Yahoo Finance Range Resources Corporation (NYSE:RRC) Q4 2023 Earnings Call Transcript
Range Resources Corporation (NYSE:RRC) Q4 2023 Earnings Call Transcript February 22, 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: Welcome to the Range Resources Fourth Quarter 2023 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 risk and uncertainties which could cause actual results to differ materially from those in the forward-looking statements. After the speaker’s remarks, there will be a question-and-answer period. At the 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 year-end 2023 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-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. 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 2023 plan was successfully executed with a consistent theme throughout the year. Operating safely while driving continued operational improvements, generating free cash flow with a peer 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 fourth quarter results are a great example of continued advancement against those key objectives and showcase the resilience of Range’s business in a low point of a cycle. Likewise, our year end reserves update and 16th consecutive year of positive performance revisions points to the repeatable nature of our Marcellus inventory.
As we look towards the year ahead, you will hear those themes repeated and I believe the resilience that our business has in a lower price environment will be a key differentiator for Range. Maintaining a flexible hedge program to cover fixed costs and capital commitments is clearly beneficial in periods of price weakness like we find ourselves in today. However, the real value proposition over the long run is underpinned by Range’s low sustaining capital requirements. Our 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. Altogether, these results in a required reinvestment rate that is lower than any of our peers, which provides Range a solid foundation for consistently generating significant free cash flow and returns to shareholders.
Further bolstering Range’s durability is our liquids contribution, which is approximately 30% of our total production volume. Our liquids revenue is expected to provide an uplift to natural gas prices and using today’s strip pricing it’s very meaningful. For context, Range’s NGL barrel is currently priced around $24 per barrel using strip prices for 2024. That is equivalent to a $1.60 per MCF premium to recent Henry Hub pricing. When we roll all of that together, our liquids revenue uplift, our low maintenance capital and a thoughtful hedging program, you get the lowest break-even among natural gas producers and the most resilient organic free cash flow as evidenced by our 2023 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.
Turning to our near-term plans. For 2024 Range expects to generate healthy free cash flow at strip pricing with all-in capital spending between $620 million and $670 million. This capital plan consists of approximately $575 million to support our base level maintenance production plan similar to the past few years, along with additional investments in three categories. First, is additional acreage spending above maintenance levels which not only allows for longer laterals but actually offsets most of our lateral footage being turned to sales keeping our 28 million feet of core Marcellus inventory relatively unchanged. Second, is an investment in expanding our water infrastructure which provides a very quick payback and supports a low D&C and LOE cost in the future.
And lastly, is flexible drilling and completion capital, like we had in 2023, which increases our year-end inventory of drilled and/or completed lateral footage providing us optionality and flexibility as we evaluate the optimum setup for following years. The overall number of drilling rigs and frac crews will be the same as last year with the additional inventory generated as a result of simply retaining the equipment, which maintains operational efficiencies and provides flexibility for 2025 and beyond given the macro backdrop. Range is planning a maintenance production profile that is similar to recent years at 2.12 BCF equivalent per day to 2.16 BCF equivalent per day. Approximately three-quarters of the lateral footage that will turn to sales this year will be located across our wet and super-rich acreage positions providing the added benefit of our NGL uplift to overall cash flow and price realizations.
With the remainder of our program focused in our dry gas footprint. Our operational cadence for 2024 will consist of two horizontal drilling rigs operating throughout the year resulting in the total combined footage of approximately 750,000 lateral feet being drilled or about 100,000 feet more than what we will turn to sales. 2024 completions will be executed utilizing a single new electric fracturing fleet operating through the year as well. Consistent with a maintenance production program approximately 640,000 lateral feet from 50 new wells is expected to go into production in 2024, with more than half of the new wells being drilled developed on pads with existing production. Returning to pads with existing production has been a repeatable part of the Range story for many years and supports both our capital and operational efficiency.
