seismic and $73 million for pipelines and facilities. Approximately 75% of the budget is intended to be apportioned toward liquids-rich and oil projects mainly in the Marcellus Shale and horizontal Mississippian plays.

Outlook

We believe that Range Resources’ large acreage holdings will support several years of oil and gas drilling in the fast-growing fields. In a low natural gas price environment, the company’s record production and declining unit costs (down 33.3% in the reported quarter on an aggregate) along with the sale of non-core properties will prove beneficial over time. We believe that with a robust asset base, Range Resources remains on track to reach its projected production level for this year. The company made significant operational progress in the quarter in all of its five liquids-rich and oil ventures, namely, Marcellus, Upper Devonian, wet Utica, horizontal Mississippian and Cline Shale.

Range Resources’ diversified asset portfolio is spread between low-risk/long reserve-life Appalachian assets and large-volume/rapid-payout Gulf Coast properties. The company has an impressive inventory in the Marcellus Shale, one of the prominent emerging shale plays in the U.S. lower 48. Given its dominant position in the Marcellus Shale play and its continuous endeavor to control costs, we believe that Range Resources will be capable of organizational sustainability and long-term shareholder value creation.

However, we remain on the sidelines as the company is still exposed to volatile natural gas fundamentals, interest rate risks and the uncertain macro backdrop. Additionally, Range Resources is governed by several stringent regulations, especially in the Marcellus Shale, the Appalachian Basin and the southwestern U.S., where it has a robust asset base. Hence, we maintain our long-term Neutral recommendation for the company, which retains a Zacks #3 Rank (short-term Hold rating).

Headquarted in Fort Worth, Texas Range Resources is an onshore-focused exploration and production company and competes with EQT Corporation (EQT), SM Energy Company (SM) and Ultra Petroleum Corp. (UPL).

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