Range Resources (RRC) Q4 2011 Earnings Call February 22, 2012 1:00 pm ET Executives Rodney L. Waller - Senior Vice President and Assistant Secretary Jeffrey L. Ventura - Chief Executive Officer, President and Director Ray N. Walker - Chief Operating Officer and Senior Vice President Roger S. Manny - Chief Financial Officer and Executive Vice President John H. Pinkerton - Executive Chairman and Member of Dividend Committee Analysts Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division David W. Kistler - Simmons & Company International, Research Division Ronald E. Mills - Johnson Rice & Company, L.L.C., Research Division Leo P. Mariani - RBC Capital Markets, LLC, Research Division Michael Scialla - Stifel, Nicolaus & Co., Inc., Research Division Dan McSpirit - BMO Capital Markets U.S. Jonathan D. Wolff - ISI Group Inc., Research Division Presentation Operator
Jeffrey L. VenturaThank you, Rodney. I'll begin with an overview of the company. Ray will follow with an operations update. Roger will be next with a discussion of our financial position and John will follow with his perspective. Then we'll open it up for Q&A. Let me begin with a review of where we've been as a company, where we are today and where the company can go in the future. Despite the current low gas price environment, Range is well positioned for 2012 and beyond. This is a result of our multiyear strategy of growth in reserves and production on a per share basis, debt adjusted, with one of the lowest cost structures in our peer group, coupled with building and high grading our inventory. It's also the result of long range planning, both operationally and financially. Our organic growth rate from 2003 to 2011 ranged from less than 5% to 2011's top rate of 12%. During this timeframe, Range went from being one of the higher cost companies in our peer group to one of the lowest cost companies. This was the result of getting into plays that if successful, offered very repeatable high rate of return growth opportunities such as the Marcellus Shale and horizontal Mississippian plays. It's also the result of exiting relatively high cost low-growth plays with little repeatability, like the Gulf of Mexico and Deepwood Viner Chalk [ph]. As a result of our strategy, we sold about $1.8 billion of properties during this timeframe. This focused our technical resources on higher quality opportunities and lowered our cost structure. It also provided significant funding for better return projects. Looking back, we were fortunate to have sold these properties in a higher commodity price environment. Carrying over a portion of the 2011 sale proceeds into 2012, coupled with our strong hedge position for the year puts us in a strong position to execute on our plan. We're currently hedged on the gas side with the floors of $4.45 per Mmbtu for approximately 75% of our estimated 2012 production. I believe 2012 will be an inflection point for Range.
In 2012, our organic growth target is expected to be 30% to 35% versus the past 9 years of less than 12%. Since 95% of our capital is planned to be directed into the Marcellus Shale and horizontal Mississippian plays, the growth should also come with higher returns and lower costs than before.Given our large acreage position in these plays, we'll have the opportunity to do this for years to come. Even at current strip pricing, all of our projects generate good to excellent rates of return. The rate of return in the liquids-rich portion of the Marcellus and horizontal Mississippian plays range from 73% to 99%. The rate of return in the dry gas drilling in the Marcellus Shale ranges from 27% to 32%. Even in our dry gas fields in Virginia, the rate of return of the wells that we had originally considered ranges from 20% to 27%. However, given that this acreage is either all held by production or we own the minerals, we're limiting the capital allocation for Virginia development to $30 million in favor of higher rate of return projects. For 2012, we're projecting 30% to 35% growth based on a $1.6 billion capital program, which is roughly flat spending from 2011. Approximately 75% of this capital will be directed into liquids-rich areas, primarily in the super-rich and wet Marcellus, and horizontal Mississippian oil play. For 2013, assuming that gas prices continue to stay relatively low and oil prices remain high, we can contain capital spending to a level which does not increase our leverage above year-end 2012 levels. Given the current strip pricing, we believe the company can grow between 15% to 20% in 2013 using just our internally generated cash flow, if we choose to do so. In this scenario, 85% to 90% of our capital would be directed into our super-rich wet oil plays. We can do this and still retain substantially all the key acreage that we want in the Marcellus and other plays. What puts us in a different category than most companies is that we're positioned to grow at 15% to 20% within cash flow for years to come and retain the ability to significantly ramp up when it's prudent to do so, based on either recovery of natural gas prices or significantly enhanced drilling results. Also, all of our investments are in the best or some of the best plays in the U.S.
Bottomline, everything we're drilling is well in excess of our investment hurdle rates, which are well above our cost of capital and therefore, will add value to the company. Additional advantages of our 2012 program are: that will increase our cash flow and convert more of our Marcellus and horizontal Mississippian acreage to held by production.Given the rates of return, the spending question is not whether this is a prudent economic investment. It's more of a balance sheet question. Our best estimate at this point in time is that our debt-to-EBITDAX at year end 2012 will be approximately 2.7x compared to 3x in the first quarter of 2011 before the Barnett sale. Therefore, we feel that our current 2012 capital plan is very consistent with the prudent management of the resources of the company. Roger will discuss this in more detail shortly. In addition, we're evaluating 5 enhancements to our portfolio. They are as follows: The first is the super-rich Marcellus. We currently have an acreage position of 125,000 net acres west of most of our drilling in Washington County, Pennsylvania, which we've defined as 1,350 Btu in higher gas or super-rich gas area. We now have drilled 8 wells on the edge of this super-rich area. So far these wells average 400,000 barrels of liquids and 3.9 Bcf of gas per well. One of these wells is estimated to produce 520,000 barrels of liquid and 4.8 Bcf. This compares to our current average wet Marcellus well of 281,000 barrels of liquids and 4.2 Bcf of gas. Given the high price of oil versus the current low price of gas, this super-rich play enhances the value of our Marcellus economics. The higher volumes are not only the result of drilling in the higher Btu area, but are also the result of drilling longer laterals and completing them with more frac stages. We've also experimented with reduced cluster spacing, decreasing the frac interval from 300 feet to 150 to 200 feet, all of this looks very promising. Once we extract ethane beginning late next year, this will further enhance the economics.
The second area is the super-rich Upper Devonian. We believe the Upper Devonian has comparable hydrocarbons in place relative to the Marcellus. This thermal maturity is also similar to the Marcellus. Where the Marcellus is dry, wet and super-rich, we believe so too is the Upper Devonian. To provide more data to evaluate this potential, we plan to drill a few wells in the super-rich Upper Devonian this year, which will be our first test there.Read the rest of this transcript for free on seekingalpha.com