Similar to prior years, our activity and capital will be weighted towards the front half of the year, while our quarterly production profile is expected to be back half weighted as the new turning lines materialize in the back half of 2024. First quarter production is expected to be around 2.1 BCF equivalent per day before building into the second half of the year. Our operational review for the past year showcased a continued theme of execution excellence that starts with our drilling highlights. 2023 saw several new efficiency records set for the program, while drilling a total combined lateral footage of nearly 700,000 feet. The team managed to drill eight of the top 15 longest laterals in Range’s program history with 40% exceeding 15,000 feet laterally.
Four of the wells had a lateral lengths greater than 20,000 feet with the longest two laterals extending four miles. Our large contiguous acreage position affords us the ability to drill these type of long laterals, increasing efficiencies and allowing us to access more reserves from a single location, all while reducing our overall footprint and consolidating infrastructure requirements. In addition to the new horizontal length records set by the team, we also set new benchmark rates for daily drill footage. The average daily lateral footage drilled in 2023 was more than 4,600 feet per day, a step change increase of 38% over the previous year, with the fastest drilling day exceeding 7,450 feet drilled in a 24-hour period. The efficiency gains we see from longer laterals and faster daily drilling rates are key to the program’s success, but equally important was that the team managed to simultaneously improve its pinpoint accuracy when in zone.
Over the years, our drilling and geoscience teams have set an extremely precise standard for our horizontal targeting, typically with a tolerance of less than 20 feet. In 2023, with all the long lateral and high drilling rate success the team had, they did it while staying within their high graded targets for more than 93% of the lateral footage drilled in the year. A noteworthy achievement by the team. This type of laser focus plays a role in the positive performance revisions and consistent reserve reporting that investors have come to expect from Range. Moving to completions, several new completion efficiency records were established during the year to include the following; increasing overall efficiencies to nine stages per day, a 10% improvement over the prior mark which was just set in 2022; achieving our highest pad average of 13.4 stages per day, a mark set during the fourth quarter; successfully completing Range’s longest well to-date with a total measure depth of 29,500 feet and setting a new record of 17 stages completed in a 24-hour period.
These incremental gains in operational efficiency could not have been accomplished without reliable logistics supporting each stage and the Range water operations and logistics team played a critical role in supporting these efforts. But these operational results are incomplete if we can’t execute safely. In addition to the highlights shared today, the team also delivered on one of our best safety and environmental performances in the company’s history. We look forward to sharing more on these results in our upcoming Corporate Sustainability Report in the months ahead. Turning quickly to marketing. During the quarter, Range’s weighted average NGL price was $24.91 per barrel. This is a $2.42 per barrel premium to the Mont Belvieu Index and the highest quarterly premium in company history.
This performance was driven by Range’s flexible LPG export program and strong seasonal butane values during the quarter. Full year 2023 saw $1.24 per barrel NGL premium and was also a company best on an annual basis. We expect Range to maintain a differential to the Belvieu Index of $1 minus to $1 premium for 2024 by leveraging our export capacity and flexible transportation options. To the extent that export dynamics remain tight in the Gulf Coast, as they were in the second half of 2023, we would expect our access to the East Coast to be advantaged, pushing us toward the premium side of our guidance. And as I mentioned at the beginning of these remarks, Range’s NGL barrel is currently priced well above natural gas prices, supporting our durable free cash flow profile.
Turning to natural gas. Near-term prices are obviously incredibly challenging for the industry and we expect these historically low price levels should help keep a lid on natural gas production across the U.S. We’re encouraged by reduced industry activity in the Haynesville and Tier 2 basins, along with maintenance programs being planned in the Marcellus. This moderated industry activity, along with LNG project startups expected in the second half of 2024 and continued strength in gas power generation, provides the potential for the domestic market to rebalance later this year. While beyond this year, continued growth and global demand for U.S. natural gas, combined with domestic power and industrial demand and Tier 1 well inventory exhaustion, all set up a strong outlook for long-term U.S. gas fundamentals.
Before handing over to Mark, I’ll reiterate a message we’ve shared previously. 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 believe the positive results we generated in 2023 and plan to build upon in 2024 are a reflection of that focus and show the resilience of Range’s business. I’ll now turn it over to Mark to discuss the financials.
