| RANGE RESOURCES CORP ITEM 1A RISK FACTORS Volatility of oil and natural gas prices significantly affects our cash flow and capital resources and could hamper our ability to produce oil and gas economically Oil and natural gas prices are volatile, and an extended decline in prices would adversely affect our profitability and financial condition |
| The oil and natural gas industry is typically cyclical, and prices for oil and natural gas have been highly volatile |
| Historically, the industry has experienced severe downturns characterized by oversupply and/or weak demand |
| For example, in 1998 and early 1999, oil and natural gas prices declined, which contributed to the substantial losses we reported in those years |
| By early 2001, oil and natural gas prices reached levels above historical norms |
| Prices declined in the second half of 2001 but have risen steadily since mid-2002 |
| Recent oil and natural gas prices are at historic highs, with oil prices recently reaching dlra70dtta85 per barrel and natural gas prices reaching dlra15dtta78 per mcf in some markets |
| Higher oil and natural gas prices have contributed to our positive earnings over the last several years |
| However, long-term supply and demand for oil and natural gas is uncertain and subject to a myriad of factors including technology, geopolitics, weather patterns and economics |
| Many factors affect oil and natural gas prices including general economic conditions, consumer preferences, discretionary spending levels, interest rates and the availability of capital to the industry |
| Decreases in oil and natural gas prices from current levels could adversely affect our revenues, net income, cash flow and proved reserves |
| Significant and prolonged price decreases could have a material adverse effect on our operations and limit our ability to fund capital expenditures |
| Without the ability to fund capital expenditures, we will be unable to replace production |
| Hedging transactions may limit our potential gains and involve other risks To manage our exposure to price risk, we enter into hedging arrangements with respect to a significant portion of our future production |
| The goal of these hedges is to lock in prices so as to limit volatility and increase the predictability of cash flow |
| These transactions limit our potential gains if oil and natural gas prices rise above the price established by the hedge |
| For example, at December 31, 2005, we were party to swap hedging arrangements covering 6dtta7 Bcf and 0dtta1 million barrels of oil |
| The derivatives’ fair value was a pre-tax loss of dlra231dtta0 million |
| If oil and natural gas prices continue to rise, we could be subject to margin calls |
| In addition, hedging transactions may expose us to the risk of financial loss in certain circumstances, including instances in which: • Our production is less than expected; • The counterparties to our futures contracts fail to perform under the contracts; or • A sudden, unexpected event materially impacts oil or natural gas prices or the relationship between the hedged price index and the oil and gas sales price |
| Recently, due to the trading volatility of NYMEX gas contracts, we have experienced larger than usual differentials between actual prices paid at delivery points and NYMEX based gas hedges |
| Due to this event, certain of our gas hedges no longer qualified for hedge accounting in the fourth quarter and were marked-to-market |
| This may result in more volatility in our income in future periods |
| Information concerning our reserves and future net reserve estimates is uncertain There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and their values, including many factors beyond our control |
| Estimates of proved undeveloped reserves, which comprise a significant portion of our reserves, are by their nature uncertain |
| Although we believe these estimates are reasonable, actual production, revenues and costs to develop will likely vary from estimates, and these variances could be material |
| The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment, assumptions used regarding quantities of oil and natural gas in place, recovery rates and future prices for oil and natural gas |
| Actual prices, production, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves will vary from those assumed in our estimates, and such variances may be material |
| Any variance in the assumptions could materially affect the estimated quantity and value of the reserves |
| 8 _________________________________________________________________ [65]Table of Contents If oil and natural gas prices decrease or exploration efforts are unsuccessful, we may be required to take write-downs of our oil and natural gas properties In the past, we have been required to write down the carrying value of certain of our oil and natural gas properties, and there is a risk that we will be required to take additional write-downs in the future |
| This could occur when oil and natural gas prices are low, or if we have downward adjustments to our estimated proved reserves, increases in our estimates of operating or development costs, deterioration in our exploration results or mechanical problems with wells where the cost to redrill or repair does not justify the expense which might occur due to hurricanes |
| Accounting rules require that the carrying value of oil and natural gas properties be periodically reviewed for possible impairment |
| “Impairment” is recognized when the book value of a proven property is greater than the expected undiscounted future net cash flows from that property and on acreage when conditions indicate the carrying value is not recoverable |
| We may be required to write down the carrying value of a property based on oil and natural gas prices at the time of the impairment review, as well as a continuing evaluation of drilling results, production data, economics and other factors |
| While an impairment charge reflects our long-term ability to recover an investment, it does not impact cash or cash flow from operating activities, but it does reduce our reported earnings and increases our leverage ratios |
| For example, based primarily on the poor performance of certain properties acquired in 1997 and 1998 and significantly lower oil and natural gas prices, we recorded impairments of dlra215dtta0 million in 1998 and dlra29dtta9 million in 1999 |
| At year-end 2001, we recorded an impairment of dlra31dtta1 million due to lower year-end prices |
| At year-end 2004, we recorded an impairment of dlra3dtta6 million on an offshore property due to hurricane damage and related production declines |
| As of December 31, 2005, we continued to have production shut-in due to the effects of hurricanes Katrina and Rita primarily to pipelines and onshore facilities |
| While we do not currently believe there is any material long-term damage to the shut-in properties, we cannot yet predict whether impairment charges may be required due to these storms |
| Our business is subject to operating hazards and environmental regulations that could result in substantial losses or liabilities Oil and natural gas operations are subject to many risks, including well blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic natural gas and other environmental hazards and risks |
