Range Resources Corp Q2 FY2025 Earnings Call

Welcome to the Range Resources Second Quarter 2025 Earnings Conference Call. Statements made during this conference call are not historical facts or 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 speaker's remarks, there will be a question and answer period. At this time, I would like to turn the call over to Mr. Laith Sando, Senior Vice President, Investor Relations at Range Resources. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining Range's Second Quarter 2025 Earnings Call. With me on the call today 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 will also find our 10-Q 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, I'll turn the call over to Dennis.

Thanks, Laith, and thanks to all of you for joining the call today. Before Mark and I provide an update on Range's business, I'd like to start today's call by expressing our deepest sympathy to all of those impacted during the recent flooding in Texas. As we continue to gather information from this tragedy, we see just how close to home this has become for many of us at Range and for many of you on this call. Our hearts go out to the families and communities impacted during this time and know that we will keep you in our thoughts. As we shift over to Range's business, this year is off to a great start with another quarter of consistent well performance and efficiency gains driving strong free cash flow. Shareholder returns are building operational momentum to support Range's 3-year outlook. Range has previously announced growth plans of approximately 20% through 2027, with near-term line of sight to growing demand for natural gas and NGLs. At the same time, our plans are positioning Range to benefit from additional in-basin demand opportunities that continue to materialize. Just last week, in Pennsylvania, we joined the President, Senator McCormick, a bipartisan group of government officials, and leaders from the largest tech, construction, financial and energy companies. In total, over $90 billion in new AI, power and infrastructure investments were announced, all in Pennsylvania. These projects represent the future, one that will require a substantial increase in regional electric demand, positioning Pennsylvania natural gas to be a cornerstone that will power the AI revolution. We believe Range is incredibly well positioned to support these initiatives, being one of the few producers in Appalachia with sufficient high-quality inventory to support the required long-term durable supply of natural gas. More near term, our consistent well results and countercyclical investments in drilled inventory over the last 18 months are allowing Range to very efficiently deliver a wedge of growth into this increasing demand. Importantly, we intend to deliver that growth while maintaining a disciplined reinvestment rate that allows for significant returns to shareholders at the same time. A key component of Range's business that allows growth and shareholder returns through cycles is Range's low capital intensity, which is anchored by our class-leading drilling and completion costs, shallow base decline, large blocky core inventory and talented team. We believe this was on display once again during the quarter. Diving into Q2, Range executed on our plans safely and efficiently, delivering consistent well results and free cash flow with steady activity levels that support the longer-term outlook we've communicated. All-in capital came in at $154 million, while generating production of 2.2 Bcf equivalent per day as we turned to sales approximately 156,000 lateral feet across 12 wells. Year-to-date capital is tracking better than planned. Our year-to-date savings from efficiencies reflect the benefit of returning to pad sites for ongoing development and the team's dedication to continued improvement. I'll touch on a few of the operational highlights driving this in just a moment. We have invested approximately $300 million in development and land capital in the first half of the year versus our full-year budget of $650 million to $690 million. As a result, we are lowering the high end of our capital guidance to $680 million without altering our planned operational activity. For production, we expect continued strong performance in the field will drive annual production above our prior guidance, with outperformance weighted towards the fourth quarter as we bring in a spot completion crew later this year to complete two pad sites. We are expecting production to be roughly flat in the third quarter at 2.2 Bcf equivalent per day and then stepping up to approximately 2.3 Bcf equivalent per day in the fourth quarter, demonstrating progress towards the planned growth we have discussed for 2026 and beyond and aligning with an expected steady improvement in natural gas fundamentals. Consistent with prior quarters, Range operated two horizontal rigs during the second quarter, drilling approximately 284,000 lateral feet across 20 laterals, averaging over 14,200 feet per well. This adds to Range's planned drilled uncompleted inventory and places us on track to exit 2025 with more than 400,000 lateral feet of growth-focused inventory, supporting our 3-year outlook. Building