Shareholder Letter - 2013 Annual Report
Dear Fellow Shareholders:
2013 was a very good year for Range. We posted another profitable year of double-digit production and reserve growth, while reducing costs and being good stewards of the environment and the communities where we live and work. Last year, we grew production 25% with a capital budget of $1.3 billion. Cash flow increased 25% year-over-year, and cash flow per share, debt adjusted, grew 26% year-over-year. Our proved reserves grew 26% to 8.2 tcfe, which equates to replacing 612% of our production. The all-in cost to find and develop these reserves was $0.61 per mcfe. Reserves per share, debt adjusted, increased 25%, while production per share, debt adjusted, grew 26%.
As a result of our development activity, we have moved 6.4 Tcfe of unproved resource potential to proved reserves over the past four years. Because of this excellent performance, our total DD&A rate has declined 38%, from $2.33 per mcfe in 2009 to $1.44 in 2013. Looking at this same time period, our operating expense per mcfe declined 57% from $0.83 per mcfe to $0.36. In short, Range is continuing to improve its capital and operating efficiency and the results are flowing through to the bottom line. Net income for 2013 was $116 million, up from $13 million in 2012.
In December, we reached two new production milestones as our gross Marcellus production reached one Bcfe per day and our corporate net production reached one Bcfe per day. Late last year, Sunoco Logistics’ Mariner West project became fully operational and Enterprise’s ATEX project started line fill in December, providing two very important ethane outlets for our Marcellus Shale production. In summary, 2013 was an excellent year in both operational and financial performance.
Looking to 2014, I believe there will be three key items that will distinguish performance among companies in our industry: (i) owning a sizable acreage position in the core area of one of the key plays, such as the Marcellus; (ii) the ability to consistently execute operationally and financially; and (iii) having a strong, forward-thinking marketing team. The first is critical because the application of the technology of horizontal drilling and multiple stage hydraulic fracturing has been applied to most of the domestic basins. Therefore, most of the major plays have more than likely been identified and are largely leased. The key, then, is to have a large concentrated acreage position in the core of one of the major plays. The economics are very different in the core versus non-core areas, due to differences in rock quality and the corresponding impact on the productivity of wells. Fortunately, our company has a huge position in the core of the Marcellus, which is the best natural gas play in North America - maybe the world, given the economics of the Marcellus and the risks elsewhere.
Second, I believe that the ability to consistently execute at a high level will be critical in 2014. At this point in time, the key plays and the resource potential in them are largely known. The key now will be to consistently drive up oil and gas production from these plays. Notably, Range has a 10-year track record of consistently meeting or exceeding its targets – a 10-year period with a 20% production CAGR. Although past performance does not guarantee future success in any industry, we have created a team and a culture that consistently performs, and meets or exceeds targets. Time after time, rather than succumbing to events like freezing weather, hurricanes and significant infrastructure delays, our team finds ways to overcome and achieve our targets.
Third, for 2014 and beyond, having a strong, forward-looking marketing team will be vital. Given the renaissance of the U.S. oil and gas business, supply is temporarily ahead of demand, although we see strong signs that demand growth is coming. We believe that Range is also well positioned to market our products as we execute a plan to grow production significantly. The best evidence for this, again, is our performance. After discovering the Marcellus Shale in 2004 and bringing the first well online in 2005, we knew the Marcellus Shale gas had very high Btu content and would not meet pipeline specifications because it contained so much ethane. Early on, some in the industry viewed gas this rich as a negative, and we were approached by some companies who wanted Range to pay a fee to them in order to “fix” our ethane problem. Rather than accept this as a solution, our team was very creative in building a diversified portfolio of three ethane markets based on three different pricing formulas that would not only ensure that our gas met pipeline quality specifications, but would also provide market price diversification and enable Range to grow production to greater than 3 Bcfe per day. Very importantly, rather than these solutions costing us money, our team’s solution enhances the value of the project. If all three marketing arrangements were fully operational today, Range’s ethane revenue would increase by about 25% compared to leaving ethane in the gas stream. That’s net of all transportation and processing costs and including additional propane recovery. We believe this is the best ethane sales portfolio of any company in the United States, and it’s a direct result of our team’s hard work and creativity.
We are currently selling our Appalachian Basin gas not only to customers in the northeast but also to customers located south, southeast and west of the basin. By 2017, our Marketing Team is working to have the capability of selling our Appalachian Basin gas to customers as far west as Wisconsin, on a line south to Texas, east to Florida and north to Maine. We are projecting that we could be able to move 4 to5 Bcf per day of Appalachian gas to where two-thirds of the current United States demand for natural gas exists.
On the financial front, we strive to maintain a strong, flexible balance sheet to fund our operating strategy. Range continues to build economies of scale and our cost structure continues to improve, enhancing our competitiveness. Range’s continued operational success, combined with the lower interest rate macro-economic environment, has resulted in a lower cost of capital.
I believe that we are well positioned for 2014 and beyond. We have a large footprint in the core of what we believe is the best gas play in the U.S., a technical and operations team that has demonstrated it can execute well, and a strong marketing team with a demonstrated track record. Our philosophy at Range is straightforward: to be good stewards for our shareholders, the environment and the communities where we live and work. It’s that simple. This core commitment starts with Range’s Board of Directors and extends to our over 800 employees. It’s this culture that has allowed us to continue to responsibly develop some of the most exciting and prolific assets in our industry and it’s what will drive us well into the future.
I would like to welcome our newest Board member, Mary Ralph Lowe, who joined the Range Board in April of 2013. Mary Ralph has served as president and chief executive officer of Maralo, LLC, a private oil and gas exploration and production company, since 1973. She served on the Board of Apache Corporation from 1996 to 2002, and currently serves on numerous Boards including Texas Christian University, the Performing Arts Center of Fort Worth, the National Cowgirl Museum and Hall of Fame, and the Modern Art Museum of Fort Worth. Mary Ralph brings a wealth of knowledge and experience to the Board, and Range is fortunate to have her as a member of the Board.
Thanks to our employees for their dedication, hard work and creativity that made 2013 a success for Range. Thanks to our Board of Directors for their wisdom and guidance during the year. Thank you to our shareholders for your belief in our company and its future.
Jeffrey L. Ventura
President & Chief Executive Officer