| If any of these hazards occur, we could sustain substantial losses as a result of: • Injury or loss of life; • Severe damage to or destruction of property, natural resources and equipment; • Pollution or other environmental damage; • Clean-up responsibilities; • Regulatory investigations and penalties; or • Suspension of operations |
| As we begin drilling to deeper horizons and in more geologically complex areas, we could experience a greater increase in operating and financial risks due to inherent higher reservoir pressures and unknown downhole risk exposures |
| As we continue to drill deeper, the number of rigs capable of drilling to such depths will be fewer and we may experience greater competition from other operators |
| Our operations are subject to numerous and increasingly strict federal, state and local laws, regulations and enforcement policies relating to the environment |
| We may incur significant costs and liabilities in complying with existing or future environmental laws, regulations and enforcement policies and may incur costs arising out of property damage or injuries to employees and other persons |
| These costs may result from our current and former operations and even may be caused by previous owners of property we own or lease |
| Any past, present or future failure by us to completely comply with environmental laws, regulations and enforcement policies could cause us to incur substantial fines, sanctions or liabilities from cleanup costs or other damages |
| Incurrence of those costs or damages could reduce or eliminate funds available for exploration, development or acquisitions or cause us to incur losses |
| We maintain insurance against some, but not all, of these potential risks and losses |
| We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented |
| Currently, we expect 9 _________________________________________________________________ [66]Table of Contents substantial increases in premiums especially in the areas affected by the hurricanes and tropical storms |
| In addition, we expect insurers to impose revised limits affecting how much the insurers will pay on actual storm claims plus the cost to re-drill wells where substantial damage has been incurred |
| Insurers are also requiring us to retain larger deductibles and reducing the scope of what insurable losses will include |
| Even with the increase in future insurance premiums, coverage will be reduced, requiring us to bear a greater potential risk if our oil and gas properties are damaged |
| We do not maintain any business interruption insurance |
| In addition, pollution and environmental risks generally are not fully insurable |
| If a significant accident or other event occurs that is not fully covered by insurance, it could have a material adverse affect on our financial condition and results of operations |
| We are subject to financing and interest rate exposure risks Our business and operating results can be harmed by factors such as the availability, terms of and cost of capital, increases in interest rates or a reduction in credit rating |
| These changes could cause our cost of doing business to increase, limit our ability to pursue acquisition opportunities and place us at a competitive disadvantage |
| For example, approximately 56prca of our debt is at fixed interest rates with the remaining 44prca subject to variable interest rates |
| Some of our current and potential competitors have greater resources than we have and we may not be able to successfully compete in acquiring, exploring and developing new properties We face competition in every aspect of our business, including, but not limited to, acquiring reserves and leases, obtaining goods, services and employees needed to operate and manage our business and marketing oil and natural gas |
| Competitors include multinational oil companies, independent production companies and individual producers and operators |
| Many of our competitors have greater financial and other resources than we do |
| The demand for field services and their ability to meet that demand may limit our ability to drill and produce our oil and natural gas properties Due to current industry demands, well service providers and related equipment and personnel are in short supply |
| This is causing escalating prices, the possibility of poor services coupled with potential damage to downhole reservoirs and personnel injuries |
| Such pressures will likely increase the actual cost of services, extend the time to secure such services and add costs for damages due to accidents sustained from the over use of equipment and inexperienced personnel |
| The oil and natural gas industry is subject to extensive regulation The oil and natural gas industry is subject to various types of regulations in the United States by local, state and federal agencies |
| Legislation affecting the industry is under constant review for amendment or expansion, frequently increasing our regulatory burden |
| Numerous departments and agencies, both state and federal, are authorized by statute to issue rules and regulations binding on participants in the oil and natural gas industry |
| Compliance with such rules and regulations often increases our cost of doing business and, in turn, decreases our profitability |
| Acquisitions are subject to the risks and uncertainties of evaluating reserves and potential liabilities and may be disruptive and difficult to integrate into our business We could be subject to significant liabilities related to our acquisitions |
| It generally is not feasible to review in detail every individual property included in an acquisition |
| Ordinarily, a review is focused on higher valued properties |
| However, even a detailed review of all properties and records may not reveal existing or potential problems in all of the properties, nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities |
| We do not always inspect every well we acquire, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is performed |
| For example, in 1997, we consummated a large acquisition that proved extremely disappointing |
| Production from the acquired properties fell more rapidly than anticipated and further development results were below the results we had originally projected |
| The poor production performance of these properties resulted in material downward reserve revisions |
| There is no assurance that our recent and/or future acquisition activity will not result in similarly disappointing results |
| In addition, there is intense competition for acquisition opportunities in our industry |
| Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions |
| Our acquisition strategy is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals |
| Our ability to pursue our acquisition strategy may be hindered if we are not able to obtain financing on terms acceptable to us or regulatory approvals |
| 10 _________________________________________________________________ [67]Table of Contents Acquisitions often pose integration risks and difficulties |
| In connection with recent and future acquisitions, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant management attention and financial resources that would otherwise be available for the ongoing development or expansion of existing operations |