on the momentum from earlier this year, our operations team set new Range quarterly drilling and completion records. To start, our drilling team set another program record by averaging approximately 6,250 lateral feet per day. This achievement occurred while maintaining precision within an exceptionally narrow geosteered landing target window, underscoring Range's capability to drill our longest, fastest, and most accurately placed wells to date. On the completion side, the team executed 812 frac stages, setting a new company record for the most stages pumped by a single crew in a quarter, a 7% increase over the previous record. Achieving this level of completion efficiencies clearly takes planning across multiple departments for water operations and logistics, and the team continues to impress, all while keeping lease operating expense at just $0.11 per mcfe for the quarter. This type of drilling and completions efficiency puts us in great shape for 2025, while also setting up the 3-year outlook we've communicated. I'd like to congratulate our team on the new milestones set during the quarter. Before moving on to marketing, I'll briefly touch on supply chain. The strength of Range's long-term service partnerships and the contractual agreements that are in place for the remainder of the year support the improved capital numbers I've highlighted. These agreements cover the majority of our 2025 spend, including drilling rigs, hydraulic fracturing services, proppant, tubular goods, and diesel fuel. Looking towards 2026, Range is preparing to launch our annual RFP for services in the months ahead, seeking to secure go-forward service pricing. While it is early to talk specifics on 2026, we expect Range will continue to be in a leading position on well cost and capital efficiency with the low required reinvestment rate that you've come to expect from us. Now turning to marketing and the macro. Natural gas inventory finished the quarter at approximately 3 Tcf, down 6% from the prior year and supported by record high LNG feedgas, which reached over 17 Bcf per day in the second quarter. From a combination of added U.S. LNG exports and pipeline expansions to Mexico, the U.S. natural gas market is expected to add 8.5 Bcf per day of new demand over the next 18 months, which we believe to be supportive of near-term natural gas fundamentals. For liquids, during the second quarter, we directed LPG barrels to the international export market in order to capitalize on continued favorable pricing dynamics. For context, Range's LPG export volumes are currently under contracts with international pricing upside or a fixed premium to the Mont Belvieu index. This structure enhances our ability to capture consistent premium pricing throughout the year and reinforces Range's competitive positioning. Additionally, our advantaged East Coast export capability continues to differentiate Range as a preferred NGL supplier to European markets relative to U.S. Gulf Coast-based peers. Range's combined flexibility, reliability, and responsiveness to market dynamics delivered solid results with a premium to the index of $0.61 per barrel. Accordingly, we have again improved the full-year guidance for our expected NGL premium. Stepping back and looking at the broader landscape for liquids, U.S. NGL exports continue to outperform with U.S. waterborne ethane exports increasing by 5% to 475,000 barrels per day, while propane exports also increased by 5% to 1.8 million barrels per day versus the second quarter last year. Looking ahead, U.S. NGL exports are expected to ramp significantly as terminal capacity is expanding, some of which is starting up as we speak. U.S. ethane and LPG export capacity are expected to grow by approximately 425,000 barrels per day over the next 18 months, helping to support near-term fundamentals. Before handing over to Mark, I wanted to share highlights from our recent corporate sustainability report. We believe the natural gas produced in Pennsylvania offers both economic and environmental advantages. This year, we're proud to have achieved net zero for Range's combined Scope 1 and 2 greenhouse gas emissions, accomplished through a combination of direct emissions reductions and the use of verified carbon offsets. This commitment can be seen in our 83% reduction in methane's emissions intensity over the last five years. Additionally, we expanded our MIQ certification to cover all of our Pennsylvania assets and once again earned an A grade, the highest distinction available. We are proud of these accomplishments, and our team remains focused and motivated to continue our efforts as an industry leader. Now more than ever, we believe the future of natural gas and NGLs is strong with significant demand coming in the near and medium term, both globally and within Appalachia. Range is poised to help meet this future demand while creating outsized value for shareholders with the strongest financial position in company history, a large contiguous inventory measured in decades, and a proven track record of delivering through-cycle returns of capital while investing in the long-term success and optionality of the business. I'll now turn it over to Mark to discuss the financials.

