Energy Prospectus

Range Announces Second Quarter 2020 Financial Results & North Louisiana Asset Sale

On August 3rd RANGE RESOURCES CORPORATION (NYSE: RRC) announced its second quarter 2020 financial results.

Second Quarter Highlights

GAAP revenues for second quarter 2020 totaled $377 million,
GAAP net cash provided from operating activities (including changes in working capital) was $79 million
GAAP earnings was a loss of $147 million ($0.61 per diluted share).

Non-GAAP revenues for second quarter 2020 totaled $502 million < Compares to my forecast of $475.9 million (including cash settlements on hedges)
Cash flow from operations before changes in working capital, a non-GAAP measure, was $81 million. < Compares to my forecast of $55.7 million
Adjusted earnings comparable to analysts’ estimates, a non-GAAP measure, was a loss of $25 million ($0.10 per diluted share) in second quarter 2020. < Compares to my forecast that Range would generate a loss of $42.3 million ($0.17 per share).

Well costs averaged less than $600 per lateral foot, including facility costs, the lowest in Appalachia
Transportation, gathering, processing and compression expense improved $0.15 per mcfe, or 10% versus prior year
Direct operating expense improved $0.05 per mcfe, or 31% versus prior year
G&A expense (before certain items) improved $0.05 per mcfe, or 28% versus prior year
Production taxes improved $0.02 per mcfe, or 40% versus prior year
Interest expense improved $0.02 per mcfe, or 8% versus prior year
DD&A expense improved $0.19 per mcfe, or 28% versus prior year
Total cash unit costs improved $0.29 per mcfe, or 14% versus prior year
Production averaged 2,349 Mmcfe per day, approximately 71% natural gas < Compares to my forecast of 2,279,400 mcfe per day in Q2.
Repurchased approximately $47 million of outstanding notes principal at an average 20% discount to par

In July, signed purchase and sale agreement to divest North Louisiana assets for gross proceeds of $245 million, plus an additional $90 million contingent on future commodity prices

Commenting on the quarter, Jeff Ventura, the Companys CEO said, Range continued to make steady progress in the second quarter - significantly improving our cost structure, operating safely, and methodically developing our core asset with peer-leading well costs and capital efficiency. After the sale of our North Louisiana assets, Ranges cost structure and capital productivity will take another meaningful step forward, driven by material improvements in our cash unit costs and a base decline solidly under 20%. Our shallow base decline and peer leading well costs provide Range a sustaining capital requirement per mcfe that we believe is the lowest amongst peers, providing us a solid foundation for generating corporate returns. In 2020, we expect Range to reduce total debt outstanding for the third consecutive year in a row, reflecting our commitment to disciplined capital allocation and a strong balance sheet. Range remains well-positioned to successfully navigate the current commodity environment and benefit from an improved outlook for natural gas and natural gas liquids, particularly given Ranges industry-leading inventory of core natural gas and liquids wells.

With gas prices firming up, 2H 2020 is going to be a lot better.

North Louisiana Asset Sale

Subsequent to June 30, Range signed a purchase and sale agreement to divest the Company’s North Louisiana assets for gross proceeds of $245 million, with the potential for $90 million in additional proceeds contingent on future commodity prices. At the time of the sale, the assets were producing approximately 160 Mmcfe per day, and Range did not have any drilling and completion activity planned for the assets this year. Per the agreement, Range will retain certain commitments through their remaining term. Range intends to use $28.5 million of the sale proceeds to reduce a portion of the retained commitments. The transaction is expected to close in August with an effective date of February 1, 2020.

Capital Expenditures

Second quarter 2020 drilling and completion expenditures were $99 million. In addition, during the quarter, a combined $5 million was spent on acreage and gathering systems. Total year-to-date expenditures were $235 million at the end of the second quarter. Well costs, including all facilities, averaged less than $600 per foot in the second quarter, the lowest normalized well costs in Appalachia. Range remains on track to spend at or below its total capital budget of $430 million for 2020.

Financial Position and Buyback Activity

At the end of the second quarter, Range had $639 million drawn on its revolver and over $1.4 billion of additional borrowing capacity under the commitment amount. Range expects its $3.0 billion borrowing base to be unchanged following the sale of its North Louisiana assets. Following the planned closing on the Company’s North Louisiana asset sale in August, Range’s liquidity is expected to exceed $1.6 billion.

Range repurchased and retired approximately $47 million in principal amount of its senior and subordinated notes during the second quarter at a weighted average discount to par of 20%. Range also repurchased 200,000 shares of the Company’s common stock during the second quarter at an average price of $2.22 per share. In total, Range has repurchased $360 million in debt principal at a discount and ten million shares since second half 2019.

U.S. Natural Gas Market:
"Domestic U.S. natural gas production declined significantly during the quarter, led by associated gas shut-ins and legacy basin declines in response to the price of both oil and natural gas. Range expects recently announced activity reductions for the industry to weigh on second half 2020 production levels, more than offsetting the return of shut-in production, while LNG export demand recovers from current levels. Evidenced by one of the lightest 2021 hedge positions among natural gas producers, Range anticipates that a sustained move higher in the forward curve for natural gas is needed to incentivize activity from dry gas producing basins to avoid extremely low storage levels next year."

"Range experienced healthy NGL demand during the second quarter as a result of its strong and diverse customer base as well as a flexible transportation portfolio that allows access to multiple domestic and international markets. The Company increased its access to waterborne exports via Mariner East and Marcus Hook during the second quarter, where LPG export premiums at Marcus Hook have remained stable at a few cents per gallon above Mont Belvieu index. Range expects NGL and condensate fundamentals to continue strengthening during the second half of 2020, as a lack of U.S. drilling and completions activity is expected to result in declining supply while demand continues to recover. Range’s liquids-weighted activity during the balance of 2020 is set to take advantage of this improving macro environment for both condensate and NGL pricing."

I have updated my forecast/valuation model for RRC based on their Q2 actual results and detailed guidance. It will be posted to the EPG website this afternoon.
The company is in much better shape today than it was a few months ago.
North Louisiana asset sale will shore up the balance by the end of August.
The NYMEX Strip for natural gas is now above $2.50/mcf, which is what I am using in all of my forecast models for Henry Hub gas prices + ~74% of Range's Q3 gas is hedged at $2.58.

RRC is trading at $7.45 this morning. I'm raising my valuation by $2.80 to $9.80. If the NYMEX Strip is a preview of what actually happens to gas prices next year, RRC should easily top $12.00.

First Call's price target of $6.28 is based on all of the forecasts submitted to Reuters. There are 23 forecast in the average and all of them appear to be based on much lower gas prices than we have on the Strip today.