Range Resources Corporation (NYSE:RRC) Q1 2024 Earnings Call Transcript

Range Resources Corporation (NYSE:RRC) Q1 2024 Earnings Call Transcript April 24, 2024

Range Resources Corporation  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello. Welcome to the Range Resources First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. After the speakers’ remarks, there will be a question and answer period. At this time, I would like to turn the call over to Mr. Laith Sando, Vice President, Investor Relations at Range Resources. Please go ahead, sir.

Laith Sando: Thank you, operator. Good morning, everyone and thank you for joining Range’s first quarter 2024 earnings call. The speakers on today’s call are Dennis Degner, Chief Executive Officer and Mark Scucchi, Chief Financial Officer. Hopefully, you’ve had a chance to review the press release and updated investor presentation that we’ve posted on our website. We may reference certain slides on the call this morning. You’ll also find our 10-Q on Range’s website under the Investors tab or you can access it using the SEC’s EDGAR system. Please note, we’ll be referencing certain non-GAAP measures on today’s call. Our press release provides reconciliations of these to the most comparable GAAP figures. We’ve also posted supplemental tables on our website that include realized pricing details by product along with calculations of EBITDAX, cash margins and other non-GAAP measures. With that, let me turn the call over to Dennis.

Dennis Degner: Thanks, Laith, and thanks to all of you for joining the call today. Range’s first quarter was executed successfully and consistent with our strategy communicated earlier this year. By operating safely while driving continued operational improvements, generating free cash flow with a pure leading capital efficiency and prudent allocation of that free cash flow, balancing returns of capital to shareholders with further debt reduction and the long-term development of our world class asset base. I believe our first quarter results reflect the ongoing advancement in line with these key objectives and showcase the resilience of Range’s business while navigating the current commodity environment. Today’s operational and financial updates should feel consistent, highlighting Range’s high quality, low breakeven inventory and liquids optionality, which drove another successful quarter with meaningful free cash flow.

Beyond a quarterly view, the long-term value proposition is underpinned by Range’s low sustaining capital requirements. This low capital intensity is the result of Range’s class leading drilling and completion costs, shallow base decline, large blocky core inventory, and talented team. These key attributes result in a required reinvestment rate that is among the best in the industry, providing Range a solid foundation for consistently generating significant free cash flow and returns to shareholders, while positioning Range to help meet future energy demand, whether that is through exports to international markets or serving our needs closer to home for further electrification of our economy related to power generation needed for AI and data centers or increased domestic manufacturing.

Bolstering Range’s profitability and durability is our liquids contribution, which is over 30% of our total production volume. As seen in the first quarter results, liquids revenue provided an uplift to natural gas prices, with NGL price realizations equating to a premium of over $2 relative to Henry Hub pricing. When we roll all of that together, our liquids revenue uplift, our low capital intensity and thoughtful hedging program, you get the lowest breakeven among natural gas producers and the most resilient organic free cash flow, as evidenced by our first quarter results and 2024 projections. Importantly, with our vast inventory of derisked high quality Marcellus wells, we have the ability to compound our per share growth in free cash flow for decades to come.

Looking back on the quarter, all in capital came in at $170 million with production of 2.14 Bcf equivalent per day. This capital spend aligns with our operational cadence detailed on our previous call and places us squarely within our stated capital guidance for the year. During the quarter, nine wells returned to sales with an average lateral length exceeding 10,000 feet per well. These wells were located in the liquids rich portion of our operating footprint, supporting the highest liquids production profile that Range’s had in many years at 32%, and providing the revenue uplift touched on just moments ago. Additionally, all of these wells are located on pads with existing production, minimizing our operating surface footprint, supporting nimble operations and driving Range’s cost efficient development approach.