Thanks, Dennis. With the first half of 2025 behind us, the year is unfolding as a success, both operationally and financially. Our 2025 operational plan is focused on disciplined development of our asset while capturing additional future value from growing demand. This plan was designed to deliver both value from future growth and to deliver returns to shareholders today. So let's dive right into what Range has already delivered to stakeholders in 2025. In the second quarter, we repurchased $53 million in shares, bringing the first half of the year total to $120 million. We paid $21 million in dividends in the quarter, bringing the year-to-date total to $43 million. We also repaid maturing senior notes totaling $606 million using cash on hand and a modest repurchase. In aggregate, this brings year-to-date enterprise value returned to equity holders to $646 million, roughly 7% of Range's market cap in just the first two quarters. These numbers are in the financials. So why am I calling them out now? It's because they warrant attention. These are tangible results delivered to shareholders, and they are indicative of where Range can take the business as natural gas prices respond to rising domestic and international demand. With a strong balance sheet, less than 1x levered, Range's ability to return capital and pursue investments in the business is not deferred by balance sheet needs but is being carefully evaluated and opportunistically executed. In other words, Range is delivering on the industry's promise of future returns today while still investing for tomorrow. Financial results rely on safe, efficient operations, and the Range team executed another successful quarter, delivering planned production on budget. In fact, drilling and completions activity and well performance are trending better than planned, such that we have improved our capital budget and production guidance for the year. This improved guidance continues to support our multiyear plan of capturing growing demand. Recall that this year's budget includes incremental investments enabling carefully staged growth through 2027 with capital at less than $700 million per year and achieving production of 2.6 Bcfe per day. Further, we estimate that Range can maintain 2.6 Bcfe per day of production for less than $600 million of annual drilling and completion capital or approximately $0.60 per Mcfe. Simply put, the goal of efficient production growth, which we expect to be augmented by a declining share count, is growth in cash flow per share. Let's put this cash flow in perspective. Forward natural gas prices for the next couple of years are above $4, closer to the marginal cost of supply. So let's use a likely conservative $3.75 natural gas price over the 3-year period through 2027. Free cash flow should total in excess of $2 billion, equal to nearly one-quarter of Range's current market cap. Alternatively, cash flow in this scenario could repay all debt and still acquire a significant percentage of Range's shares outstanding. The objective is simple: drive per share value through the compounding effects of prudently growing the business while reducing share count. This goal is underpinned by a strong balance sheet that allows optionality in capital returns and reinvestment. Combine this with the long duration of our inventory, and we believe the Range story represents unique value. Given the level of Range's expected cash flow generation, and changes to tax rules within recently passed legislation, it's worth a quick update on how the effective tax rate unfolds over the next few years. We anticipate Range becoming a full cash taxpayer one year later than before, due to updated depreciation and R&D expense rules. As a result, we expect the effective cash tax rate for 2025 will be in the low-single digits. 2026 will likely be mid-single digits. 2027 should be high single digits, and in 2028, a full cash taxpayer with a rate in the mid- to high teens. These estimates are a significant improvement from prior estimates of after-tax cash flow through 2027. Moving from Range specific matters to the broader market backdrop, recently announced large-scale power and AI or other data center supply deals, both in and out of basin, speak to the fundamental tailwinds to the gas macro and the potential for incremental value creation through pricing and marketing. These deals should serve to improve pricing dynamics for all producers over time. However, the companies that will benefit the most are those with the ability to offer counterparties the scale to sign large supply agreements, the inventory quality and duration to deliver gas through cycles and over the long term, the infrastructure to reach numerous outlets, the creativity to structure win-win deals and the execution track record to attract high-quality partners. Long-term surety of supply is once again front of mind in the global gas market, with domestic infrastructure investments needing to be paired with dependable supply. Range is among a small group of companies well positioned to provide the markets required surety of supply long-term. That position should allow us to capitalize on our strategic advantages and ultimately produce positively differentiated margins, greater free cash flow, and superior shareholder returns. In summary, Range is in a strong position to continue capitalizing on strategic advantages across several key areas, maintaining superior full-cycle margins through operational efficiency, delivering strong capital returns to shareholders, and exploring new business opportunities that position us for long-term growth in the evolving energy market. As the natural gas market continues to evolve, Range will remain nimble, responsive to market signals, and focused on creating sustainable value for our shareholders. We're excited about the opportunities ahead and remain confident that our strategy will continue to deliver superior financial and operational performance. Dennis, back to you.

