Range's Profits Beat Expectations; Record High for 3Q Production
Range Resources Corporation has announced third quarter financial and operating results. Natural gas and oil production averaged 437 Mmcfe per day, representing a record high for Range and a 13% increase over third quarter 2008. This represents Range's 27th consecutive quarter of sequential production growth and was achieved despite losing 15 Mmcfe per day of production due to asset sales, which closed on June 30, 2009.
While production increased 13%, realized prices fell 30% compared to the same period in 2008. Range's average realized price (including all derivative settlements) for oil and gas was $6.35 per mcfe in third quarter 2009, compared to $9.02 per mcfe in the third quarter of 2008.
This compares to average price realizations of $6.18 per mcfe for second quarter 2009. As a result, oil and gas sales (including cash-settled derivatives a non-GAAP measure reconciled in the attached tables), totaled $255 million, a 21% decrease compared to third quarter 2008. For the quarter, Range reported, for GAAP purposes, a loss of $29.8 million, which included a non-cash mark-to-market hedging loss of $53 million. Diluted GAAP earnings (loss) per share was $(0.19) per share compared to $1.81 per share in third quarter 2008.
Adjusting for certain non-cash items, net income comparable to analysts’ estimates would have been $41 million compared to $82.8 million in third quarter 2008 with the most significant difference being realized gas prices between the two periods. Diluted earnings per share using net income comparable to analysts' estimates would have been $0.26 in third quarter of 2009 and $0.53 in third quarter 2008. Cash flow from operations before changes in working capital declined 25% from the same period in 2008 to $171 million. Adjusted earnings and cash flow both exceeded the average analysts' estimates.
Commenting on the announcement, John H. Pinkerton, Range's Chairman and CEO, said, "While our financial results suffered from lower commodity prices, our operating results were the best in our Company's history. Despite losing 15 Mmcfe per day at the close of the second quarter due to asset sales, we were able to more than overcome the loss and post our 27th consecutive quarter of sequential production growth in the third quarter. The production increase was driven by the terrific results of our drilling program, as we have not made a producing property acquisition in nearly two years. The impact of selling higher cost properties, combined with lower service costs and increasing production in our core areas with low operating costs helped us drive down operating costs by 25% per mcfe. All of this was accomplished while maintaining a capital spending program that was less than cash flow, allowing us to protect and strengthen our financial position. The third quarter results are an exciting reflection of the progress we have made in high grading our drilling inventory and the continued focus on our low-cost structure. Our key projects, and in particular the Marcellus Shale play, are having a profound impact on Range Resources. As a result, we are extremely well-positioned to continue to provide low-cost, per-share growth for our shareholders, even in this period of low natural gas prices."
Direct operating expenses for the quarter were $0.75 per mcfe, a 25% decrease compared to $1.00 in the third quarter of 2008 and a 13% decrease compared to $0.86 in the second quarter of 2009. Production taxes were $0.19 per mcfe, a 56% decline versus third quarter 2008 due to lower commodity prices and level with the $0.19 per mcfe of taxes in second quarter 2009. Exploration expense in the third quarter totaled $10 million, down 44% from $18 million in the same period of 2008 due primarily to lower seismic expenses. General and administrative expenses were $0.57 per mcfe, an increase of $0.03 per mcfe from the prior-year quarter and $0.06 per mcfe higher than second quarter 2009. The increase was due primarily to one-time charges associated with closing our Houston office and an allowance for bad debt. Interest expense rose to $31 million compared to $25 million in third quarter 2008, primarily due to the replacement of short-term floating rate bank debt with long-term fixed rate subordinated notes in the second quarter of 2009. Depreciation, depletion and amortization averaged $2.42 per mcfe, versus $2.15 per mcfe in the third quarter of 2008 as of result of the changing mix of production for the various cost centers. Third quarter lease abandonment and impairment expense was $24 million compared to $5 million in the third quarter of 2008 as Range elected not to renew certain leases, including those outside the core of our North Texas Barnett Shale play and certain shallow, tight gas sand leases in Appalachia.
Third quarter development expenditures of $143 million funded the drilling of 128 (76.9 net) wells and no recompletions. A 100% success rate was achieved. For the first nine months of 2009, 297 (186.5 net) wells have been successfully drilled and are now on production, while 76 (50.0 net) wells are currently in various stages of completion or waiting on pipeline connection. Third quarter cash capital expenditures totaled $167 million. Third quarter cash flow of $171 million was sufficient to fund all of the cash capital expenditures for the quarter. For the year, cash flow and the proceeds from already completed asset sales are expected to fully fund capital expenditures. For the fourth quarter of 2009, Range has approximately two-thirds of its gas production hedged at an average floor price of $7.79 and an average cap price of $8.53. Range has hedged 53% of its first half 2010 gas production at a $5.50 floor and a $7.45 cap and 42% of its second half 2010 gas production at a $5.59 floor and a $7.50 cap.
Range is currently running 15 rigs versus 23 rigs at this time last year. During the third quarter, the Marcellus Shale division continued to make excellent progress. The Marcellus Division is continuing to delineate and de-risk its large land position. We now have two rigs in northeast Pennsylvania in Lycoming County drilling two horizontal wells offsetting our high-rate vertical wells. We expect initial results from these two wells by early next year. We also plan to drill a Utica Shale horizontal and an upper Devonian horizontal before year-end. Results of these two wells should be available by early first quarter 2010.
Marcellus Shale production is on plan and now exceeds 80 Mmcfe per day net and is expected to approach the higher end of the previously increased target of 90 - 100 Mmcfe per day net by year-end 2009. From inception, Range has drilled 77 horizontal Marcellus Shale wells, of which 60 have been completed and 54 are on production. The Company expects to drill and case approximately 20 additional horizontal wells in the Marcellus Shale play during the fourth quarter 2009 and carry over approximately 20 for completion in 2010. The Marcellus division is currently running a total of five horizontal rigs. We anticipate entering 2010 with six custom-built horizontal rigs.
The build-out of the Marcellus midstream infrastructure in southwest Pennsylvania is progressing as scheduled. By December 2009 or January 2010, gross cryogenic processing capacity is expected to increase to 155 Mmcf per day. An additional 30 Mmcf per day of processing capacity is expected to be added in mid-2010 and another 150 Mmcf per day has been ordered for start-up in mid-2011, increasing gross cryogenic processing capacity to more than 300 Mmcf per day. The current 65 Mmcf per day refrigeration processing is expected to be suspended during 2010 as the new cryogenic processing is brought on.
The Southwest division also delivered strong drilling results in the quarter. Production in the Barnett averaged 123 Mmcfe net per day during the third quarter and is currently producing approximately 130 Mmcfe net per day. The highlight of the quarter has been the completion of eight wells in southern Tarrant County for a combined production rate of 32 (20.4 net) Mmcfe per day. Also in Hood County, Range's Barnett team completed four wells for a combined rate of 8 (6.0 net) Mmcfe per day.
During the third quarter 2009, Range's Appalachian division continued to focus on its key coal bed methane, shale and tight gas sand drilling projects in the Nora area of Virginia. During the quarter, Range drilled five horizontal Huron Shale wells, two horizontal Big Lime wells and one horizontal Berea well. Year-to-date, 15 horizontal wells have been completed in these three target zones, of which 10 are currently online and producing on par with expectations. In addition, during the third quarter of 2009, 71 coal bed methane and 20 vertical tight gas sand wells were drilled in the Nora field.
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