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Range Resources Corp. (RRC - Analyst Report) has reported stellar third-quarter 2011 results, buoyed by higher production level and realized prices along with lower unit costs. The company posted adjusted earnings of 28 cents a share, beating the Zacks Consensus Estimate of 24 cents. Results also saw an almost two-fold growth from the year-earlier profit of 12 cents a share.

Total revenue showed a 73.3% year-over-year improvement to $338.2 million.

Operational Performance

Production volume of 537.2 million cubic feet equivalent per day (MMcfe/d) in the third quarter jumped nearly 7% 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.

Natural gas and oil production increased more than 5% and 13% year over year, respectively, and NGLs output surged nearly 11%. The company’s endeavour for oil-weighted drilling activities drove the oil and NGL production in the quarter.

Range sold its Barnett Shale properties in April 2011, when it accounted for 20% of the company’s total production. Excluding the impact of the sale, production would have risen 27%.

Range Resources’ total price realization for the quarter averaged $5.73 per Mcfe, up 15.3% year over year. The rise 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 $4.51 per Mcf, up almost 4% from the prior-year quarter. NGLs were sold at $49.52 a barrel (up 45% year over year) and oil at $81.70 a barrel (up 22%).

Financials

At the end of the quarter, long-term debt was $1,787.7 million, representing a debt-to-capitalization ratio of 43.5% compared with 44.3% in the prior quarter. The company spent $265.0 million in capital expenditure in the quarter.

Hedging

For two consecutive quarters starting third quarter 2011, Range has hedged 318,200 million British thermal units per day (MMbtu/d) and 348,200 MMbtu/f of natural gas production at an average floor price of $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

The company has increased its projected 2011 production growth to 11% from 10% and the full-year capital budget guidance to $1.47 billion from $1.38 billion, up 6.5%. The additional capital spending is mainly for non-operated drilling activities in the Marcellus, Ardmore Woodford and Cana Woodford shale plays as well as leasehold acquisition costs related to the Mississippian horizontal play in Oklahoma.

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) along with the sale of non-core properties will prove beneficial over time. We believe that with a robust asset base, Range Resources remains on track to reach its raised projected level.

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 #5 Rank, which translates to a short-term Strong Sell rating.

Headquarted 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 - Analyst Report), SM Energy Company (SM - Analyst Report) and Ultra Petroleum Corp. (UPL - Analyst Report).

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