Range Resources Outperforms

Range Resources Corp. (RRC - Analyst Report) has reported robust fourth-quarter 2011 results, buoyed by a higher production level and realized prices along with lower unit costs. The company posted adjusted earnings of 33 cents a share, comprehensively beating the Zacks Consensus Estimate of 18 cents. Results also experienced an almost 74% growth from the year-earlier profit of 19 cents a share.

For full-year 2011, the company posted adjusted earnings of $1.11 a share, surpassing the Zacks Consensus Estimate of 54 cents. Results also saw an almost twofold growth from the year-earlier profit of 56 cents a share.

Fourth quarter 2011 total revenue of $348 million was ahead of our $313 million projection and up 21% year over year. The full-year revenue improved 16% year over year to $1,282.6 million, and exceeded the Zacks Consensus Estimate of $1,143 million.

Operational Performance

The fourth quarter production volume of 625.1 million cubic feet equivalent per day (MMcfe/d) jumped nearly 16% from the year-earlier level. Of the total production volume, natural gas accounted for more than 78%.

Production for full-year 2011 climbed 12% compared to the 14% increase in 2010, and averaged 554 MMcfe/d. Despite the sale of Barnett assets in April 2011, Range saw the eighth consecutive year of double-digit production growth of 12%. Adjusting for the sale of the Barnett properties, production growth would have been 36%.

Natural gas and NGLs output surged 19.8% and 3.8%, respectively. However, oil production dropped 2% year over year.

The average realized gas price was $4.09 per Mcf, down 6.6% from the prior-year quarter. NGLs were sold at $54.31 a barrel (up 29% year over year) and oil at $83.71 a barrel (up 15.6%). Range Resources’ total price realization for the quarter averaged $5.41 per Mcfe, up 1.5% year over year.

Financials

At the end of the quarter, long-term debt was $1,975 million, representing a debt-to-capitalization ratio of 45.2%.

Hedging

For two consecutive quarters starting first quarter 2012, Range has hedged 189,641 million British thermal units per day (MMbtu/d) of natural gas production at an average floor price of $5.43. For the third and fourth quarters of 2012, the company has hedged 279,641 MMbtu/d of natural gas production at an average floor price of $4.76.

The company has also hedged 240,000 MMbtu/d of natural gas at an average price of $4.73 for 2013 and 90,000 MMbtu/d at an average floor price of $4.25 for 2014.

Guidance

The company has set its 2012 production growth guidance in the range of 30% to 35% and capital budget guidance at $1.6 billion, which comprises $1.3 billion for drilling and recompletions, $215 million for leasehold, $47 million for seismic and $73 million for pipelines and facilities. Approximately 75% of the budget will be apportioned toward liquids-rich and oil projects mainly in the Marcellus Shale and horizontal Mississippian plays.

Outlook

We believe that Range Resources’ 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 and declining unit costs (down 37.5% 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. As of December 31, 2011, Range’s proved reserves stood at 5.1 trillion cubic feet equivalent (Tcfe), up 14% from year-end 2010. Without giving effect to the sale of the Barnett properties, which took place in April 2011, the year-over-year proved reserve increase would have been 43%.

Although we appreciate Range Resources’ increasing focus on liquids, its natural gas weighted production and reserve will weigh on the stock. Our long-term Underperform recommendation for the company remains unchanged considering the company’s highly gas-weighted reserves/production profile.

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).

Read the full analyst report on RRC

Read the full analyst report on EQT

Read the full analyst report on SM

Read the full analyst report on UPL