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Range Resources Corporation’s (RRC - Analyst Report) first quarter 2012 production volume experienced a 20% improvement from the year-earlier period, mainly on the back of sustained accomplishment from the company’s drilling program.

The company’s first quarter production averaged 655.5 million cubic feet equivalent per day (MMcfe/d), comprising 78% natural gas, 16% natural gas liquids (NGLs) and 6% oil. Oil production expanded 36%, NGL rose 20% and natural-gas production increased 19% on a year-over-year basis. Range’s high liquid-rich spending level was responsible for the relative increase in oil and natural-gas liquids production.

In April last year, Range sold all of its 52,000 acre Barnett Shale properties for $900 million in order to focus on its Marcellus Shale assets. Excluding the impact of the sale, production would have risen 50%.

For the first quarter, Range’s total price realization, on a preliminary basis (including the effects of hedges and derivative settlements) averaged $5.19 per Mcfe, down 14% year over year. The overall price comprised NGL at $46.20 per barrel, crude oil at $83.54 a barrel and natural gas at $4.01 per Mcf.

In February, Pennsylvania imposed stringent regulations and charges for natural gas drilling after drillers were blamed for the contamination of local water supplies. The new law entails a flat annual impact fee on shale gas producers. Hence, in the first quarter of 2012, Range Resources expects company-wide production taxes of $13.6 million in total. Additionally, the company will also witness a one-time expense of about $24 million in the upcoming quarter, based on the required payment for wells drilled last year and in the previous years.

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. The company remains well on track to reach its 2012 production growth target of 30% to 35%.

The company is seeking to ramp up the output of NGLs (such as ethane, propane and butane) and oil, which are better price takers than natural gas. In a low natural gas price environment, Range Resources’ record production, declining unit costs and the sale of non-core properties will be beneficial over time.

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

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