Range Resources Corp. 's ( RRC ) second-quarter 2012 results were aided by a higher production level and lower unit costs, partly mitigated by lower realized prices.
The company posted adjusted earnings of 11 cents a share, comprehensively ahead of the Zacks Consensus Estimate of loss of 1 cent a share. However, results decreased by about 59% from the year-earlier profit of 27 cents a share.
Second quarter total revenue of $442.4 million comfortably surpassed our $321.0 million projection and grew almost 32% year over year. The annualized growth is attributable to nearly 42% production increment.
The company's second quarter production averaged 719.3 million cubic feet equivalent per day (MMcfe/d), comprising 80% natural gas, 14% natural gas liquids (NGLs) and 6% oil. Total production volume experienced a 41.6% improvement from the year-earlier period, mainly on the back of sustained accomplishments from the company's drilling program.
Oil production expanded 23.5%, NGL rose 20.3% and natural-gas production increased 47.8% on a year-over-year basis.
For the second quarter, Range's total price realization (including the effects of hedges and derivative settlements) averaged $4.74 per Mcfe, down 26% year over year. The overall price comprised NGL at $42.30 per barrel (down 18.0% year over year) and natural gas at $3.66 per Mcf (down 32.0%), however crude oil was sold at $84.31 a barrel (up 5.0%).
At the end of the quarter, long-term debt was $2,623.6 million, representing a debt-to-capitalization ratio of 52.1% (versus 49.9% in the preceding quarter).
For two consecutive quarters starting third 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. For the second quarter of 2012, the company has hedged 189,641 MMbtu/d of natural gas production at an average floor price of $5.32.
The company has also hedged 240,000 MMbtu/d of natural gas at an average price of $4.73 for 2013 and 285,000 MMbtu/d at an average floor price of $3.74 for 2014.
The company now expects its 2012 production growth to be 35%, with liquid production growth of 40% year over year for the fourth quarter.
For the upcoming quarter, Range Resources foresees total production of 773-778 MMcfe/d, comprising natural gas in the 618-620 MMcf/d range, NGL at 18,300−18,600 Bbls/d and oil at 7,600−7,800 Bbls/d.
Range Resources reaffirmed its capital budget guidance at $1.6 billion for the year, comprising $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 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 coupled with a 16% decrease in total cash costs per unit is reflected in its second 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 adversely affected its financial results, the company's solid hedge position has guarded its performances extensively. Looking ahead, the company has approximately 80% of the expected production hedged for the remainder of the year. 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, namely Marcellus, The Southern Appalachia Division, horizontal Mississippian, Cline Shale and Wolfberry plays.
It also added that in the second half of the year, oil and NGL production is expected to climb on the back of intense drilling activities in the liquids-rich portion of the Marcellus and the horizontal Mississippian oil play in Oklahoma.
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).