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Range to Jettison Barnett Stake to Focus on 'Liquids-Rich' Marcellus

Marking a U-turn of sorts in the company's exploration and production strategy due to low natural gas prices and a premium on liquids prices, Range Resources Corp. in its 3Q2010 earnings call put its Barnett Shale properties in Texas on the block and announced that it plans to focus on its "liquids-rich plays" in the Marcellus Shale.

The Barnett properties include approximately 360 producing wells and 1,000 drilling locations, Range said, noting that net production from the properties is expected to average approximately 120-130 MMcfe/d in 4Q2010. The holdings include 53,000 net acres, of which approximately 80% is located in the core of the play and nearly 80% of the acreage is currently held by production.

"Importantly, our portfolio of high-quality, high-return projects is leading the way as shown by the results of liquids-rich plays in the Marcellus Shale play as well as in the Midcontinent and Permian areas," said CEO John Pinkerton. "Our confidence in the quality and size of these plays was one of the key reasons we have decided to market our Barnett Shale properties. Divesting of our Barnett Shale properties reflects Range's strategy of focusing on per-share growth.

"While a sale of our Barnett Shale properties will provide substantial capital, it will not inhibit our per-share production and reserve growth outlook. We currently anticipate that we can grow production and reserves in 2011 on both an absolute and per-share basis, despite losing the production and reserves associated with the planned sale."

The Barnett divestiture move would appear to be a departure from the company's plans just one quarter ago. During the 2Q2010 earnings call, Range said it planned on continuing to build on its "core areas" in the Barnett, Marcellus and Nora plays.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. (TPH) said the asset sale is smart as long as the price is right. "Monetizing Barnett would reduce capital/equity need through 2012 plus divest gassy assets to focus on core, more liquid rich Marcellus," said TPH analysts David Heikkinen and Brad Pattarozzi in a research note. "Price, however, is going to matter, with $11K+/MMcfe/d necessary for the deal to be neutral to multiples or NAV [net asset value]."

Heikkinen and Pattarozzi added that as Range's Marcellus position/focus has continued to grow, the company has "slowed down Barnett activity to the point where the company is only running one rig in the Barnett and has moved its core Barnett team to focus on the Northeast Marcellus. From a capital allocation standpoint, economics are simply better in [Range's] southwest PA acreage versus dry gas out of the Barnett..."

The analysts were quick to note that exiting the Barnett Shale would not make Range a one basin company as it also has operations in the Nora gas field in southwestern Virginia and in the Midcontinent, in addition to the Marcellus.

During 3Q2010, Range said the Marcellus infrastructure build-out continued to make solid progress in both the southwestern and northeastern portions of the play. In the southwestern portion, committed wet gas processing capacity has increased to 185 MMcf/d and has scheduled expansions of 165 MMcf/d in the first half of 2011 and another 40 MMcf/d in the second half of 2011. Range said it also has access to an additional 40 MMcf/d of wet gas processing on an interruptible basis during these same periods.

The company noted that dry gas capacity is currently 25 MMcf/d in southwestern Pennsylvania, which should increase to 65 MMcf/d by year-end 2010. In the northeastern portion of the play, the build-out of the first phase 150 MMcf/d Lycoming County gathering system is on schedule for a year-end 2010 start up, with capacity increasing to as much as 350 MMcf/d by year-end 2011. All told, Range currently has dry and wet gas capacity in the Marcellus of 250 MMcf/d, which is anticipated to rise to 440 MMcf/d by year-end 2010 and to 805 MMcf/d by year-end 2011.

In 3Q2010, Range said financial results were impacted by a 22% drop in realized prices, which more than offset a 16% decrease in unit costs. Reported net income was a loss of $8.2 million versus a loss of $29.8 million for 3Q2009, while diluted earnings per share were a loss of 5 cents versus a 19-cent loss for the prior-year period. Adjusted net income for 3Q2009 was $18.9 million, or 12 cents per diluted share, down from $41 million, or 26 cents per diluted share during 3Q2009.

Production averaged 503 MMcfe/d for the quarter, a record high for the company and a 15% increase over the prior-year quarter. Range said this represents the 31st consecutive quarter of sequential production growth. Production was 77% natural gas and 23% natural gas liquids (NGL) and crude oil. Drilling in the liquids-rich portion of the Marcellus Shale play as well as in the Midcontinent and Permian Basin regions drove the production growth. On a year-over-year basis, NGLs and crude oil production rose 62%, while natural gas production rose 6%, the company said.

"While our financial results were impacted by a 22% decline in realized prices, much progress was made in the third quarter as our operating results were terrific, and we continue to execute on reducing our cost structure," said Pinkerton. "Production rose 15%, surpassing the 500 MMcfe/d milestone and marking our 31st consecutive quarter of sequential production growth. Unit costs continued to decline, with depreciation, depletion and amortization expense leading the way with an 18% decrease versus the prior-year quarter."

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