Exploration & Production | Quarterly / Earnings Reports | Third Quarter (3Q) Update | Forecast - Production
Range Hits Record 1.2 Bcfe/d in Production; Sets Sights on 3 Bcfe/d
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Range Resources Corp. has reported its third quarter 2014 results.
Third Quarter Highlights:
- Range produced a record average of 1,209 Mmcfe per day, an increase of 26% over the prior year quarter
- Unit costs decreased $0.36 per mcfe or 10% compared to the prior year quarter
- Outstanding well results continue in the Marcellus
- New technology in Nora field yields best results in years with returns up to 100%
- 45 new gas purchase customers added to date in 2014
- New bank agreement announced with a maximum facility amount of $4.0 billion and reduced borrowing costs
- Credit upgrades announced from Standard and Poor's and Moody's
Commenting on the results, Jeff Ventura, Range's President and CEO, said, "Range set a record production level this quarter of over 1.2 Bcfe per day net to Range, driven by the Marcellus. It is exciting to see how far we have come since Range completed the Marcellus discovery well ten years ago this month. We are even more excited about future growth, as we capitalize on the first mover advantages Range enjoys in the Marcellus. This includes the largest net acreage position in Pennsylvania, specifically in southwest Pennsylvania, where we have leased the core of the highest hydrocarbon in place in the basin when considering stacked pay potential in the Marcellus, Utica and Upper Devonian. This also is the area that has the liquids-rich portion of the Marcellus and Upper Devonian. We have secured the lowest cost firm transportation portfolio of our peers which aligns with our production growth target of 20% to 25% per year. As these transportation contracts come into service, they will move an increasing portion of our natural gas and natural gas liquids to markets with strong year-round demand and stable index prices.
"Although the rapid growth in Marcellus production has created a challenging regional pricing environment for this quarter, looking ahead, prices are expected to improve. In addition, our liquids pricing, net of transportation costs, will be enhanced with the start-up of Mariner East. The propane portion is projected to start in early 2015 and the ethane portion in July 2015. We believe that as midstream projects come on line in 2015 and beyond, designed to move Marcellus gas to new markets with increasing levels of demand, the current supply/demand imbalance in the Appalachian basin will improve. As a first mover, with a low cost structure, strong balance sheet and a proven track record, Range is well-positioned to continue our annual 20% to 25% production growth to 3 Bcfe per day and beyond."
Operational Discussion
Range produced a record average of 1,209 Mmcfe per day during the third quarter, consisting of 822.4 Mmcf per day of gas, 53,640 barrels of NGLs and 10,710 barrels per day of oil and condensate. Third quarter 2014 production exceeded the prior year quarter by 26% and the previous quarter by 9.4%. Production guidance for the fourth quarter is 1,350 Mmcfe per day, with 30% liquids. Annual production growth beyond 2014 is expected to be in the range of 20% to 25%.
The company has updated its E&P divisions, which can be accessed below.
Marcellus
MidContinent
Southern Appalachia Division -
Marcellus Shale Marketing, Transportation and Processing Update
In the early stages of the Marcellus play, Range anticipated that successful development would inevitably create a regional oversupply beyond what local demand could absorb. At that time, Range began focusing its marketing efforts on developing new markets outside the Appalachian basin, along with securing transportation arrangements at a reasonable cost to serve these markets. As a result, Range anticipates having the capability of selling Appalachian gas to a customer base that stretches from the Northeast to the Upper Midwest, the Gulf Coast and Texas, Florida and the Atlantic Coast. To this end, the Company has added 45 new natural gas customers so far in 2014. This has allowed Range to diversify its natural gas pricing, as we expect to move gas to over 20 different indices by 2018. Accordingly, the Company expects its Marcellus price realizations to improve in the years ahead compared to prices being received in Appalachia today, given the almost 34 Bcf per day of announced Appalachian basin pipeline takeaway projects that are expected to be in service by the end of 2018. Range expects that long-term differentials in Appalachia will ultimately equal the cost of transport out of the basin.
At the end of the third quarter, Range has contracts in place for approximately 1.1 Bcf per day of transportation capacity, increasing to 2.4 Bcf per day by 2018. Range's objective has been to layer in additional commitments that follow the Company's growing production volumes. These future capacity additions, to multiple markets outside the Appalachian region, will support Range's growth while maximizing net realized gas prices. As a result of discovering the Marcellus and being a first mover in securing transportation, Range has been able to secure its firm transportation and firm sales through 2016 at an expected average cost of $0.28 per Mmbtu in 2016, rising to $0.39 through 2018. Range expects that costs can be further reduced with our contractual marketing arrangements. Importantly, the Company has the option to renew many of these transportation agreements at the currently contracted rate.
Range is the largest producer of wet gas and NGLs in the Appalachian basin, with the most comprehensive and diversified plan to move our growing volumes of gas, NGLs and condensate. Similar to the Company's natural gas diversification strategy, its existing NGL contracts and commitments are intended to ensure Range can move all products to new and growing markets at prices greater than what would alternatively be realized in local markets. The Mariner East project provides Range benefits on propane and ethane. In early 2015, the propane portion of Mariner East is expected to be operational, allowing Range to continue selling propane to international markets, but at significantly lower transportation cost to Sunoco's Marcus Hook facility in Philadelphia. The project also adds size and scale, opening up the potential for other marketing options. Mariner East is expected to further diversify and strengthen Range's ethane marketing abilities when it becomes operational in July 2015 by selling ethane to INEOS for use in its European petrochemical facilities.
