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Range Drops Rigs but Still Reports Record Output

Range Resources Inc., which has 90% of this year's capital spending riding on three onshore natural gas projects, Wednesday reported record natural gas and oil output and stronger-than-expected net income for the first three months of 2009.

Output for the Fort Worth, TX-based independent was 416 MMcfe/d, which was 12% higher year/year and the 25th consecutive quarter of growth.

Lifted by hedging gains, net income in 1Q2009 rose to $32.6 million (21 cents/share) versus earnings of $1.7 million (1 cent) in the same period a year ago. Range in 1Q2008 took a $135 million noncash charge against earnings related to hedging. Lower commodity prices pressured revenue in 1Q2009, which fell to $203 million from $307 million a year ago.

"While our financial results reflect the decline in oil and gas prices, our operating results were strong, reflecting excellent first quarter drilling results," CEO John Pinkerton told energy analysts during a conference call.

Three U.S. onshore gas plays are getting the bulk of Range's capital spending, with the biggest by far in the Marcellus Shale. Range holds an estimated 900,000 net acres in the play. By the end of the year, output is expected to be 80-100 MMcf/d. By the end of 2010, Range hopes to double that number.

"We have so few rigs running there, but it's the quality of the rigs," said COO Jeffrey Ventura. "We have three rigs there now, and we'll exit the year with six...We're working on plans for 2010, and the early estimate is to double the 2009 exit rate."

The Marcellus play offers "excellent economics," with 3-4 Bcfe per well at a cost to complete of around $3-4 million, said Ventura. "Assuming a $7/Mcf gas price, our rate of return is 75%. At $5 gas, the rate of return is 46%. Assuming the same reserves, Nymex [New York Mercantile Exchange] could drop below $3 and these wells would still have a 20% rate of return."

Across its U.S. portfolio, Range is running 15 drilling rigs, compared with 33 at this time last year. However, Pinkerton said fewer rigs worked to the company's advantage in the first months of this year.

"We expended the majority of our leasehold budget in the first quarter to tie up key leases on attractive terms, especially as it relates to the Marcellus Shale play," Pinkerton said. Now that it has more acreage in key resource areas, the sky's the limit, he said.

Most of the talk is centered on the Marcellus Shale, but the company also has had exceptional initial production (IP) rates from wells in the Barnett leasehold and in the Nora Field.

In the Marcellus, Range completed a horizontal well with an IP rate of 7.9 MMcfe/d; it's testing another with an IP of 10.7 MMcfe/d. Some prolific Barnett Shale wells include five new ones in southeast Tarrant County/Ellis County, TX, which tested at a combined IP rate of 19 MMcfe/d. A Parker County, TX, well tested at 5 MMcfe/d.

In addition, a well in the Nora Field, in which Range holds a 50% stake, averaged an IP rate of 3 MMcfe/d over 30 days, which is believed to be the best result in the field to date.

"Range beat the high end of our guidance in the quarter," said Pinkerton. "We drilled 101 wells on schedule, and we're pleased with the drilling results. Despite lower prices, we continue to create effective returns on capital..."

Realized prices fell 31% from a year ago to an average of $6.62/Mcfe. Average gas prices went down 30% to $6.47/Mcf; the average oil price decreased 15% to $59.64/bbl.

"If gas prices behave as we anticipate, it's likely we will begin to hedge again later this year," Pinkerton said. Even if prices continue to stagnate, Range has "sufficient liquidity" to meet its needs.

"I'm most pleased with what happened on the cost side," said the CEO. "Costs were controllable, well aligned with expectations and well below last year.

"All said, with the momentum from our existing drilling, we currently believe we will hit a 10% production growth target, even after taking hits from asset sales into account."

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