Markets

Range Resources Turns The Gas On

By David Phillips

Updated on: September 5, 2008 / 7:18 AM EDT / MoneyWatch

The Company: Range Resources, a natural gas exploration company operating in the United States.
The Filing: Form 8-K filed with the SEC on September 3, 2008.
The Finding: Like its natural gas peers, Range Resources is facing production delays due to a shortage of pipeline capacity. The company said shut-in wells at the Marcellus Shale development in Appalachia are now expected to commence production early in the fourth quarter of 2008, ahead of the previously scheduled second-quarter 2009. Falling natural gas prices, however, could turn good cheer at the company to bad tidings.

The Upshot: Range is working to unlock the shale gas potential in the unconventional Appalachian Basin. Currently three rigs are in operation, and management said the 40-well horizontal program is progressing with encouraging results. Plans are to steadily increase drilling operations to eight rigs by year-end 2009. With regard to delivery, Range has secured firm capacity that escalates to 150 Millions of Cubic Feet Equivalent (Mmcfe) per day over time, from year-end production projected at 30 Mmcfe per day. The company is in discussions to increase pipeline capacity to more than 300 Mmcfe per day by year-end 2009.

"The times they are a-changin," sang Bob Dylan. Historically, drilling activity and gas prices formed a feedback loop. As inventories fell, demand and prices increased-signaling producers to ramp-up rig and drilling rates. No longer -- with billions being spent on onshore drilling, companies can ill-afford to shut-in capacity.

As of August 29, natural gas in storage was 2,847 billion cubic feet, which is about four-percent above the 5-year average (2003-2007), according to the Energy Information Association. Not surprisingly, at the New York Mercantile Exchange, the futures contract for October delivery at the Henry Hub settled Wednesday at $7.264 per MMBtu -- down more than 14 percent from the average price Range realized for its natural gas delivered in its second-quarter ended June 30.

New wells are marginally economic only where the projected production revenue approaches the cost of drilling the well. Range spent $469 million on development and exploration for the six-months ended June 30 -- almost $124 million more than the net cash generated from operations. Eventually, the company caps its wells, or offsets revenue decline (in times of sustainable natural gas price declines) by expanding production.

The Question: Will the price of natural gas on the futures market force energy companies to rethink where and how much they invest in unconventional resources like Marcellus?