Range Resources Earnings Call INSIGHTS: Living Within Cash Flow, Maximizing Shareholder Value
On Wednesday, Range Resources Corporation (NYSE:RRC) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Living Within Cash Flow
David Kistler – Simmons & Co.: Real quickly on the comments about leverage that Roger made. As you start to look towards ’13 in the past you have highlighted you can live within cash flow and deliver maybe 15% to 20% production growth. However it seems like there is a willingness to go outside of cash flow. Should we be looking at that leverage metric to determine how far you guys will go outside in ’13 or could there be a decision to start living within cash flow by ’13, any kind of color you can give there would be great?
Jeffrey L. Ventura – President and CEO: This is Jeff, let me start and then Roger will add his comments on at the end. So let me put it in context. After this year, we are taking it to a really high level, our strategy is to stay focused on growing reverses and production per share within some of the highest rate of return and lowest cost plays out there. This year we are looking at 35% growth (outstanding) cash flow and what most people would recognize are two of the best plays if not the best plays in the industry, the Marcellus, particularly the wet part and the horizontal Mississippian oil play. So, next year and we won’t set our budgets till later this year, but we’re obviously working ahead and we’re planning ahead. We said it earlier this year we have the opportunity if we choose to do so to live within cash flow and still grow 15% to 20%, and we believe we can still do that. So, it sort of brackets off a couple different slots here (for where) we are this year, if we choose to do that next year we have that ability. But let me put that in context and I want talk about it in a number ways. One, another advantage of Range as we control or operate almost every area we have with the single exception really of Nora. So outside of Nora, we operate typically with a higher working interest of 100%. So, we really have the ability even if we choose to live within cash flow next year or something close to cash flow to really shape our growth to what prices ultimately do in order to capture NAV. We have the ability and we have great operating teams led by Ray that can ramp up quickly if we choose to do so and capture NAV. If we keep spending down for a year, a year or two or a year, we have the ability to ramp up significantly and you can see this year what the quality of the portfolio can do. I think another key thing to really look at to is, when you look at – and if you go up to the 100,000 foot level and you look at the various plays that are out there. If we were strictly focused on maximizing growth in all these plays, the highest growth areas are the dry gas parts versus the liquids-rich parts and then typically the thickest, gaseous, highest pressure parts, whether it’s the Barnett Shale, the Marcellus or Haynesville or you pick it, so that’s where you get the best growth. What’s really impressive is, if you look at the quality of some of our gas properties that we’ve talked about, literally if we were only focused on growth and we aren’t, we are focused on rate of return and we’re focused on a lot of other things, but if we only focused on growth, what we would do is direct 100% of our drilling into the dry gas areas and rather than growing within cash flow of 15% to 20%, theoretically you could probably double that, probably be 30 to 40 or where we are today. But importantly, what Range is, is really focused on maximizing our rate of return, and given today that oil prices are high and gas prices are low, in order to maximize rate of return, what we’re doing is focusing on liquids. In fact, you can see us, we’re dropping rigs in the dry gas areas and focusing predominantly in the whether super-rich part of the Marcellus or horizontal Mississippian play. But I think the really key part, again bringing it back to Range, is Range is in a great position. We have great potential in both oil and gas. Just in the Marcellus alone, we talked about – what we have in the wet and super-rich part, but if you look at the dry gas part in the Southwest of 235,000 acres plus another 180,000 in the Northeast, so we have 415,000 acres of dry potential in the Marcellus alone, and then if you look at the super-rich and wet component just in the Marcellus, that’s 335,000 acres. We’ve got tremendous running room with really strong rates of return both ways with the ability and flexibility to direct our capital off into the future, including the rate of production growth, plus we have 152,000 net acres in the horizontal Mississippian. So, I’m reaffirming that we have the ability to do that if we choose to do so. We’ll continue to work it through the end of the year, we’ll look at the results of our projects, we’ll put together a plan that we think optimizes value for our shareholders based on our core values of growth and reserves per share, production per share, both of that, adjusted rate of return, holding acreage, all those considerations and we’ll present that to our Board in December and typically we’ve come out with our 2013 plans early in 2013 and whether we accelerate that a little bit into right at the end of this year or early next year like in previous years we’ll decide later this year, but Range is in great shape. We’ve got high rate of return projects in multiple areas and what we’re trying to do is just frac it off a little bit with some of the flexibility that we have. So let me turn it over to Roger to discuss further.