Production during the quarter was aided by strong well performance and continued optimization of our dry and wet gas gathering systems. These consistent quarter-over-quarter results demonstrate the repeatable nature of our large contiguous acreage position and the benefit of returning to pad sites for our ongoing development. Turning to operations, two super spec horizontal rigs operated during the quarter adding 13 laterals with an average lateral length of just under 16,000 feet per well. This was a new quarterly record for Range and is the type of performance that underpins the improved well cost Range expects for 2024. For completions, the team successfully onboarded our new build electric frac fleet that will be utilized throughout 2024.

The new fleet provides a smaller operating footprint, which complements operations when moving back to pads with existing production. The fleet also includes state-of-the-art process control and power distribution technologies and is coupled with a larger natural gas fired turbine, which aids our continued efforts to electrify operations and reduce emissions. Performance of the new fleet thus far has been excellent, as evidenced by the new program records set during the first quarter with a 15% increase in the number of stages per day completed versus the same time period just a year ago. Supporting the completions performance was efficient water operations and logistics as the team recycled 100% of Range’s produced water while taking incremental third-party water to further support our operations.

Looking at activity levels for the remainder of 2024, we will continue to run one electric fleet on completions and two horizontal rigs, but we have further refined the timing of our turn in line activity and have pushed all of our tills for the dry window deeper into the back half of the year. Despite pushing these productive dry gas wells later in the year, our annual production guidance remains unchanged with a slightly higher liquids cut expected in the first nine months of the year, when NGLs are particularly advantaged relative to natural gas based on current forward prices. Before moving on to marketing, I’ll briefly touch on service costs. So far in 2024, we’ve seen full utilization of high spec equipment in the region such as high torque top drive drilling rigs and electric frac fleets with service costs remaining relatively in line with our prior call.

There is potential for service cost to ease during the year as operators complete or curtail their programs in response to the current commodity environment, especially for higher cost dry gas basins. In the event service costs softened during the year, Range will be positioned to capture savings and further complement our lean program and capital efficiency for the year. Shifting over to marketing, similar to our messaging in February, Range utilized the flexibility built into our NGL transportation portfolio to capture some of the highest market premiums in company history during the quarter. This winter’s market dynamic suggested that domestic butane prices offered the best returns, while international propane netbacks were set to exceed local values.

As a result, Range directed more butane to U.S. Northeast markets, while exporting the vast majority of its propane production. This resulted in some of the highest premiums to the Mont Belvieu Index that we’ve seen. In total, the realized NGL price for the quarter was $26.24 per barrel, $1.91 over the Mont Belvieu equivalent, which contributed to our overall corporate realizations of $3.54 per MCFE, a significant premium to natural gas. Going forward, we expect continued growth in U.S. propane exports as 18 new PDH units come online this year and next, adding the capacity to consume another 500,000 barrels per day of propane at fuel utilization rates. To the extent Gulf Coast NGL export capacity continues to tighten, Range’s firm transport on Mariner East to the Marcus Hook export facility should continue to provide advantaged NGL price realizations.

As a result of this dynamic and the strong start we’ve had to the year, Range is improving its full year guidance for NGLs to a differential to the Mont Belvieu Index of $0.25 per barrel discount to $1.25 per barrel premium. Despite current natural gas storage levels and the current commodity backdrop, the resilience of Range’s business is on full display in quarters like Q1. This is underpinned by our large contiguous high quality acreage position, operational efficiencies, NGL uplift, diverse marketing portfolio and talented team. We believe the future of natural gas and NGLs is strong and the Range team remains focused on generating free cash flow, while advancing our overall efficiencies and delivering repeatable well performance across our large contiguous inventory.

I’ll now turn it over to Mark to discuss the financials.

Mark Scucchi : Thanks, Dennis. In the first three months of 2024, Range has kicked off what we expect will be a disciplined and promising year. Range’s most fundamental objective is to safely and consistently generate cash flow for its stakeholders. Despite commodity prices seen in early 2024, Range continues to generate healthy free cash flow, pay dividends, reduce debt while maintaining the ability to thoughtfully reinvest in our operations. As mentioned during our last call, Range has an efficient plan to maintain steady production this year, adapt to near-term commodity prices and resulting economics, while also positioning our long-term business for eventual growth as demand increases from domestic and international customers.