Mark Scucchi: Thanks Dennis. 2023 highlighted the strengths and the weaknesses of companies in the energy sector. For upstream producers, quality assets with low full cycle costs, the ability to reach a diverse set of customers with a variety of price points and a rock solid balance sheet to provide flexibility were all necessary to create value. Range has each of these key attributes and through sound execution by the team, the company generated strong free cash flow, reduced debt, paid dividends, bought back shares and reinvested in operations, not only for maintenance, but to prudently position the company for the future. As we sit here in early 2024 with an efficient plan to maintain steady production, we are also carefully positioning the business for evolving domestic and international demand for natural gas and natural gas liquids.
As incremental demand materializes, Range will be positioned to be a reliable long-term energy supplier that generates strong returns from a resilient business. Let’s start with capital allocation in 2023. Cash flow before working capital of approximately $1.1 billion funded our capital investments of $614 million, a reduction in debt net of cash of $292 million, along with roughly $96 million in dividends and share repurchases. This allocation demonstrates the fact that in a low commodity price setting, Range comfortably maintained base production that drove strong cash flow on the back of cash margins equating to greater than 40% of realized price per unit. This resilient margin attributable to an advantageous commodity mix, paired with a diverse sales portfolio and competitive unit costs, allowed prudent investments in the business and cash returns from the business, while further strengthening the balance sheet.
Over the past two years, Range has reduced net debt by an aggregate $1.2 billion and returned capital to shareholders in the form of share repurchases and dividends totaling $535 million. In total, that is more than $1.7 billion in capital returned to stakeholders. With a balance sheet in great shape and a reduced share count, continued resilient value generation is the goal. Driving 2023 strong financial results was the tireless operating team focused on safety and efficiency. The team delivered planned production at a competitive drilling and completion capital cost, which included building a few wells for inventory. With perhaps the lowest decline rate of comparable companies, Range’s capital efficiency stands out in terms of cost per MCFE, full cycle break-even costs and the required reinvestment rate of cash flow to maintain production.
As a percentage of cash flow, Range should regularly be near the lowest call on cash for sustaining CapEx. We expect this to be true of this asset base for many years. Focusing on the fourth quarter for a moment, operating results achieved cash flow before working capital of $300 million. Cash flow was a result of realized price per unit of $3.25 per MCFE. Margin benefited from lower expenses with an $0.11 reduction in unit costs compared to fourth quarter last year, driven primarily by lower GP&T and lower interest expense. Fourth quarter cash margins per unit of production were $1.42, a healthy 44% margin despite lower commodity prices. As we often mention, Range’s gas processing cost is linked to NGL prices such that gathering, processing and transportation expense decreased during the fourth quarter, serving as a right-way risk relationship between costs and pricing.
Also reducing costs in Q4 were lower fuel and electricity costs. Taxes have become a relevant topic with company profitability. In 2023, Range’s cash taxes are only at the state level for a total of roughly $1.5 million for the year. At year-end 2023, Range had federal NOL carry forwards totaling $1.8 billion. These NOLs will serve to reduce taxable income in coming years. For some added understanding, the first layer of federal NOLs totaling approximately $158 million can be used to reduce up to 100% of taxable income. The approximate 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 we will benefit from the full utilization of these NOL carry forwards in coming years.
Turning from 2023 accomplishments to where the company is headed in 2024, given the strong foundation provided by high quality assets and low financial leverage, we intend for Range’s strategic focus to remain consistent. Maximize the value of a multi-decade project inventory, generate free cash flow, prudently return capital and reinvest in the business. 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, all to support consistent efficient operations, preserving the balance sheet and creating additional optionality around capital allocation. We believe Range’s results demonstrate a successful hedging philosophy that has served the company well and 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 an average floor price of $4.11, providing Range a stable base to consistently generate free cash flow through market cycles. 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 the Range business can and will continue to deliver significant value to investors. Dennis, back to you.
Dennis Degner: Thanks, Mark. Before moving to Q&A, I’d like to congratulate our team for their accomplishments discussed today and their dedication to our continued safety performance, operational improvements and progress towards our stated financial objectives. 2024 looks like it’s going to be a challenging year for the industry, but Range’s business has never been stronger, having derisked a 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 up the line for questions.
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