Range Resources Corp. (RRC) reported better-than-expected adjusted first-quarter 2011 earnings of 22 cents per share compared with the Zacks Consensus Estimate of 5 cents and the year-earlier profit of 16 cents. The outperformance was mainly attributable to record production level in the quarter with stellar results from its liquid-rich Marcellus shale, along with continuous divestment of its non-core properties.

However, revenue plunged 37% year over year to $187.6 million, and remained well below the Zacks Consensus Estimate of $281 million.

Operational Performance

Range Resources reported a record production volume of 545.5 million cubic feet equivalent per day (MMcfe/d) in the first quarter. The quarter’s volume jumped 17% from the year-earlier level and increased marginally from the prior quarter. This marks the 33rd consecutive quarter of sequential production growth for the company. Liquids-rich Marcellus Shale play in Pennsylvania and the Midcontinent region drove the production growth.

Out of the total production volume in the reported quarter, natural gas accounted for nearly 79%, while natural gas liquids (NGLs) and oil contributed 16% and 5%, respectively. While natural gas and NGLs production increased 15% and 55% year over year, respectively, oil production dropped 14%.

Range Resources’ total price realization for the quarter averaged $5.45 per Mcfe, down 2% year over year but up 2% sequentially. The average realized gas price was $4.41 per Mcf, down 8% from the prior-year quarter. NGLs were sold at $47.96 a barrel, up 11% year over year. The average oil price rose 14% year over year to $79.48 a barrel.

Financials

At the end of the quarter, long-term debt stood at $2,166.8 million, representing a debt-to-capitalization ratio of 49.8% compared with 46.9% in the prior quarter. The company spent $267 million in capital expenditure (capex) in the quarter. Total capex comprises $19 million on acreage, $6 million for gas gathering systems and $26 million for exploration expense (including $13 million for seismic and $9 million for delay rentals).

The company seems to be on track with its full year 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. The company has also hedged 438,200 MMbtu/d of natural gas at an average price of $5.47 for the fourth quarter of 2011 and 119,641 MMbtu/d at an average floor price of $5.50 for 2012.

Guidance

The company expects production growth of 10% (including its asset sale program) for 2011. For 2012, production growth is projected 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, its natural gas weighted production and reserve will weigh on the stock. Our long-term Neutral recommendation for the company remains unchanged. Range Resources holds a Zacks #3 Rank, which translates to a short-term Hold rating.

Headquartered in Fort Worth, Texas Range Resources is an onshore-focused exploration and production company with operations primarily in Appalachia and the Barnett Shale. The company competes with EQT Corporation (EQT), SM Energy Company (SM) and Ultra Petroleum Corp. (UPL).

 
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