As incremental demand materializes in basin, near basin and farther downstream, Range has the cost structure, inventory and infrastructure to remain a reliable long-term energy supplier. Results of the first quarter highlight the strength of Range’s production mix and transportation portfolio. Realized price per unit of production before NYMEX hedging was $0.70 above NYMEX Henry Hub prices, a byproduct of our diversified mix in production and sales outlets. Including hedges, Range realized $3.54 per MCFE. First quarter cash margins per unit of production were $1.59 a healthy 45% margin, resulting in cash flow before working capital of approximately $308 million. Cash flow funded capital investment for the quarter of $170 million a reduction in debt, net of cash of $150 million along with roughly $19 million in dividends and $24 million paid for common shares withheld for taxes on equity compensation.

Financial results rely on safe, efficient operations and the Range team executed another successful quarter delivering planned production on budget. As a reminder, the plan we announced for 2024 differs slightly from others in the industry and that our capital efficiency, low full cycle costs, paired with advantaged marketing of our production, generates meaningful margin at current commodity prices, meaning Range has options, options on how we redeploy capital into the drill infrastructure, like water facilities to provide durable cost reductions or low cost lateral extending land among other attractive alternatives. With a thoughtfully constructed hedging program, we seek to participate in improved long-term market dynamics while increasing confidence in near-term forecasted cash flow that support consistent efficient operations, while protecting the balance sheet and creating additional optionality around capital allocation.

Range’s hedging philosophy has produced successful results that have served the company well and we expect will continue to do so in the future. Presently, Range has approximately 55% of 2024 natural gas hedged with an average floor price of $3.70 and in 2025, approximately 25% hedged with floor price of $4.11 providing Range a stable base to consistently generate free cash flow through market cycles. Our comments this morning may sound familiar and that is a good thing. We intend to share our corporate goals and to deliver on those plans. Range has transitioned over the years from a start up in a manner of speaking when it drilled the discovery well of the Marcellus to a rapid growth commissioning phase for a decade to a successful business generating value from a massive well understood asset.

The options ahead for Range are attractive, particularly given a balance sheet within our targeted debt levels. LNG is a well-known evolution for the industry, linking the U.S. with international customers. What is perhaps less appreciated and still developing are domestic opportunities in the form of reindustrialization be it semiconductor manufacturing, EV battery plants, data centers and electric generation. With modest investments in inventory this year, we believe Range is creating valuable future optionality to participate in that growing demand as it comes online. Range’s business plan continues to be executed on what we believe is the largest per share exposure to core Appalachia inventory, paired with the transport and sales portfolio delivering production across the U.S. and internationally, all underpinned by a strong financial foundation.

We have the team, assets and balance sheet to succeed through price cycles and we believe the Range business can and will continue to deliver significant value to investors. Dennis, back to you.

Dennis Degner: Thanks, Mark. Our 2024 program is off to a solid start, and I believe the first quarter results communicated today showcase that Range’s business is in the best place in company history, having derisked the high quality inventory measured in decades and translated that into a business capable of generating free cash flow through these types of cycles. With that, let’s open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Michael Scialla with Stephens.

Michael Scialla: Dennis, you mentioned the strong domestic butane in international propane markets, sounds like the dynamics there are more than seasonal and caused you to raise your 2024 realization guidance. Do you have any visibility on those markets longer term? I know everybody’s bullish on gas longer term, but haven’t really heard views on those NGL markets for the ’25 and beyond period.

