Range holds production flat in Q1 2023, keeps paying down debt

Appalachian shale gas driller Range Resources Corp. will drop two-thirds of its horizontal rigs before the end of the year while keeping production flat over the same time, executives said.

Wall Street has been calling on shale gas producers to cut their rigs to help balance an oversupplied gas market, but Range's move will not appreciably change the amount of gas coming to market in 2023. Under the company's maintenance plan, Range intended to produce between 2.12 Bcfe/d and 2.16 Bcfe/d of oil, gas and liquids, just above 2022's output of 2.12 Bcfe/d.

"We're very comfortable with the maintenance program that we have laid out," COO Dennis Degner told analysts on the company's first-quarter earnings call April 25. "By the time we get to the midyear point, we'll be down to one drilling rig and one frack crew. So this is what I would say is a very comfortable low-end position for our program."

Currently, Range is operating three horizontal rigs in Appalachia with one frack crew and two "top hole" rigs. Top hole rigs drill the initial vertical part of a shale well and are cheaper to operate than horizontal rigs. Degner said Range planned to drill more wells in the first half of the year and maybe add a frack crew to complete them in the second half.

Inflation slowdown

Degner said inflation is easing in Appalachia and costs are coming down. "Year to date in 2023, we have seen the price of rigs and pumping crews start to show signs of receding slightly," Degner said. "Next-generation pumping crews continue to be in high demand, but the availability of traditional spot crews and drilling rigs has increased.

"Commodities and raw materials like tubular goods and sand are also starting to show signs of increased availability," Degner said. "It is possible this could translate into slight one-off savings later this year with broader savings more likely to occur in 2024."

A 2-Bcfe production level will allow the driller to keep costs down while keeping its gathering systems full, Degner said. Range had no immediate plans to grow volumes significantly.

Range's first-quarter gas production of 1.49 Bcf/d was 2% more than the first quarter of 2022, while its combined production of gas, oil and liquids was up 3% on the strength of a 10% increase in NGL volumes to 103,219 b/d. In the first quarter, Range realized $3.58/Mcf for its gas after hedging, an 11% decline from the first quarter of 2022, and 28% less for its NGLs, which are 30% of production, at $27.60/b.

Range's adjusted net income of $239 million, or 99 cents per share, exceeded consensus expectations of 81 cents per share among analysts surveyed by S&P Global Market Intelligence.

A pioneer of Marcellus Shale gas drilling, Range is banking on its large Appalachian land position and lower costs to keep generating cash as commodity prices rise and fall. In the first quarter, Range reported $475 million in cash from operations, a 17% increase over the same period a year ago.

Use of cash

Range ended the quarter with $228 million in cash on the books.

CFO Mark Scucchi outlined Range's intentions for its free cash. "First, maintenance capital expenditure in order to utilize infrastructure and maximize margins; second, debt reduction towards target debt levels; third, return of capital to shareholders; and fourth, growth," Scucchi said on the call.

Scotiabank analyst Cameron Bean told clients that the company allocated most of the quarter's free cash flow to debt reduction, reducing net debt to about $1.62 billion. "We continue to view Range as well-positioned to ride out the weak natural gas price environment and deliver a free cash flow yield near the top of the peer group in 2023," Bean wrote.