Roger S. Manny – EVP and CFO: Yeah, Dave, just to comment on the leverage, I mean clearly the leverage in 2013 is going to be a function of where we set the drilling throttle and where on gas and liquids prices are going into next year. And since we haven’t set the drilling throttle yet and we don’t know where prices are going to be it’s a little hard to predict where the leverage is going to be, but we have committed to keep the balance sheet strong and it’s what we’re going to do. As I mentioned, when the leverage gets in that three times range while we’re fully comfortable in that range because of all the factors that I had mentioned earlier in my remarks, we are going to tell you what we intend to do to manage it going forward and in this case that asset sale is a big part of that. So we’ll see how the asset sales goes later this year then we’ll see where the drilling throttle needs to be set and then leverage will be somewhat of a byproduct of that, but when you look at the EBITDAX build that results from bringing these wells that aren’t on production yet, on production that EBITDAX build will help to bring leverage down as well along with the asset sales. So we’re very comfortable with the leverage where it is presently.
David Kistler – Simmons & Co.: Then maybe just one follow on, the Mississippi result that you kind of outlined both in your release and then in the presentation on the longer laterals generating over 100% rates of return at the current strip, it would seem to me it would make sense to be redirecting activity there than many of the other plays just from a rates return comment that you guys both made. Can you talk a little bit about your thoughts on that? Does that encourage you to buy more acreage? You added another 7,000 acres but is this – should we look at this as becoming a much bigger part of the portfolio on a longer-term basis?
Jeffrey L. Ventura – President and CEO: This is Jeff. Let me start again and then Ray will probably add a little more color. But, yes, I think, the key thing is to look at the position we have built. You can go through some simple back of the envelope math that I have done with several of you at conferences and that could be a 1 billion to 2 billion barrels type of resource potential on upside. It’s huge, particularly for a Company our size, coming with rates of return that you mentioned. So what you’re seeing is we will be an increasing activity there and we think it’s a great play. We got a great team up in Oklahoma City that manages it. We have been in that area since 2004. So we have got infrastructure, office, good local knowledge. But I think what you’ll see as we continue to drill and assuming continued success which I believe we will have, you will see us ramp up activity throughout this year. We haven’t – again we haven’t set our budgets for next year and we will continue to look at that and present to the Board late this year. But it wouldn’t be unreasonable to think that we could run something like in the order of five rigs next year and maybe the following year 2014 maybe going to 10 and the following year to 15. If we follow a schedule like that, that allows us the opportunity to not only hold that acreage but really significantly ramp up our oil production NGLs and you get great rich gas with that. So Ray, you might talk a little bit about things we have in place and things we are doing to start leading us down that path.
Ray N. Walker, Jr. – SVP and COO: This is Ray. I think the results that we have seen so far this year are really impressive. Our guys have done a great job thinking through the future and we did a really good job, we were really disciplined in the way we put those leases together out there. We stayed very disciplined and making sure they were consolidated because we knew handling saltwater and all those things is going to be – play a big role in the economics of the play. So, it’s taken some time to really put a lot of those (core rules) together, to put a lot of those things in place to get the midstream infrastructure and the power infrastructure all of those things in place. One of the things that we don’t want to be guilty of is just going fast for the sake of going fast and we’re trying to take a very disciplined approach and ramp up as it makes sense to ramp up. In other words, we don’t want to bring rigs in, complete wells and then not be able to form. So, we really – that play is really dictated a lot by handling a lot of fluid really at cheap prices to get that oil production, and so I think the guys have got an excellent plan. I’m really confident of what they’re doing, and like Jeff said, I think we do have some pretty aggressive plans in the future to ramp that play up. I think you’ll start hearing and seeing that as we get into the early part of next year you’ll start seeing that really happen pretty quickly.
Jeffrey L. Ventura – President and CEO: The other thing if you look on our website Ray talked about a very efficient plan that we have. There is a diagram in there that shows that. The other thing when we finally release our specific detailed land maps like we have in the Marcellus, I think you’ll be impressed with the big blocky dominant position we have and obviously the early drilling looks great.
David Kistler – Simmons & Co.: I really appreciate the color, one just last one to sneak in. On the Miss Lime how do you guys think about the NGLs and how are you going to manage that in that area of the country? I know you’ve been very focused on it up in the Marcellus, but any color you can give us with respect to NGLs pricing outlook in the – around the Miss would be helpful.
Jeffrey L. Ventura – President and CEO: One I’d say, again, you get a nice, so we have a liquids component and a big piece of that is oil. We have two facilities in place able to handle and process liquids and NGLs, and with the third one that will be up by the end of the year. So we have good diversity, we have a strong marketing team, and I think really we’ll be in good shape there.
