Range Resources Corp Earnings: Why the Miss?

On July 28, Range Resources Corporation (NYSE: RRC  ) reported earnings that came in 10% below Wall Street's expectations, but once again proved why this is a great way for long-term investors to cash in on one of the hottest energy megatrends in history.

Firing on all cylinders
For the second quarter Range Resources reported $0.36/share in net profits/share, $0.04/share lower than expectations. However, this still represents a 19% increase in net income over the same quarter last year, thanks to a 21% increase in production that resulted in a 14% increase in revenue. The company continues its long-term trend of lower costs, reporting an 11% decline in unit costs that helped net cash from operations soar 231%. During the quarter Range drilled 75 net wells at a cost of $318 million ($4.24 million/well) and achieved a 100% drilling success rate.


Source: Range Resources Aug 18 Investor Presentation

Why the earnings miss?
The reason for the earnings miss was that three events disrupted the company's ability to ship its gas, which hit a record of 1.105 billion cubic feet/day. 

This included downtime at two processing centers owned by MarkWest, one of which was planned maintenance. An unexpected disruption on Sunoco's Mariner West ethane pipeline also negatively affected the quarter's results. All told these three events resulted in $19 million reduction (7.6%) in cash flows.

Range Resources has learned from this unfortunate series of events and is diversifying its transportation agreements, acquiring an additional 400 million cubic feet per day of capacity on Energy Transfer Partners' Rover pipeline. The company also continues to diversify its client base by adding 17 new customers, two new ethane supply contracts, and two LNG supply agreements. 

Solid long-term guidance
Range Resources' guidance exemplifies the strong investment thesis for the company. Over the remaining six months of the year, Range Resources plans on drilling 129 wells that will increase production to 1.2 billion cubic feet/day in the third quarter (8.6% quarterly increase) and 1.35 billion cubic feet/day in Q4. That represents a 22% increase in just two quarters, and management remains confident in its target of 25% production growth for the full year.

The company's long-term guidance is nothing short of spectacular. According to Jeff Ventura, Range Resources' President and CEO, "We have confidence in our ability to grow our net production to 3 Bcfe per day, nearly three times where we are today. The wells have been identified, the compression and plants have been scheduled, and the takeaway capacity to multiple markets has been secured."


Source: Range Resources Aug 18 Investor Presentation

Strong balance sheet to fund growth
That kind of ambitious growth will require a lot of capital, with $1.52 billion in capital expenditures for 2014 alone. Fortunately the company has a combined $2 billion borrowing base, with $1.1 billion in remaining liquidity. Range's debt load is also highly manageable, with a debt/EBITDA ratio of of 2.4, down 14% from 2.8 in Q1. The company has no debt coming due until 2016.

Range Resources is one of the largest owners of shale gas acreage in America, with 1.86 million net acres.


Source: Range Resources Aug 18 Investor Presentation

Its acreage in the Marcellus shale has been the major driver of growth, especially in southern Appalachia where the average well costs $430,000 and yields a total of 1.5 billion cubic feet of gas over its lifetime. This results in an internal rate of return of over 100%.

Marcellus: King of shale formations


Source: EIA July Drilling Productivity Report

The Marcellus shale is Range Resources' main growth driver because it has increased production 15-fold in the last seven years and is projected to grow 33% by 2020 and nearly double production by 2035, to 28 billion cubic feet/day.

To put that in perspective -- the Marcellus, a single gas formation, if it was a country, is about to be the third largest gas producer in the world. 

Range Resources: decades of growth ahead
Range Resources has proven itself a master of growing production, growing reserves, and cutting costs. 

In 2009 the company had proven reserves of 3.1 trillion cubic feet of gas, with 24 trillion to 32 trillion cubic feet of potential reserves. By the end of 2013 those had grown to 8.2 trillion cubic feet of proven reserves and 65 trillion to 86 trillion cubic feet of potential reserves, 165% and 169% growth, respectively. This means that Range Resources has been able to grow its proven reserves by 28% annually for the last four years. 

Reserve growth that outpaces production is key to maintaining the company's red-hot performance over the long term, and so far Range Resources has proven itself a master. However, the best is likely yet to come: Of the 6,625 potential well locations Range owns in southern Pennsylvania (53% of its Marcellus acreage), thus far it has only drilled 581 wells. Thus, 91% of its most profitable potential well locations remain yet untapped. 

Foolish bottom line
Range Resources' latest quarter shows why this remains one of the best ways for long-term investors to cash in on the bounty of the Marcellus gas boom. Management continues to prove itself supremely confident at lowering costs and growing production and proven reserves, which could mean decades of market outperformance to come.  

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