SM SM Energy Company

Range Resources Corp. (RRC) has reported stellar second-quarter 2011 results, buoyed by higher production level and realized prices along with lower unit costs. The company posted adjusted earnings of 27 cents a share, substantially beating the Zacks Consensus Estimate of 12 cents. The quarterly results improved three times from the year-earlier profit of 9 cents a share.

Total revenue showed a 60.4% year-over-year improvement to $306.6 million, surpassing the Zacks Consensus Estimate of $257 million.

Operational Performance

Production volume of 508.0 million cubic feet equivalent per day (MMcfe/d) in the second quarter jumped nearly 8% from the year-earlier level. Out of the total production volume, natural gas accounted for more than 76%, while natural gas liquids (NGLs) and oil contributed 17% and 7%, respectively.

While natural gas and oil production increased 2% and 4% year over year, respectively, NGLs production surged 49%. The company’s endeavor for oil-weighted drilling activities drove the NGL production in the quarter.

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, to focus on its Marcellus shale assets. Excluding the impact of the sale, production would have risen 33%.

Range Resources’ total price realization for the quarter averaged $5.76 per Mcfe, up 13.6% 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 average realized gas price was $4.54 per Mcf, up almost 4% from the prior-year quarter. NGLs were sold at $50.07 a barrel (up 35% year over year) and oil at $80.42 a barrel (up 18%).

Financials

At the end of the quarter, long-term debt was $1,787.4 million, representing a debt-to-capitalization ratio of 44.3% compared with 49.8% in the prior quarter. The company spent $281.1 million in capital expenditure (capex) in the quarter. Since it began extracting gas from the Marcellus, Range has drilled 292 horizontal wells. Of these, 71 are yet to be completed and 30 are awaiting pipeline connection.

Hedging

For three consecutive quarters starting second quarter 2011, Range has hedged 347,870 million British thermal units per day (MMbtu/d), 318,200 MMbtu/d and 348,200 MMbtu/f of natural gas production at an average floor price of $5.48, $5.43 and $5.33, respectively.

The company has also hedged 189,641 MMbtu/d of natural gas at an average price of $5.32 for 2012 and 160,000 MMbtu/d at an average floor price of $5.09 for 2013.

Guidance

Previously, the company had projected 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.

The company had also forecast its full-year capital budget at $1.38 billion with 86% apportioned for the Marcellus Shale play and the remaining for Midcontinent, Appalachian and Southwest divisions. Total capex comprised $1.13 billion for drilling and recompletions, $160 million for land, $55 million for seismic and $35 million for pipelines and facilities.

Outlook

We believe that Range Resources’ 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 (down 9% in the reported quarter on an aggregate basis) 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) and the company replaced 931% of its total production. We believe that with a robust asset base, Range Resources remains on track to deliver 10% year-over-year production growth during 2011.

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 #4 Rank, which translates to a short-term Sell 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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