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