Range set a quarterly record for its oil and gas production. In addition, production has now increased sequentially for 15 consecutive quarters. Third quarter production increased 19% to 289 Mmcfe per day. Natural gas production jumped 25% to 219 Mmcf per day, while oil and natural gas liquids production rose 3% to 11,744 barrels per day. On an equivalent basis, natural gas represented 76% of the total production.
Commenting on the results, John Pinkerton, Range's President and CEO, said, "Third quarter results reflect the consistent execution of our strategy. Production reached a record high, extending our string to 15 consecutive quarters of growth. Steady production growth coupled with our low cost structure continues to drive increasing operating cash flow, strong per unit margins and healthy earnings. Looking ahead, we are well on our way to achieving our 15% production growth target for 2006 and have set the same 15% target for 2007. Our confidence is driven by our large inventory of over 8,000 drilling projects, a superb technical team and stability of future cash flow from hedges that cover nearly 70% of 2007 and 2008 gas production at an average floor price of $8.50 per mcf. With the combination of this strong foundation and our emerging plays, which have the potential to more than triple our proved reserves, we are in an excellent position to continue to build per share value."
Wellhead prices, after adjustment for hedging, averaged $6.49 per mcfe, a 3% increase. The average realized gas price decreased 2% to $6.19 per mcf, as the average realized oil price increased 10% to $46.10 a barrel. While higher production, realized prices and hedging gains caused revenues to jump 61%, expenses rose only 21%. Operating expenses per mcfe, excluding the effect of non-cash stock expenses under FASB 123R discussed below, increased $0.18 over the prior year and rose $0.08 versus the second quarter. The increase was due to higher field service costs ($0.05), higher insurance premiums ($0.04), higher field personnel expense ($0.03) and costs associated with integrating the Stroud properties. Production taxes per mcfe were the same ($0.38) as the prior-year.
General and administrative expenses per mcfe, excluding the non-cash stock FASB 123R expense, were held level ($0.31) with the prior year and were $0.04 per mcfe lower than the second quarter. Interest expense increased $0.19 per mcfe over the prior year as a result of the debt assumed in the Stroud acquisition coupled with rising interest rates and a greater proportion of fixed rate debt. Depletion, depreciation and amortization per mcfe increased $0.27 over the prior year to $1.74 per mcfe due to a $0.09 one-time charge to fully impair an offshore property and the higher depletion rate associated with the Stroud properties.
Beginning January 1, 2006, all non-cash expense associated with expensing stock options and SARs per FASB 123R was included in a single line item in the income statement titled "non-cash stock compensation expense." Beginning with the third quarter of 2006, pursuant to recent accounting interpretations, non-cash expense associated with FASB 123R is recorded in multiple line items including direct operating expense ($378,000), exploration expense ($757,000), G&A expense ($3.9 million) and an $86,000 reduction of transportation and gathering revenue. The separate line item entitled "non-cash stock compensation expense" now represents the change in value of Range stock held in the Company's deferred compensation plan. The cumulative effect of these reclassifications are reflected in nine month results.
Income from discontinued operations was a $14.1 million loss. Because GAAP accounting requires that assets held for resale be revalued each quarter based upon commodity prices in effect at quarter-end, a $30.4 million non-cash impairment was recorded in the third quarter reflecting the drop in commodity prices. To the extent that commodity prices fluctuate, positive or negative adjustments will likely be recorded in the future regarding the assets held for resale. Net cash flow from the properties held for resale was $8.0 million during the quarter. Since this cash flow is associated with discontinued operations, it has been excluded from the cash flow from operations amounts reported herein.
Third quarter development and exploration expenditures totaled $180 million, funding the drilling of 281 (194 net) wells and 17 (12 net) recompletions. A 98% success rate was achieved with 277 (190.9 net) wells productive. By quarter end, 188 (118.2 net) of the wells had been placed on production, with the remainder in various stages of completion or waiting on pipeline connection. For the nine months, capital expenditures (excluding acquisitions) totaled $437 million, funding the drilling of 760 (540 net) wells and 59 (47 net) recompletions. The full-year capital expenditures are estimated to total $588 million.
Drilling activity in the third quarter remains high with 37 rigs currently running. During the third quarter, Range continued to expand several of its key drilling areas and emerging plays. In our tight gas sand plays, the Company plans to drill 439 wells, of which 357 had been drilled by September 30. The Company achieved a 99% success rate in this portion of its operations, which is low-cost, low-risk and highly repeatable. Approximately 3,300 tight gas sand wells remain in inventory. In our coal bed methane projects, which now cover approximately 400,000 acres, production has reached about 25 Mmcfe per day. In the first nine months, 188 CBM wells were drilled, with approximately 2,700 locations remaining in inventory. Three wells of a 20-well program to test 30-acre downspace drilling in the Nora field of Virginia have been drilled. The remaining 17 locations are expected to be drilled before year-end. If the downspace drilling is successful, the number of undrilled CBM locations could essentially double.