Dennis Degner: I’ll kind of take a step back and kind of start in at a high-level and then we have Alan Engberg here with us this morning. And so I’ll look to hand off to him to maybe take a bit of a deeper dive on this topic. But I think if you look back on the past several years, we tend to see some seasonal effects associated with both propane and butane and just the different components of the NGL stack itself. And that’s one of the reasons why we’ve always had a flexibility that we’ve left into the way we look at our sales and also our transportation options where we can put barrels on waterborne export or leave them here on a domestic basis when we see those fluctuations. Gasoline blending season no doubt played a role in how we looked at the different pricing for both of them, but as we take a step back and look at propane, a big driver was no doubt getting stock levels back to a place more re-normalized in the back half of last year and then getting into what we felt like was more something normalized for this past Q1 and the presence of winter that we did have.

I’m going to hand it over to Alan though and he can add some additional color.

Alan Engberg: This is Alan here. I guess part of your question also is around what we see coming forward. And I guess, I could say right now where we’re at on propane, we’ve got days of supply as of the end of winter or the end of March at around 19 days. So that’s about 10% under the five-year average. Pricing, we saw that improve during the first quarter. Just market price went to $0.86 per gallon on average and 46% of crude and that compares to the fourth quarter, which was at $0.67 per gallon and 36% of crude. Going forward though, over the next two years, so this year through 2025, we still see tremendous new demand coming on stream internationally. That’s LPG crackers, that’s ResComm growth and it’s 18 new PDH units that are going to come on.

In that 620 day of new demand that’s taking PDH utilizations down to 65% this year, 70% next year. So we think it’s pretty conservative estimate. Overall, U.S. supply so far this year, if we look at the weekly EIA stats, it’s up about 6% and that matches the supply growth that we saw in 2023. So it’s a relatively decent number to work with. Internationally though, kind of like we saw last year, there really isn’t a whole lot of international supply growth. In fact during the first quarter OPEC+ if you look at them as a whole their LPG exports relative to first quarter ’23 were down 2%. So what that means that there is going to be going forward a continued strong call on U.S. supply to the international markets. During ’23, the U.S. captured 90% of the international growth in LPG demand.

And I got to just conservatively cut that to 80% and it still means a call on U.S. supply of 500,000 barrels per day this year and next year. And that’s going to — that’s more than what our supply is. So that means that we’re probably going to be pulling from inventory that means U.S. fundamentals are going to improve, that means dock premiums are going to get higher. Range has dock capacity or export market capacity that’s equivalent to roughly 80% of our LPG production. That exceeds any of our wet peers and it’s a good position to be in. So we’re quite pleased with that. Dock capacity is getting tighter, particularly in the U.S. Gulf Coast. There’s more capacity available on the East Coast. And I think we’re in a very good position to continue to use our flexibility to place products to the markets that give us the best returns.

Michael Scialla: I want to ask Mark, your cash balance increased for the quarter above $300 million. Should we assume you want to maintain a higher cash balance now than you have in the past to take advantage of opportunities to purchase notes like you did in the quarter in the open market or do you expect that cash balance to come down over the year?

Mark Scucchi: I think you’ll just see it fluctuate based on how we choose to allocate within a given quarter. The 2025 notes is clearly very high priority that we make sure we comfortably handle and very economically handle. So chipping away at those in the open market being able to buy those in at a discount is certainly a compelling option. But our returns to capital program as well as just funding our working capital needs intra month, it’s most efficient to use that especially since interest rates are where there are. There’s decent return in holding that versus quickly redeploying and some other areas are moving too quickly on buying back some bonds or paying a premium at the moment. That said, we’ll take a conservative and risk appropriate strategy to continue deleveraging paying off that debt.

But I guess the long and short of it is having some cash on the balance sheet I think is prudent at this time and an effective — cost effective way to manage our working capital.

Operator: Our next question comes from the line of Bertrand Donnes with Truist.

Bertrand Donnes: Just wanted to brush on the topic of shifting some of your dry gas wells to later in the year, is this a moving target? If gas prices remain depressed, would these move into 2025 or would they be replaced with liquids locations or is there some motivation maybe lease lines or something like that where you need to get these wells turned in next 12 months?