Range has recently posted a presentation to our website entitled "Takeaway Capacity in Appalachia" that explains many of the macro dynamics that have occurred in the Appalachian basin due to the rapid growth of Marcellus production, the outlook for the future and Range's strategy regarding the current and future challenges.
Financial Discussion
GAAP revenues for the third quarter of 2014 totaled $617 million (39% increase as compared to third quarter 2013), GAAP net cash provided from operating activities including changes in working capital was $213 million versus $223 million in the third quarter 2013 and GAAP earnings were $146 million ($0.86 per diluted share) versus net income of $19 million ($0.12 per diluted share) in the third quarter 2013, an increase of 663%.
Several non-cash or non-recurring items impacted third quarter results. A $125 million favorable non-cash mark-to-market gain on derivatives, a $46 million mark-to-market gain due to the decrease in value of the Company's common stock held in the Company deferred compensation plan (which was fully funded on the date of grant), $13.4 million for abandonment and impairment of unproved properties, a $4.9 million fine for water handling and storage issues and $14 million of non-cash stock compensation expenses were recorded.
Non-GAAP revenues for third quarter 2014 totaled $491 million (13% increase as compared to third quarter 2013), cash flow from operations before changes in working capital, a non-GAAP measure, reached $257 million (a 5% increase as compared to third quarter 2013). Adjusted net income, a non-GAAP measure, for third quarter 2014 was $62 million (an 8% increase as compared to third quarter 2013).
Total unit costs improved by $0.36 per mcfe or 10% compared to the prior-year quarter, with the largest decreases in interest expense, production and ad valorem taxes and depreciation, depletion and amortization expense.
Third quarter production volumes averaged 1,209 Mmcfe per day, a 26% increase over the prior-year quarter. Year-over-year gas production increased 11%, NGL production rose 109%, while oil and condensate production was down 3%, primarily due to the Conger property exchange in late second quarter, representing approximately 9% of oil and condensate volumes for the quarter. The third quarter 2014 natural gas, NGLs and oil price realizations (including the impact of cash-settled hedges and derivative settlements which would correspond to analysts' estimates, a non-GAAP measure) averaged $4.16 per mcfe, a 13% decrease over the prior-year quarter of $4.80 per mcfe, partially due to the Conger exchange in second quarter 2014.
- Production and realized prices after hedging for each commodity for the third quarter of 2014 were: natural gas -- 822 Mmcf per day ($3.63 per mcf), NGLs -- 53,640 barrels per day ($22.53 per barrel) and crude oil and condensate -- 10,710 barrels per day ($78.66 per barrel).
- The third quarter average natural gas realized price before hedging settlements was $3.34. Financial hedges based upon NYMEX increased realizations by $0.06 per mcf while financial basis hedges increased realizations by $0.22 per mcf during the quarter. The average Company natural gas differential including the settled financial basis hedges but before NYMEX hedging for the third quarter was $(0.49) per mcf compared to $(0.58) per mcf for the second quarter 2014. (See the schedule below which details the components of the non-GAAP average realized natural gas price for the quarter and the tables presented elsewhere that reconcile the non-GAAP measures to their most directly comparable GAAP financial measure.)
- NGL pricing before the impact of hedging was 23% of WTI or $22.26 per barrel for the third quarter of 2014 ($22.53 per barrel after hedging, hedging added $0.27 per barrel). Ethane was approximately 50% of the total composite barrel in the Marcellus during the quarter.
- Crude oil and condensate price realizations, before financial hedges, for the third quarter averaged 84% of WTI or $81.34 per barrel ($78.66 per barrel after hedging, hedging reduced realizations by $2.68 per barrel).
New Bank Agreement Signed and Credit Ratings Upgraded
Subsequent to the end of the quarter, Range announced that it amended and restated its revolving credit facility. The new five-year agreement has a maximum facility size of $4 billion, with an initial borrowing base of $3 billion and $2 billion in commitments. This represents an increase in the borrowing base of $1 billion and increased commitments of $250 million. The agreement also reduces drawn borrowing costs by 25 basis points and grants Range the option to release all collateral upon the receipt of a single investment grade rating. The maturity date is extended to October 16, 2019. On October 16, Standard & Poor's Ratings Services announced it had upgraded Range's corporate credit rating to BB+. Earlier in September, Moody's Investors Service upgraded Range's outlook to 'Positive' with a current corporate rating of Ba1.
Capital Expenditures
Third quarter drilling expenditures of $341 million funded the drilling of 71 (68 net) wells and the completion of previously drilled wells. A 100% drilling success rate was achieved. In addition, during the third quarter, $36 million was expended on acreage, $6 million on gas gathering systems and $10 million for exploration expense. Range is on track with its 2014 capital expenditure budget of $1.52 billion.
Guidance - Fourth Quarter 2014
Production Guidance:
Production growth for 2014 is targeted at 25% year-over-year. Average daily production for the fourth quarter is expected to be approximately 1.35 Bcfe per day, with 30% liquids.
Guidance for 2014 Activity:
Under the current plan, which is still subject to change, Range expects to turn to sales approximately 76 wells during the fourth quarter in the Marcellus, Nora and Midcontinent, as shown below:
