Range Resources Corporation (NYSE:RRC) Q4 2022 Earnings Call Transcript

Range Resources Corporation (NYSE:RRC) Q4 2022 Earnings Call Transcript February 28, 2023

Company Representatives: Jeff Ventura – Chief Executive Officer Dennis Degner – Chief Operating Officer Mark Scucchi – Chief Financial Officer Alan Farquharson – Senior Vice President Laith Sando – Vice President, Investor Relations

Operator: Welcome to the Range Resources, Fourth Quarter 2022 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.

Laith Sando: Thank you, operator. Good morning, everyone, and thank you for joining Range’s year end earnings call. The speakers on today’s call are Jeff Ventura, Chief Executive Officer; Dennis Degner, Chief Operating 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 of those slides on the call this morning. You will also find our 10-K 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. For additional information, we’ve posted supplemental tables on our website to assist in the calculation of EBITDAX, cash margins and other non-GAAP measures. With that, let me turn the call over to Jeff.

Jeff Ventura: Thanks Laith and thanks everyone for joining us on this morning’s call. While front month natural gas prices have no doubt wavered over the past couple of months, Range’s operations have remained consistent. We’ve made steady progress on key objectives and our business is more resilient today than at any point in the company’s history. In 2022 Range successfully managed a great opportunity the natural gas markets presented us with. We delivered our operational plans safely and with peer leading efficiencies, we generated record free cash flow, materially strengthened our financial position and returned significant capital to shareholders. At the end of the year we had reduced debt by over $1 billion marking our 5th consecutive year of debt reduction, repurchased $400 million in shares and established an annualized dividend of $0.32 per share.

We captured much of the upside presented to us in 2022 with a deliberate fit-for-purpose hedging program. Ultimately, every natural gas EMP Company would have preferred to have been unhedged last year as the natural gas market moved higher. But when looking back at our results, Ranger’s hedge program retained more of the upside on a per Mcf basis than any of our natural gas peers. Looking forward into 2023 and 2024, the natural gas market is in a different place, but our hedge program is once again positioned for success. Our hedging activity is not aimed at picking tops and bottoms, but our program is aimed at supporting durable free cash flow through the cycles while retaining exposure to improving longer term natural gas and NGL fundamentals.

Looking at our 2022 results and projections for the next two years, I believe we’ve struck that balance quite well. Our business generates free cash flow down to very low prices, and for 2023, we believe Range has among the best annual breakevens in the industry, well below $2 per Mcf. The resilience that our business has in a lower price environment, like we find ourselves in today is a positive differentiator for Range. Having hedges in place to cover our fixed cost and capital commitments as part of it, but the business model over the long run is really underpinned by Range’s sustaining capital requirements. Our relatively low capital requirements are the result of Range’s class leading drilling and completion costs, coupled with our shallow base decline and large blocky core inventory.

Altogether, these result in a peer leading all-in maintenance that is approximately $0.76 per Mcfe. This provides Range a solid foundation for consistently generating significant free cash flow and returns to shareholders. Further bolstering Range’s durability is our liquids production. NGLs and condensate are approximately 30% of Range’s production. Through the cycles, our liquid revenue has provided an uplift to natural gas prices and using today’s strip pricing for 2023; that uplift is meaningful. For context, Range’s NGL’s pricing would currently be priced around $26 per barrel, using strip prices for 2023. That is the equivalent to a 40% or $1.30 per Mcf premium to current Henry Hub strip pricing for 2023. When we roll all of that together, our low maintenance capital, our leading hedge program in our liquids optionality, you get the lowest breakeven amongst natural gas producers in the most durable free cash flow in 2023.

As we show in our slides, Range is still generating several hundred million in free cash flow at $2.50 natural gas prices. Importantly, our leading efficiencies and low breakevens are sustainable, because of Range’s large blocky acreage position that provides us decades of core inventory. A portion of the value of this massive inventory can be found in our year end reserves. The after-tax PV10 of our reserves using $4 NYMEX, which is approximately where the 10-year strip is, equates to over $40 per share net of debt, over 50% higher than Range’s current share price. For added context, our reserve report includes our proved developed wells in only 367 undeveloped locations out of approximately 3,000 undrilled core locations we have in the Marcellus.

Simply put, we do not believe the significant resource value is currently reflected in today’s market, presenting Range the opportunity to create meaningful, long term per share value for equity holders through our buyback program, which has $1.1 billion of availability remaining. As a reminder, we set a target in the spring of 2021 to reduce debt by more than $2 billion by the end of 2023. Today we are 90% of the way towards that target. It’s been a successful repositioning of our balance sheet within a short period of time and clears the path for meaningful returns of capital to shareholders in the years ahead. Before turning it over to Mark and Dennis, I’ll reiterate what I’ve said on the last many calls. Range is in the best position in the company’s history.

As the world continues to move towards cleaner, more efficient fuels, natural gas and NGLs will be the affordable, reliable and abundant supply that help power our everyday lives, while also helping billions of others improve their standard of living. We believe Appalachia natural gas and natural gas liquids are positioned to meet that future demand. And within Appalachia, Range will be among those leading the way on capital efficiency, emissions intensity and transparency, which are all core to generating sustainable long term value for shareholders. Range has derisked a massive inventory of high quality wells in the Marcellus, measured in decades and translated that into a business capable of generating free cash flow through the cycles. With the resilient business plan for 2023 and 2024 and favorable long term fundamentals for natural gas and natural gas liquids, Range is well positioned to generate healthy returns on and returns of capital to shareholders.

I’ll now turn it over to Dennis to cover operations.

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Dennis Degner : Thanks, Jeff. I’ll start with capital. All in CapEx for the year totaled $492 million. Included in our fourth quarter activity were nine additional top holes as we were able to secure drilling equipment in December in advance of our 2023 program. This added $11 million to our original capital plans. Production for the fourth quarter averaged 2.2 Bcf equivalent per day, resulting in an annual average daily production just above 2.12 Bcf equivalent per day for the year. This was achieved despite a cumulative production loss of 2.7 Bcf equivalent and a few well turn-in-lines being moved into January during the cold weather Appalachia experienced in late December. As we look forward into 2023, our all-in capital spending is expected to be between $570 million and $615 million.

With this year’s activity weighted more towards our liquids rich acreage versus last year. Approximately two-thirds of the lateral footage turned to sales this year will be in the wet and super rich acreage positions with the remainder in Range’s dry gas footprint, including three wells in northeast PA. This plan delivers a similar production level as last year, at 2.12 Bcf to 2.16 Bcf equivalent per day, while adding lateral footage to our expected inventory at year end. The incremental inventory being added is underpinned by the drilling team’s successes in late 2022, and so far in 2023, they are off to an incredible start, setting daily footage records that I will touch on in just a moment. As a result our 2023 capital plan includes approximately $30 million associated with this lateral inventory, providing us with increased optionality as we think about our 2024 and 2025 operational plans.

Approximately 95% of this year’s capital is slated to be allocated towards drilling and completions related activity, with the remaining balance director towards leasing and support functions. Similar to prior years, the 2023 program is front-end loaded, with three horizontal rigs tapering off by year end, while completions will continuously utilize a single electric frac crew with a second crew performing planned spot work. 68 horizontal wells are expected to be drilled, with 61 wells turning to sales during the year. Our average horizontal links for wells completed and turned to sales during the year will be approximately 11,000 feet per well. With more than half of the wells developed on pads with existing production, similar to prior years.

Our production is expected to be back half weighted in 2023, similar to the last year, which fits nicely with the current shape of the natural gas forward curve. A review of our 2022 operational highlights begins with drilling. In the fourth quarter we drilled 13 top holes and five horizontals, with an average drilled horizontal length for the quarter of approximately 14,700 feet. As part of these results, we also added four new wells to our top 15 long lateral list, with each of the four laterals drilled in excess of 18,300 feet. This success continued into 2023, where the team has set a new Range record by drilling in excess of 7,300 feet in a single day and then beat that record again at 7,900 feet in a single day in the days that followed.

These results so far this year represent a 20% increase versus the prior record, showing the team’s continued efforts to improve efficiencies after drilling over 1,200 wells. Continuing with the flexibility afforded by our large contiguous acreage position and the practice of returning to existing pads, 75% of top holes drilled in the fourth quarter were on pads with existing production. In addition to the efficiency gains by returning to pads, 90% of the wells drilled in Southwest PA in 2022 were drilled with dual fuel rigs, which successfully displaced more than 480,000 gallons of diesel fuel. The fuel savings equated to nearly $2 million, while improving emissions from our operations. As a result of our fourth quarter long lateral development, drilling costs were approximately $230 per lateral foot, which was a 15% improvement versus the prior quarter.

On the completion side, we reached 8.8 fracs stages per day in the fourth quarter and completed over 3,100 total fracs for the year. Looking back on 2022, completion efficiencies continue to improve while setting several new records. The first new record involved averaging nine frac stages per day for a given quarter. Second, a new benchmark of 15 frac stages completed in a 24 hour period; and third; averaging 8.2 frac stages per day for the full year. One area driving these efficiency improvements is our return trips to existing pads, and the data driven decisions enhancing each consecutive completion job. For example, operations returning to pads has seen the average frac stages per day increase by 33% versus the first wave of development.

Applying data from prior completions, coupled with our use of strategic logistical planning and utilizing existing surface equipment has supported our recent records and continued leadership amongst peers on well cost and overall capital efficiency. Water recycling efforts for Range’s water operations and logistics teams resulted in saving $2.8 million for the fourth quarter, with our full year savings reaching a total of $12.9 million. Looking back on the past three years, the average savings per year is $12.4 million, and looking back even farther to 2018, the five year average is $11.8 million in savings per year, once again demonstrating the repeatable components that underpin Range’s operations. In addition to our standard production procedures, new technology is playing a role in our base production management.

This past year Range pilot tested the use of artificial intelligence in our production operations. Working in conjunction with our AI technology provider, an algorithm was created to monitor well production and make automated changes to parameters within our flow logic that enhanced production and reduced downtime. The trial was completed last year and based upon the results the project will be expanded this year, with the potential to add approximately 1 Bcf of growth production for the year. This production addition may appear small versus our total production, but it is this type of project that demonstrates our team’s continued focus on production optimization and the use of technology to further support our low base decline and improve returns.

In addition to our operational highlights, Range saw similar advancements for our safety performance in 2022. Through collaborative efforts with our Range employees and contractors, a 50% percent reduction in our OSHA incident rate was achieved versus last year, while reaching a program record low for days away or restricted duty, and making it our best safety performance in our program history. Shifting over to marketing, Range’s pre-hedged NGL price for Q4 was $27.17 per barrel, which was approximately $0.75 per barrel below the Mont Belvieu equivalent, showing the differential improvement mentioned on our prior earnings call. In November, Shale Chemical announced that operations had begun at its Pennsylvania project. The facility includes an ethylene steam cracker that will consume an estimated 100,000 barrels per day of ethane when it ramps to full production, representing a significant increase in basin ethane demand.

As we’ve stated previously, Range’s NGL logistics and marketing program is designed to provide flexibility across seasons, markets and phases of the business cycle. I’m pleased to report that the Range team made uninterrupted deliveries to our customers with improved NGL pricing versus the prior quarter. Looking ahead, Range is poised to benefit from improving NGL export economics in the first half of 2023. As China’s reopening proceeds, ocean freight rates stabilize and exports via the Marcus Hook terminal continue to command a price premium versus the Mont Belvieu index. Looking at this year, Range’s NGL differential guide for 2023 is between $1 below and $1 premium relative to our Mont Belvieu equivalent barrel. For natural gas, Range reported a better than expected differential of $0.29 below NYMEX for full year 2022, which beat the low end of our guidance.

As seen in our fourth quarter numbers and over the past several years, Range’s natural gas marketing process and active basis hedging program helped to mitigate some of the swings experienced in the daily markets. Similar to our guidance at the start of last year, Range is setting 2023 natural gas differential guidance at $0.35 to $0.45 below NYMEX. As we wrap up our operations and marketing update, I’d like to congratulate our team for their accomplishments discussed today and their dedication to our continued improvements. Thanks for your hard work and commitment to delivering on our safe, efficient operations. We look forward to the exciting things we’ll achieve in the year ahead. I’ll now turn it over to Mark to discuss the financials.

Mark Scucchi : Thanks, Dennis. On the earnings call a year ago, we spoke of a transformational year. We defined target debt levels and discuss the priority of debt reduction alongside a return of capital program. So in 2022, how do the actions and results compared to our stated objectives. I believe the results speak for themselves that we met or exceeded state objective. It was a record year for Range Resources in nearly every respect. Safe, efficient operations led to planned production levels. Our on-plan production levels sold through a diverse portfolio of sales points yielded strong realized prices. A constant focus on costs helped translate strong pricing into record cash flow and net income. That cash flow was strategically deployed to reduce debt, repurchase common stock and to reinitiate a cash dividend.

In summary, we executed on the plan communicated a year ago, exceeded goals and enhanced the resilience of the company so the business can thrive throughout commodity price cycles, generating strong returns and free cash flow. Let’s start with a discussion of the balance sheet. During 2022 Range reduced debt by approximately $1.1 billion. This brings total debt reduction since 2018 to approximately $2.3 billion. Debt reduction, combined with a timely refinancing in January of last year reduces current annualized interest expense by approximately $35 million, with additional savings expected as debt is further reduced. Leverage debt-to-EBITDAX stood at 0.8x at year end, the lowest in company history. Equity holders gained value from debt reduction, as well as through return of capital programs, including our share repurchases and cash dividends.

In 2022 Range repurchased $400 million in common equity. Since initiating the share repurchase program, Range has repurchase $430 million in stock, reducing share count by 24 million shares or nearly 10%. Additionally, the sustainable dividend was reinitiated midyear at an annualized rate of $0.32 per share, returning an additional $39 million to shareholders during the second half of the year. In total, capital returned to stakeholders in 2022 alone was more than $1.5 billion according to roughly one quarter of current market cap. With $1.1 billion remaining under the existing share repurchase program, we have ample capacity to prudently reinvest free cash flow in shares of the business. As a reminder, our priority remains further improving the balance sheet to within our stated target range of $1 billion to $1.5 billion net debt, which we have a potential to reach in coming months based on recent strip pricing.

As debt declines, we have incremental latitude to deploy free cash flow as evidenced by our actions in 2022. Driving balance sheet improvement and shareholder returns was the tireless operating team focused on safety and efficiency. The team delivered planned production at a competitive all-in capital cost of $0.64 per unit of production. When measuring capital efficiency and a maintenance profile, dividing capital expenditures by total production offers good perspective on relative performance, both in terms of cost and production profile. Not all capital dollars invested are equal. With perhaps the lowest decline rate of comparable companies, Range’s capital efficiency stands out in terms of cost per Mcfe, as well as the required reinvestment rate of cash flow to maintain production.

At $0.64 per Mcfe or less than 30% of cash flow reinvested as maintenance capital in 2022, Range was at or near best in the industry. We expect the same to be true in 2023. Fourth quarter operating results achieved cash flow of $513 million, compared to $112 million in capital spending, resulting in free cash flow of approximately $400 million. Significant improvements in fourth quarter free cash flow were driven by a combination of lower expenses and a 5% improvement in hedged realized prices per unit of production versus the prior year period, with realized price per unit reaching $4.33 per mcfe in the fourth quarter. Fourth quarter cash margins per unit of production were $2.49, an increase of $0.39 or 18% compared to fourth quarter last year.

Lease operating expenses remain in the historic range and in line with guidance at $0.11 per unit. Recurring cash G&A expense was approximately $32 million or $0.15 per unit, roughly in line with preceding quarters despite inflation. Cash interest expense declined to less than $36 million with redemption of 2023 notes in December totaling $528 million. Combined with debt reduction and refinancing earlier in 2022, annualized net interest expense run rate is estimated at $35 million lower than last year. Further significant interest savings should follow-up as we retire our additional debt. As we discussed each quarter, Range’s gas processing costs is linked to NGL prices such that gathering, processing and transportation expense decreased during the fourth four, serving as a right-way risk relationship between costs and pricing.

Also reducing costs in Q4 were lower fuel and electricity costs and some cost savings from winter weather downtime. Additionally, rising commodity prices has improved the value of our contingent derivative assets, such that the 2022 installment was maximized at $24.5 million, leaving an additional $21 million as a potential remaining balance for 2023. Taxes have become a relevant topic with company profitability. In 2022 Range’s total cash taxes are state level for a total of roughly $15 million for the year. At year end 2022 Range had federal NOL carry forwards totaling $2 billion. These NOLs will serve to reduce taxable income in coming years subject to utilization limitations. For some added understanding, the first layer of federal NOLs totaling $375 million can be used to reduce up to 100% of taxable income.

The remaining $1.7 billion of federal NOLs can be used to reduce up to 80% of a given year’s taxable income. At current strip pricing and Range’s expected profitability, we believe will benefit from the full utilization of these NOL carry forwards in coming years. Turning from 2022 accomplishment to where the company is headed in 2023, given the strong foundation provided by high quality assets paired with low financial leverage, we expect Range’s strategic focus will remain consistent going forward: Generate free cash flow, reduce debt, prudently return capital and reinvest in the business. This plan is reinforced with a thoughtfully constructed hedge book that in principle is the same risk management process we have always used. We seek to thoughtfully retain participation and improve long term market pricing, while increasing confidence in near term forecasted cash flow, all in support of a consistent, efficient operations, preserving the balance sheet and thereby preserving optionality around returns of capital.

We believe Range’s results demonstrate a thoughtful approach to hedging has served the company well and will continue to do so in the future. Presently, Range has approximately 55% of 2023 natural gas hedged with an average floor price of $3.57 and in 2024 approximately 35% hedged with an average floor price of $3.75, which is at or near the head of the class among natural gas producers. Range’s business plan continues to be executed on what we believe is the largest high quality asset in Appalachia, paired with a 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 that the Range business can and will continue to deliver significant value to investors.

Jeff, back to you.

Jeff Ventura: Operator, we’ll be happy to answer questions.

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Q&A Session

Operator: Thank you, Mr. Ventura. The question-and-answer session will now begin. The first question comes from the line of Jacob Roberts of TPH&Co. Your line is now open.

Jacob Roberts : Good morning, guys.

Jeff Ventura: Good morning.

Jacob Roberts : Just looking at the Q4 results, I noticed the liquids percent is a tiny bit higher than the 30% and it had scaled throughout the year, and then comparing that to the turn in line plan you’ve laid out for 2023. I’m just curious if you could provide some guardrails around that 30%, either through the year or as we might see it progress over the quarters.

Dennis Degner: You bet. Good morning, Jacob. This is Dennis. When you look at a given quarter’s results, you know there’s some things that could move that percentage factor around as we kind of take a step back and put some color around it, and one could be you know variations in ethane extraction just given what’s taking place at the market at that particular time. The timing of vessel loadings, that’s something we’ve also clearly referenced as variable that can move some of our percentages around. But when you look at 2023 versus 2022 or even Q4, half of our activity in our turn-in-lines is going to be clearly in the wet portion of our field, and when you look at from wet to super rich, you’re going to see really variations, just even between those two areas from the amount of NGLs and also overall liquids production that will be generated from that activity.

As you start to look through the balance of the year though, that production profile as we touched on in the prepared remarks will be more back half weighted, so we’ll see some fluctuations throughout the given quarters as we move from dry to wet through the super-rich profile of our activity program.

Jacob Roberts : Great, that’s helpful. And then for my follow-up, and I would echo the commentary about the great work your marketing team does on results as well as the disclosures you guys give. I’m just curious if you could talk a little bit about longer term, how you guys are approaching the market 2025 plus as new opportunities might present themselves and any conversations that are happening now, we might think about longer term?

Dennis Degner: Yes, this is Dennis again Jacob. I’ll dive in on this one. You know as we start to think about 2025 and beyond, clearly the topic that starts to surface is really this €“ the LNG second wave expansion that will start to come hit the surface and beyond and potential additional infrastructure. When you look at the way our program is shaped today, you know a couple of things we think about. One, our organization has what we would say is from a marketing perspective, experience in not only transacting conventional indices and markets here in the lower 48, but also is we’ve also got exposure to international indices as we currently sit with our liquids exposure, and we’d like that in a way that has diversified our program.

Our transport as we’ve touched on before, we get essentially 25% of our gaskets to the gulf. The other 25% of that 50 that gets there is already transacting in the LNG space today and we would continue to look at participating in that space further as we go forward, but it also has to compete on a returns basis as Mark just touched on with our financial objective, so those are two key items. As we think about what the program will look like in the future, we want to continue to have conversations with varying €“ we’ll just say we’re going to have, continue to have diversity as a part of our transportation portfolio and our customers that we transact with, whether it’s on the NGL side or it’ll be on the net gas side as well, and we think when you look at it, this all ties back to our inventory conversation.

We know that the expansion of infrastructure in the future, these are multi-decade financial investment decisions for our organizations, and we think that our inventory and our transport aligns really well with the ability to participate in this infrastructure and opportunities as they further materialize.