Thanks, Mark. The first half of the year results for Range reflect a consistent theme communicated earlier this year and throughout prior quarters. Strong operational performance against our stated multiyear plan. Consistent free cash flow generation, and prudent allocation of that cash flow, balancing returns of capital, balance sheet strength and the optimal development of our world-class asset base. You've heard us state this before, but we continue to believe the results communicated today showcase that Range's business is in the best place in company history, having derisked the high-quality inventory measured in decades and translated that into a business capable of generating significant free cash flow through cycles. With that, let's open the line for questions.

And our first question comes from Doug Leggate with Wolfe Research.

So Dennis, obviously, a lot of news in your backyard regarding supply agreements. And you've been very vocal about the potential market opportunity. So far, I think you were actually the first to talk about it. But so far, Range hasn't participated. So I wonder if you could offer any line of sight on where you stand on supply deals? And I guess, address perhaps what we're hearing back at least is the biggest worry of the regional market, which is the market gets oversupplied because everyone adds production and ends up killing the regional basis. How do you think about managing the cadence of supply agreements versus adding production? And I've got a quick follow-up, please.

You're right. We were among the first to announce our collaboration and commitment to supply fuel gas for power generation with Imperial Land Development this past spring. From our ongoing discussions with them, there's considerable interest in subscribing to the output from that facility. It's a very dynamic situation right now, especially with all the recent announcements in the past week or two. We anticipate that this will continue to evolve, and we believe an end user will commit to what we mentioned earlier this spring. We see potential for that facility's growth to exceed what we've previously communicated, and we are optimistic that discussions will progress in the near term. Reflecting on the broader context of last week and the $90 billion in commitments announced, along with the 1.5 Bcf a day that others will supply, there is a significant opportunity. When considering who can supply that gas, it largely points to a producer like Range. Our focus is on a few key elements. We've heard from end users that addressing reliability at a 99.999% level is crucial, which involves not just the quality of inventory but also the ability to deliver on commitments. I believe that Rate has consistently demonstrated a reliable capacity to meet or exceed expectations, showcasing efficiency and supply delivery. The quality of our inventory remains a fundamental aspect of our operations, as evidenced by our ability to meet production expectations year over year. Additionally, the diversity of our marketing portfolio allows us to distribute gas regionally, bolstering that 99.999% reliability. It makes sense for us to partner with an organization like Range to address future demand, and we anticipate that inventory depletion will become more significant as we approach the end of this decade, especially as power forecasts continue to rise.

I appreciate the answer. There's a lot of moving parts. And obviously, it's still early days. But yes, the 30-year inventory you talk about is going to differentiate for sure. And it really gets to my follow-on question, which is when, if at all, does Range start thinking about adding capital? And if I could frame the question a little bit, Mark pointed out $2 billion of free cash flow over the next three years. Well, if I average that and annuitize it simply put, you get your market cap. So as opposed to thinking about it, $2 billion is X percent of your market cap, annuitizing that run rate is your market cap on a DCF basis. So growth needs to be part of the story. When do you think or do you need to add activity to support longer-term growth beyond the two rig one frac you have currently? I'll leave it there, please.

Doug, maybe I'll kick that off just from the financial conceptual aspect of valuation and how we're thinking about that cash flow and then how to translate that into per share value. And I think that's the key. I touched on that during the opening comments. You're right, the number over the next couple of years in this illustrative example we gave, $3.75 type prices equate to over $2 billion, something closer to $2.5 billion cumulative free cash flow over a 3-year period. But what matters is the per share price and per share value. As we're shrinking the share count and buying back shares and driving growth, you're getting a twisting effect, a compounding effect of the value. So to your point, absolutely, run an annuity evaluation model just at that $2 billion, $2.5 billion, you get something equal to today, except that both of those variables are moving and improving for shareholders. Growth will come when it's appropriate for Range, when we have clear line of sight deliverability to that incremental demand. With Range's inventory, we fully expect to deliver to both in-basin demand growth and through our long-haul transport. The risk of in-basin oversupply is mitigated by the fact that we're all focused on discussions with specific projects trying to match the cadence of our build-outs with that call on supply. Ultimately, it's about capitalizing on our growth as these opportunities become available while providing returns to shareholders by shrinking share count.

If I could rephrase my question, considering the potential for 4 Bcf to 5 Bcf per day of in-basin demand over the next few years, and noting that Range plans to increase to 2.6 Bcf per day by 2027, what do you believe is your practical logistical capacity to contribute to that demand? Could Range provide 1 Bcf per day or possibly as much as 2 Bcf per day? I'm thinking about this in a longer-term context, looking at the next 5 to 10 years.

Scott, I'll try and address that question. I think I'll start with what we've communicated on this 3-year outlook. It's a starter kit of what the business is capable of to grow 20%. We're adding 400 million a day over the next 2 to 3 years, which is a snapshot of our growth potential using almost a maintenance level staff and rig activity in a single frac crew with some spot activity sprinkled in throughout the next 24 months. It's a little bit endless for us because of our inventory and our efficiency with the utilization of our equipment. We can participate in this space at a very large volume, which depends on having clarity on where the demand is going to take shape. We can be nimble because of our ability to move back to pad sites with existing infrastructure. That gives us flexibility for how we could participate in the growing demand.

