Range Resources Corp. continues to beat production forecasts, and in the second quarter the Fort Worth, TX-based independent did it on the strength of its growing operations in the Marcellus Shale.

Total gas-weighted output averaged 472 MMcfe/d in the latest quarter, with the biggest gains in the Marcellus Shale. During the latest quarter Range set up a joint venture partnership with Talisman Energy Inc. in the Marcellus Shale to test some wells, and in a separate transaction, it bought some producing gas properties in Virginia from a subsidiary of Chesapeake Energy Corp.

"The second quarter of 2010 shaped up to be a bit of a sequel to the first quarter of this year," CFO Roger Manny told financial analysts during a conference call on Tuesday. "Production against all odds and asset sales hit a new record high...like last quarter, direct operating costs were reduced on an absolute and unit-cost basis." However, he said a 9% jump in quarterly production compared with a year earlier "could not overcome the 18% decline in realized prices" for natural gas, natural gas liquids (NGL) and oil sales.

Range's net income in the latest quarter increased to $9.1 million (6 cents/share) versus a loss in 2Q2009 of $39.9 million (minus 26 cents). Net cash from operating activities in 2Q2010 totaled $108 million. However, because of lower realized prices, cash flow from operations before changes fell 17% to $129 million.

"Significant progress was made in the second quarter," CEO John Pinkerton said. "The catalyst for our performance was outstanding drilling results. We believe we are on track to deliver all-in finding cost of below $1.00/Mcfe for 2010. As a result, we are generating attractive returns on our capital despite low natural gas prices. With 75% of our 2010 gas production hedged and 60% of our 2011 gas production hedged, coupled with our low cost structure, solid financial position, and high return projects, we are confident that we can continue to drive up our per share value."

Production in the quarter averaged 472 MMcfe/d, which included 382 MMcf/d of gas (81%), 9,651 b/d of NGL (12%) and 5,327 b/d of oil (7%). Natural gas production jumped 9% over output in 2Q2009, even though Range sold some producing properties in Ohio in the first three months of the year. Adjusting for asset sales, quarterly gas production would have grown by 13%.

Wellhead prices, including cash-settled derivatives, averaged $5.07/Mcfe, down 18% from the same period a year ago. Average realized gas prices in the quarter were $4.37/Mcf, off 25% from 2Q2009. NGL prices jumped 54% to $37.13/bbl versus a year ago. Total natural gas, NGL and oil sales (including cash settled derivatives) declined 11% compared with the prior-year quarter to $217 million, with lower prices more than offsetting higher volumes.

However, operating costs are coming down, explained COO Jeff Ventura. On a production unit basis, the company's four largest cost categories fell by 8% in aggregate compared with a year ago. Direct operating expenses in 2Q2010 were 68 cents/Mcfe, a 21% decrease compared with 86 cents in 2Q2009. Depreciation, depletion and amortization expenses fell 6% to $2.12/Mcfe, and interest expenses declined 4% to 72 cents/Mcfe.

Range completed the sale of its Ohio property in June, which generated total proceeds of $323 million and a pre-tax gain of $77 million for the first half of 2010. In turn, Range acquired some gas producing assets in Virginia from a subsidiary of Chesapeake for $135 million. The acquisition, with 115,000 net acres and 30 miles of gas transmission lines, partially overlaps Range's existing Nora/Haysi properties, and the new acreage currently produces 10 MMcfe/d. Proved reserves associated with the acquisition are estimated at 125 Bcfe; the acquired properties contributed about 2 MMcfe/d to the latest quarter's results.

The Virginia properties, said Pinkerton, "literally fit hand in glove" with the Nora assets and "blocks up over 350,000 acres for future development in stacked pay reservoirs of the shallow coalbed methane horizons, tight gas horizons and the deeper Huron Shale. These same reservoirs are currently being developed in the adjoining Nora Field."

Range spent $237 million on drilling in 2Q2010, which funded 87 (65.5 net) wells. At the end of June Range had drilled 146 horizontal Marcellus wells, with 29 awaiting completion and four awaiting pipeline hook up. The board of directors has approved an additional $215 million to $1.2 billion in capital spending related to "seizing opportunities in the Marcellus Shale play ($210 million) and for development of the recently acquired properties in Virginia ($5 million)."

Around $65 million of the new money will be used to drill 18 additional wells in the Marcellus; 15 of the new wells are to be completed before year's end. Range will use $73 million to construct drilling locations, roads and other infrastructure requirements for wells expected to be drilled in 2011.

Range also is using some of the new funding to combine 14,000 net acres in Bradford County, PA, with Talisman in a joint venture (JV). Range would own a one-third working interest in the combined acreage position; Talisman would be the operator. Range's share of the JV's costs for the rest of this year is estimated at $25 million.

With the bump in capital spending, the company also increased its 2010 production growth guidance to 14% from 12%. Specifically in the Marcellus, the 2010 exit rate target now is set at 200-210 MMcfe/d net from 180-200 MMcfe/d net. Range currently is producing 160 MMcfe/d net in the play. In 2011, Marcellus output "will increase by no less than 25%" to 400-420 MMcfe/d net, which is ahead of an earlier forecast of 360-400 MMcfe/d net.

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