Maximizing Shareholder Value
Brian Lively – Tudor Pickering: Just to follow up on me three times EBITDAX commentary, just wondering if that is – is that your covenant levels or is that just the internal comfort from the management team.
Roger S. Manny – EVP and CFO: Our covenant is 4.25 times. So, it’s clearly a management comfort level. We talk with the rating agencies, everybody is comfortable with us kind of being here in the low 3s. Using that financial flexibility, quite frankly financial flexibility to us is a lot more than just having a 1.75 billion committed credit facility under a $2 billion borrowing base. It’s the cost structure, it’s the hedging, it’s the operating control, as I said, being able to set the drilling throttle where it needs to be. All those factors together make us very comfortable being in that low 3 range, but we’re not going to come anywhere near the covenant limits. That’s just not the way we do things.
Brian Lively – Tudor Pickering: So, if we’re thinking about 2013, and I know it’s a function of commodity prices, but do you guys expect to use a 3 times that EBITDA sort of as a throttle such that we would either have to look at slowing activity or doing more asset sales in terms of keeping the leverage below that ratio?
Roger S. Manny – EVP and CFO: I think at this point it’s a wait and see game. We’ll see how the asset sale goes and we’ll just play it accordingly. I mean, one of the big factors that’s different about Range is when you look at our reserve to production ratio whether on our total proved reserve basis or just the proved develop basis, our ratio is about double the other shale players and that’s really indicative of a quality of our plays and also the diversity of the plays. We have a lot of assets contributing a lot of value to the Company. So we’ve sold $1.8 billion in assets in the last 10 years and we’ve not leveled our assets. So, if it comes down to making some of those hard decisions. We’ll make them just like we always have.
Jeffrey L. Ventura – President and CEO: I think another key point too is our strategy has been growth of low cost on a per share basis that’s adjusted and really the other part we say periodically in building high-grade the inventory. Like Roger said, over the years we’ve added in, not only sold $1.8 billion worth of properties, we added in things like the Marcellus, we added in things like the horizontal Mississippian. I think in the future the St. Louis looks pretty exciting. We’re looking at the Cline, the Utica, the Upper Devonian. So it’s that constant process of building shareholder value by adding in higher quality plays and periodically divesting of things that either no longer are competitive in our portfolio or that we’re not going to fund any more, even if there are quality properties like the Ardmore Woodford grade properties that’s small position for us and it’s going to be worth more to somebody else than us.
Brian Lively – Tudor Pickering: Are there any properties right now that you guys are thinking given the high grading that’s happened? Are there any other properties that you can think of that are moving more to the non-core and should be monetized?
Jeffrey L. Ventura – President and CEO: Sure. I mean, we always look at our portfolio, we always (forward-frank) it, we look at the upside, we look at the other potential and we make that decision. I’m not on the call today talk about what that is, but yes, we absolutely – Chad Stevens and his team are on top of that.
Brian Lively – Tudor Pickering: But if you were to keep CapEx flat in 2013 versus 2012 do you have a sense of (indiscernible)?
Jeffrey L. Ventura – President and CEO: I mean, one, we haven’t made all those iterations. Like I said a lot of it ends up on where you end up focusing. If we focus in the liquids rich portion and we stay within cash flow we would grow on the order of 15% to 20%. If gas prices moved up substantially and we added in a bigger component to that you can see this year, for that amount we are growing at 35%. Like I said if you just focused 100% on dry gas literally you could, theoretically probably double the numbers we have, but it’s early. Right now, I think we are doing exactly the right thing. We are staying disciplined, oil prices are still high. Gas prices are relatively low. Moving into our liquids rich areas in Southwest Pennsylvania and focusing on the high rates of return there as well as the great rates of return. Like Dave Kistler mentioned earlier in the horizontal Mississippian I think is the right thing to do. The other thing is if you look at our Company order size we are $9 billion to $10 billion Company depending on the stock price and the day. We have got such a huge position that it predominantly derisked and again you can look in our IR presentations, we have literally got the opportunity to grow tenfold from where we are today. We are only a 5 TCF Company and in not counting ethane or those things, we have got the opportunity or resource potential to grow 44 to 60 Ts. Again some of the highest rate of return plays out there. If you focus in just on the Marcellus Shale we have got the opportunity and we are only a 5 TCF Company. Our net resource potential in the Marcellus is 24 to 32 TCF, that’s massive and it’s largely derisked. This is play now that is basically the largest gas field in the United States and recognized by most as the high quality too. So we’ve got a great portfolio. We will continue to work it as we go throughout the year. We’re working internally with the divisions on what we think maximizes the shareholder value, present it to our Board and then let you guys know, but we’re in great shape.