SM SM Energy Company

Range Resources Corporation’s (RRC) second quarter 2011 production volume saw an 8% improvement from the year-ago period, augmented by superior drilling results from its Marcellus Shale and Mid-continent properties.

The company’s second quarter production volume of 508 million cubic feet equivalent per day (MMcfe/d) comprise 76% natural gas, while natural gas liquids (NGLs) and oil contributed 17% and 7%, respectively.

Range lost more than 100 MMcfe/d of production when it sold its 52,000 acres of Barnett Shale properties for $900 million on April 29, in order to focus on its Marcellus shale assets. Excluding the impact of the sale, production would have risen 33%.

The Mid-continent region experienced a 30% increase in its quarterly production, with liquid production growth of 20% from the year-earlier period. In its Marcellus position, the company raised its ultimate recovery (EUR) expectation to 5.7 billion cubic feet equivalent (Bcfe) versus its prior expectation of 5.0 Bcfe. The upward revision in EUR is based on production results from 103 horizontal wells that became operational during the last two years.

The company’s total price realization for the second quarter (including the effects of hedges and derivative settlements) averaged $5.63 per Mcfe, up 11% year over year. This was mainly attributable to a higher liquids proportion in the total production mix and increased NGL and crude oil prices. The overall price comprised NGL at $50.07 per barrel, crude oil at $80.42 a barrel and natural gas at $4.36 per Mcf.

Range Resources displays a diversified high-quality asset base across the low-risk/long-reserve Appalachian assets and large-volume/rapid-payout Gulf Coast properties. Given a dominant presence in the Marcellus Shale play, we believe that the 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, declining unit costs and the sale of non-core properties will be beneficial over time.

The company spent $280 million to drill 91 wells and 4 recompletions, while achieving a 100% success rate during the second quarter. We believe that with a robust asset base, Range Resources remains on track to deliver 10% year-over-year production growth (excluding the Barnett asset sale) during 2011.

However, considering the company’s exposure to volatile natural gas fundamentals, interest rate risks and the uncertain macro backdrop, we maintain our long-term Neutral recommendation. The company retains a Zacks #3 Rank (short-term Hold rating).

Headquartered in Fort Worth, Texas, Range Resources competes with EQT Corporation (EQT), SM Energy Company (SM) and Ultra Petroleum Corp. (UPL).

 
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