Range Resources Corp.’s third-quarter 2012 earnings were driven by a record production level and lower unit costs. The company posted adjusted earnings of 20 cents a share versus the Zacks Consensus Estimate of break-even.
However, results decreased by about 28.6% from the year-earlier profit of 28 cents a share on the heels of lower realized prices.
Third quarter total revenue of $294.9 million failed to meet our $352.0 million projection and decreased 20.4% year over year as well.
The company’s third quarter production averaged 790.1 million cubic feet equivalent per day (MMcfe/d), comprising 79% natural gas, 15% natural gas liquids (NGLs) and 6% oil. Total production volume experienced a 47% improvement from the year-earlier period, mainly on the back of sustained accomplishments from the company’s drilling programs in the Marcellus and horizontal Mississippian oil plays.
Oil production expanded 36.4%, NGL rose 29.9% and natural gas production increased 51.8% on a year-over-year basis.
For the third quarter, Range’s total price realization (including the effects of hedges and derivative settlements) averaged $4.17 per Mcfe, down 27.5% year over year. The overall price comprised NGL at $37.23 per barrel (down 24.5% year over year) and natural gas at $3.03 per Mcf (down approximately 33.0%), however crude oil was sold at $84.86 a barrel (up 3.8%).
At the end of the quarter, long-term debt was $2,849.9 million, representing a debt-to-capitalization ratio of 55.5% (versus 52.1% in the preceding quarter).
For the fourth quarter 2012, Range has hedged 279,641 million British thermal units per day (MMbtu/d) of natural gas production at an average floor price of $4.76.
The company has also hedged 280,000 MMbtu/d of natural gas at an average price of $4.59 for 2013 and 385,000 MMbtu/d at an average floor price of $3.80 for 2014.
The company now expects its 2012 production growth to be 35%. It also expects its liquid production growth in the range of 33% to 36% year over year for the fourth quarter. Earlier, the company had expected its liquid growth at 40%. This tempered outlook mainly reflects the asset sale as well as lower production in areas of the wet and super-rich Marcellus due to bottlenecks and equipment limitations in the gathering systems.
Range Resources reaffirmed its capital budget guidance at $1.6 billion for the year. Approximately 75% of the budget is intended to be apportioned toward liquids-rich and oil projects mainly in the Marcellus Shale and horizontal Mississippian plays.
We maintain our long-term Neutral recommendation for Range Resources Corporation.
The company’s record production combined with a 12% decrease in total cash costs per unit is reflected in its third quarter performance. Additionally, the asset sale, which took place in April last year, when Range sold all of its 52,000 acre Barnett Shale properties for $900 million in order to focus on its Marcellus Shale assets, also benefited the quarter.
Although low natural gas prices have adversely affected its financial results, the company’s solid hedge position has guarded its performance extensively. Looking ahead, the company has approximately 85% of the expected production hedged for the fourth quarter. We believe that Range Resources’ large acreage holdings will support several years of oil and gas drilling in the fast-growing fields.
We also believe that with a robust asset base, Range Resources remains on track to reach its projected production level for this year. The company made significant operational progress in the quarter in all of its liquids-rich and oil ventures, particularly in two wells – one in the super-rich Marcellus and the other in the Horizontal Mississippian oil play – producing over 1,000 barrels of liquids per day each.
Meanwhile, the company plans to act as the anchor shipper for the next 15 years on the Mariner East Project − which aims to ship NGL resources to a Philadelphia-area terminal for U.S. and international users.
Mariner East is a pipeline venture between Sunoco Logistics Partners L.P. (SXL - Analyst Report) − which is the owner of the line − and MarkWest Energy Partners, L.P. (MWE - Analyst Report). Range Resources is one of the major producers in the Marcellus Shale in Pennsylvania and West Virginia and it commits to provide 40,000 barrels a day to the pipeline comprising 20,000 barrels of ethane and 20,000 barrels of propane.
Given its dominant position in the Marcellus Shale play and its continuous endeavor to control costs, we believe that Range Resources will be capable of organizational sustainability and long-term shareholder value creation.
However, we remain on the sidelines as the company is still exposed to volatile natural gas fundamentals, interest rate risks and an uncertain macro backdrop. Additionally, Range Resources is governed by several stringent regulations, especially in the Marcellus Shale, the Appalachian Basin and the southwestern U.S., where it has robust asset bases.
Hence, we maintain our long-term Neutral recommendation for the company, which retains a Zacks #3 Rank (short-term Hold rating).