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Range Natural Gas Volumes Exceed 2Q Forecast

Jet-propelled by organic drilling, Range Resources Corp.'s natural gas-weighted production blasted 42% higher in the second quarter from a year ago and was 10% more than in the first quarter, the independent said last week. Gas production, which makes up 80% of total output, rocketed 48% higher.

The onshore operator, which now concentrates its exploration and development in the Marcellus Shale, the Midcontinent and along the Gulf Coast, said total production volumes averaged 719.3 MMcfe/d in 2Q2012, exceeding original forecasts.

"The 42% increase in production reflects excellent performance by our operating, midstream and marketing teams," said CEO Jeff Ventura. "As a result, we are well on track to achieve our 2012 production growth target of 30-35%...Our focus on reducing unit costs continues to bear fruit, and capital expenditures are within our original budget."

Gas volumes totaled 574.7 MMcf/d in 2Q2012, which was about 1% more, or 6.7 MMcf/d, than the company had forecast.

Close to 14% of total output in the latest quarter was composed of natural gas liquids (NGL); quarterly production of 17,259 b/d was 20% higher than a year earlier but 7% (1,241 b/d) below company guidance. Crude oil output, which comprised 6% of total volumes, jumped 23% year/year to 6,846 b/d and was 14% (846 b/d) above guidance.

"Oil and NGL volumes varied from the amounts anticipated for the quarter due to the timing of when certain wells were brought on production," the company said. In the second half of this year oil and liquids output likely will "rise at an increasing rate" because of a "heavy emphasis on planned drilling in the liquids-rich portion of the Marcellus," as well as Range's leasehold in the emerging Mississippian Lime formation.

Preliminary commodity price realizations, including hedges, averaged $4.74/Mcfe in 2Q2012, compared with $6.43/Mcfe in 1Q2012. Average natural gas realized prices were $3.66/Mcf; NGL prices averaged $42.30/bbl and oil averaged $84.31.

At the end of June, Range had about 80% of its expected 2012 gas production hedged at a weighted average floor of $4.18/Mcf. About the same amount of projected crude oil output was committed at $91.19 and composite NGL production was hedged "at or above current market prices," Range said.

The Fort Worth, TX-based company said in the "past several months the light end of the NGL barrel, propane (C3) and ethane (C2) have experienced a weakness in prices. Propane prices are soft due to mild winter demand for a product [that] is primarily used as a consumer heating fuel.

"Ethane demand and prices have been weak due in part to crackers being down for maintenance and expansion projected to handle an additional 150,000 b/d of future ethane capacity at the same time that supplies have increased. Weakness in these two products has caused a weakening in the correlation of NGL prices to West Texas Intermediate (WTI)."

Range said because of the weakness, the hedges it has using natural gasoline (C5) as a proxy, which "largely tracks the movement in WTI, while still strongly in-the-money, have become less effective in our view as a hedge for the entire NGL barrel." To "more effectively hedge" the NGL output, the company now is using C5 and propane (C3) as proxy hedges for heavy and light NGL barrels "to better correlate the market relationship between our hedges and our production. We believe this approach has allowed us to help stabilize our NGL prices without the additional cost of hedging each NGL barrel component."

Range's numbers indicate that its liquids growth is "at risk" because the segment grew "only fractionally" from the first three months of this year, said Canaccord Genuity analysts John Gerdes and Ryan Oatman. The analysts now expect Range's 2012 liquids growth to be 35%, "down from our prior 43% expectation and below guidance of 40%."

Wells Fargo Securities energy analysts viewed the production numbers as a "slight negative." However, Range has an "impressive inventory in the Marcellus Shale, one of the preeminent emerging shale plays in the Lower 48. Combined with its portfolio elsewhere, this lowers reinvestment risk for shareholders. Despite this, we believe a capital overhang will result in [Range] giving back some of its premium valuation."

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