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Range Resources Marcellus Output May Double in 2010

It may work well for other independents to set up joint venture (JV) agreements to help defray the costs of drilling natural gas prospects, but don't look for Range Resources Corp. to take that step anytime soon, CEO John Pinkerton said last week.

Pinkerton told financial analysts during a quarterly earnings conference call that he'd prefer that his company keep all of its resources for Range shareholders. He noted that the Fort Worth, TX-based independent didn't complete a single producing property acquisition in 2009.

"We...considered but did not pursue a joint venture of our Marcellus Shale acreage," Pinkerton said of the company's operations in 2009. "While shale play joint ventures seem to be the current rage, we view them simply as asset sales. Given that we believe the Marcellus has some of the best, if not the best, economics in the E&P [exploration and production] business today, we are a buyer, not a seller, of the Marcellus."

Range's strategy "has been to sell our higher-cost, lower-growth, more mature properties and recycle the proceeds into our lower-cost, high-return projects like the Marcellus [and the] Barnett" shales, he said. "While not completely ruling out Range doing a Marcellus JV, if we did want to do one, they'd have to be at a substantially higher price than any previous deals, including the recently announced Anadarko-Mitsui joint venture."

In that transaction, an affiliate of Mitsui & Co. Ltd. agreed to pay $1.4 billion to acquire a 32.5% stake in Anadarko Petroleum Corp.'s 300,000-acre-plus leasehold in the Marcellus (see NGI, Feb. 22).

"At the end of the day, I think it's our job to keep all Marcellus resource potential for Range's shareholders," said Pinkerton. "In addition to diluting our NAV [net asset value] and resource potential for share, JVs also dilute our technical teams. At Range we own roughly 100% working interest in nearly all of our Marcellus acreage and have an average royalty of roughly 15%. So when our technical teams go out and drill a Marcellus well we gain 85% of the production reserves and cash flow. By buying into a JV our technical teams would have to drill significantly more wells to achieve the same net result."

Range spent 52% of its 2009 capital budget in the Marcellus play, but the strong well results led management to decide to divert around 75% of this year's $950 million capital expenditures in the Appalachian Basin play. Most of the funds are to be directed toward ongoing development in Pennsylvania. The remaining budget is to be spent mostly in Range's Barnett Shale operations in Texas and in the promising Nora Field in Virginia.

"This time last year, our plan was to exit 2009 with net production from the Marcellus Shale from 80-100 MMcf/d," said Jeff Ventura, who runs operations for Range. "We hit the high end of our guidance. Today we're producing about 115 MMcf/d net. We currently have 31 horizontal wells that have been drilled and are not yet on line. Six of these wells have been completed and are waiting on hook-up. The remainder are waiting on completion. All of the wells will be completed within the next 90 days.

"Our plan is to exit 2010 at a net rate of 180-200 MMcf/d from the Marcellus Shale and to exit 2011 at a net rate of 360-400 MMcf/d. Given our large acreage position and our net resource potential of 18-25 Tcfe, I believe we can surpass 1 Bcfe/d and grow toward 2 Bcfe/d in the future."

Range's year-end proved reserves in the Marcellus Shale were 3.1 Tcfe, and "we believe that our current leasehold position of 2.5 million net acres contains 22-30 Tcfe of resource potential," said Pinkerton. Based on Range's results to date, "at least in our view, there's probably a pretty good chance that the Marcellus by the end of this year will be the most active gas play in the world."

Increasing development in the Marcellus may put pressure on other producers to find oilfield services and rigs for the play, but "we've got great relationships with the vendors," he said. "We've been up there for a long time...most of the vendors know that we own 900,000 net acres in the fairway. Another several 100,000 is outside the fairway that has a chance of being good...

"We now have roughly 175 people in Pittsburgh. Two years ago, we had one. So we've really ramped up the team...And that's what gives us the confidence that we can go from roughly 40 wells drilling, completed, in 2009 to 150 for 2010. That's a huge ramp-up..." Once Range gets to 2012, the company projects that it will be operating on positive cash flow, and "then, you know, at that time, it's going to be Katy bar the door."

The impact of lower natural gas prices and writedowns in the value of its properties led to quarterly and year-end losses for Range. Adjusting for one-time items, Range experienced a net loss in 4Q2009 of $16.8 million (minus 11 cents/share) on revenues of $246.8 million versus net income of $93.6 million (60 cents) on revenues of $344.9 million in the year-ago period. For the year Range lost $53.9 million net (minus 35 cents/share), compared with net earnings of $351 million ($2.25) in 2008.

Last year Range's gas-weighted output increased 13%, and proved reserves rose 18% with an all-in reserve replacement of 486% year/year. Production for the year totaled 159 Bcfe, comprised of 131 Bcf of gas and 4.7 million bbl of oil and liquids. Wellhead prices, after adjustment for all cash-settled hedges and derivatives, decreased 25% to average $6.44/Mcfe.

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