So is it unreasonable to think over the next, say, decade-plus, you guys have the ability or capability, or maybe even position to double your current production base?

I think that is very much an art of the possible. It goes back to what you've seen from the current team and also the infrastructure that we have in inventory. Absolutely, that could be a scenario that could exist.

Maybe I'll start this one off. It's a good question, and it's frankly just a touch early to give too many details before all of these contracts are nailed down. Surety of supply is, number one. These data centers and whether it's data centers or a power plant or an industrial plant with on-site generation, they want 99.999% reliability. You got to have the inventory. For Range, these types of contracts are nothing new. We've structured long-term deals with various customers. What's unique to Range is our experience in structuring deals that work in-basin plus. We're mindful of pricing around these deals and ensuring win-win contracts are agreed to. These are significant investments for developers and insights from our ongoing conversations are being taken into account, but ultimately ensuring supply commitments is front of mind for potential customers.

Is there any possibility or would there be any benefit to going ahead and completing some of the lateral footage you guys are accumulating and delaying turning to sales? Just trying to think about the possibility that another spot crew could come in and maybe prepare the setup for 2026 in a way that you could respond to pricing a little bit faster?

Yes. Good question, Jake. One of those spot crews is actually operating as we speak. We’re executing one as we speak. The other one is going to be a little bit later this year. Some of this activity aligns with our midstream expansions that we have set to commission in the end of Q3, beginning of Q4. That timing lines up well with efficient operations and market fundamentals improving going into this winter season. We think we've got the right timing there, and hopefully everything will come together as expected.

2Q CapEx came in well below expectations, and it looks like net lateral footage was up pretty materially quarter-over-quarter. Any comments on what the main driver of executing on those lower well costs are? Is there anything particular on the drilling or completion side? Or maybe any comments on deflation you're seeing in the market?

Kevin, I think our conversation around capital for Q2 starts with the efficiencies you heard us touch on. Our drilling team continues to perform well, drilling 6,250 feet on average in the lateral during the quarter, demonstrating our capital-efficient wells. That efficiency translates into lower costs and quicker setup for next pad sites. We were efficient with water logistics, supplying 800 frac stages pumped. You've just seen quarter-over-quarter and year-over-year incremental improvement, attributed to strong operational execution in recent quarters.

I just wanted to follow up on the U.S. production numbers. I think there's no doubt there's going to be tremendous demand over the long term, but there's been an investor debate around some of the scraps that we've seen here over the last couple of weeks with production kind of queuing up over 107 on some of the third parties. So I'd be curious if you have been surprised relative to your own modeling about U.S. production? And do you think that there will be price elasticity if near-term gas prices rise to the downturn?

There have been few surprises for us as we think about the supply for the year. We anticipated relatively stable production response due to global investments and infrastructure. Maintenance across the industry created disruption, but we expect a balance as we ramp up LNG projects. We're optimistic about the eventual production numbers by year-end, but the dynamics are not simply based on stock levels but truly involve a balance between demand and supply.

What you have seen, modest changes in our hedge book this past quarter is consistent with the philosophy around the business objective we described over the last number of years. We aim primarily to cover fixed costs, while managing downside and ensuring upside benefit. This philosophy or strategy guides how we handle both hedging and pricing structures to maintain flexibility in the face of changing market conditions.

Can you speak to the discussion or level of optimism around federal permit reform just as it relates to the third-party pipeline or in-basin projects? How meaningful some of the changes in the big beautiful bill could be?

Permit reform plays an important role in our future. Federal reforms influence overall project timelines. Recent bipartisan support shows optimism, and that was evident in recent discussions with various stakeholders. This support aids in securing construction approvals, ultimately benefiting Appalachia's energy sector by cutting down the time frame for project completion. I think we still are really optimistic about the propane market. If you look at exports over the last quarter, we've averaged as an industry 1.8 million barrels per day, which is up 5% versus the same time a year ago. Projections point to increased production and demand with new infrastructure projects coming online. While market dynamics fluctuate, we expect improved demand-side growth as we move into 2026.

Thank you. This concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Degner for his concluding remarks.

I'd like to thank everybody, as always, for joining us on the call today and having another great conversation with us. If you have any questions, please don't hesitate to follow up with our Investor Relations team. We look forward to seeing you at upcoming meetings and on the road during the fall and talking again in October at our next call. Thanks, everyone.

Thank you for your participation in today's conference. You may now disconnect.