Our shale gas plays now cover in excess of 400,000 acres. In the Fort Worth Basin Barnett Shale play, the Company plans 40 wells in the second half of the year. Since announcing the Stroud acquisition in early May, Barnett production has increased from approximately 16 Mmcfe per day to more than 30 Mmcfe per day currently. In the Devonian Shale play of Pennsylvania, the Company has drilled 14 wells, with several wells yet to be completed to the shale. Six of the vertical wells and one horizontal well are currently on production and reserves appear to be in the range of 600 to 1,000 Mmcf per well. Plans are to have 10 vertical wells and three horizontal wells fraced and on production by year-end.
Production also continues to climb from our field rejuvenation projects. At the West Fuhrman-Mascho field in West Texas we continue to test five-acre infills. To date, six wells have been drilled on five-acre spacing with production rates comparable to the 10-acre wells. If successful, the downspacing program has the potential to double the recovery from this field. At our Eunice field in New Mexico, production has tripled since the June 2005 acquisition to 21 Mmcfe per day. At our Tonkawa project in northern Oklahoma, 58 wells have been drilled to date with encouraging results. Production has risen from essentially zero to 1,000 barrels of oil per day currently. More than 400 drilling locations have been identified on our acreage. Success also continues in our stacked-pay areas that now cover more than 200,000 net acres.
Finally, progress continues with several key exploratory projects. Our 22,000 foot Norphlet test in Mississippi (25% working interest) is expected to reach total depth in December. If successful, full project development could add as much as 150 Mmcfe per day net to Range. Drilling has been completed on our 12,000 foot Trenton Black River well (50% working interest) in western Pennsylvania. Production casing has been set and testing will begin in the fourth quarter. In the Anadarko basin of western Oklahoma, a deep exploratory well (16% working interest) has been completed to the Springer formation and is expected to be online in November. Another deep Springer well (70% working interest) recently reached total depth of 20,000 feet and completion will commence shortly. Two other deep Springer wells are currently drilling. All of these wells represent high-potential opportunities.
The Company will host a conference call on Thursday, October 26 at 1:00 p.m. ET to review these results. To participate in the call, please dial 877-407-8035 and ask for the Range Resources third quarter financial results conference call. A replay of the call will be available through November 2 at 877-660-6853. The account number is 286 and the conference ID is 217879.
A simultaneous webcast of the call may be accessed over the Internet at www.rangeresources.com or www.vcall.com. To listen, please go to either website in time to register and install any necessary software. The webcast will be archived for replay on the Company's website for 15 days.
Non-GAAP Financial Measures:
Earnings for third quarter 2006 include ineffective hedging gains and gains related to mark-to-market on derivatives of $55.1 million and a non-cash stock compensation expense of $2.5 million. Excluding such items, income before income taxes would have been $52.3 million, a 13% decrease from the prior year. Adjusting for the after-tax effect of these items, the Company's earnings would have been $32.2 million or $0.24 per share ($0.23 fully diluted). If similar items were excluded, 2005 earnings would have been $37.8 million or $0.30 per share ($0.29 per diluted share). In 2005, results were impacted by a net $671,000 ineffective hedging loss on commodities and interest and $20.4 million of non-cash stock compensation expense. (See reconciliation of non-GAAP earnings in the accompanying table.) The Company believes results excluding these items are more comparable to estimates provided by security analysts and, therefore, are useful in evaluating operational trends of the Company and its performance relative to other oil and gas producing companies.
Cash flow from operations before changes in working capital as defined in this release represents net cash provided by operations before changes in working capital and exploration expense adjusted for certain non-cash stock compensation items. Cash flow from operations before changes in working capital is widely accepted by the investment community as a financial indicator of an oil and gas company's ability to generate cash to internally fund exploration and development activities and to service debt. Cash flow from operations before changes in working capital is also useful because it is widely used by professional research analysts in valuing, comparing, rating and providing investment recommendations of companies in the oil and gas exploration and production industry. In turn, many investors use this published research in making investment decisions. Cash flow from operations before changes in working capital is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operations, investing, or financing activities as an indicator of cash flows, or as a measure of liquidity. A table is included which reconciles net cash provided by operations to cash flow from operations before changes in working capital as used in this release. On its website, the Company provides additional comparative information on prior periods.
Range Resources Corp. is an independent oil and gas company operating in the Southwestern, Appalachian and Gulf Coast regions of the United States.
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