| Future acquisitions could result in our incurring additional debt, contingent liabilities, expenses and diversion of resources, all of which could have a material adverse effect on our financial condition and operating results |
| Our success depends on key members of our management and our ability to attract and retain experienced technical and other professional personnel Our success is highly dependent on our management personnel, none of which is currently subject to an employment contract |
| The loss of one or more of these individuals could have a material adverse effect on our business |
| Furthermore, competition for experienced technical and other professional personnel is intense |
| If we cannot retain our current personnel or attract additional experienced personnel, our ability to compete could be adversely affected |
| Our future success depends on our ability to replace reserves that we produce Because the rate of production from oil and natural gas properties generally declines as reserves are depleted, our future success depends upon our ability to economically find or acquire and produce additional oil and natural gas reserves |
| Except to the extent that we acquire additional properties containing proved reserves, conduct successful exploration and development activities or, through engineering studies, identify additional behind-pipe zones or secondary recovery reserves, our proved reserves will decline as reserves are produced |
| Future oil and natural gas production, therefore, is highly dependent upon our level of success in acquiring or finding additional reserves that are economically recoverable |
| We cannot assure you that we will be able to find or acquire and develop additional reserves at an acceptable cost |
| A portion of our business is subject to special risks related to offshore operations generally and in the Gulf of Mexico specifically Offshore operations are subject to a variety of operating risks specific to the marine environment, such as capsizing, collisions and damage or loss from hurricanes or other adverse weather conditions |
| These conditions can cause substantial damage to facilities and interrupt production |
| As of February 20, 2006, we continued to have 1dtta6 Mmcfe per day of production shut-in due to the effects of hurricanes Katrina and Rita |
| As a result, we could incur substantial expense and liabilities that could materially reduce the funds available for exploration, development or leasehold acquisitions or result in the loss of equipment and properties |
| Production of reserves from reservoirs in the Gulf of Mexico generally declines more rapidly than from reservoirs in many other producing regions |
| This results in recovery of a relatively higher percentage of reserves from properties in the Gulf of Mexico during the initial few years of production |
| As a result, reserve replacement needs from new prospects are greater and require us to incur significant capital expenditures to replace production |
| New technologies may cause our current exploration and drilling methods to become obsolete The oil and natural gas industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using new technologies |
| As competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost |
| In addition, competitors may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can |
| One or more of the technologies that we currently use or that we may implement in the future may become obsolete |
| We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us |
| If we are not able to maintain technological advancements consistent with industry standards, our operations and financial condition may be adversely affected |
| Our business depends on oil and natural gas transportation facilities, many of which are owned by others The marketability of our oil and natural gas production depends in part on the availability, proximity and capacity of pipeline systems owned by third parties |
| The unavailability of or lack of available capacity on these systems and facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties |
| Although we have some contractual control over the transportation of our product, material changes in these business relationships could materially affect our operations |
| We generally do not purchase firm transportation on third party facilities and therefore, our production transportation can be interrupted by those having firm arrangements |
| Federal and state regulation 11 _________________________________________________________________ [68]Table of Contents of oil and natural gas production and transportation, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines and general economic conditions could adversely affect our ability to produce, gather and transport oil and natural gas |
| The disruption of third-party facilities due to maintenance and/or weather could negatively impact our ability to market and deliver our products |
| We have no control over when or if such facilities are restored or what prices will be charged |
| A total shut-in of production could materially affect us due to a lack of cash flow, and if a substantial portion of the production is hedged at lower than market prices, those financial hedges would have to be paid from borrowings absent sufficient cash flow |
| Our significant indebtedness could limit our ability to successfully operate our business We are leveraged and our exploration and development program will require substantial capital resources estimated to range from dlra450 to dlra550 million per year over the next three years, depending on the level of drilling and the expected cost of services |
| Our existing operations will also require ongoing capital expenditures |
| In addition, if we decide to pursue additional acquisitions, our capital expenditures will increase both to complete such acquisitions and to explore and develop any newly acquired properties |
| The degree to which we are leveraged could have other important consequences, including the following: • We may be required to dedicate a substantial portion of our cash flows from operations to the payment of our indebtedness, reducing the funds available for our operations; • A portion of our borrowings are at variable rates of interest, making us vulnerable to increases in interest rates; • We may be more highly leveraged than some of our competitors, which could place us at a competitive disadvantage; • Our degree of leverage may make us more vulnerable to a downturn in our business or the general economy; • The terms of our existing credit arrangements contain numerous financial and other restrictive covenants; • Our debt level could limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and • We may have difficulties borrowing money in the future |
| Despite our current levels of indebtedness we still may be able to incur substantially more debt |
| This could further increase the risks described above |
| Any failure to meet our debt obligations could harm our business, financial condition and results of operations If our cash flow and capital resources are insufficient to fund our debt obligations, we may be forced to sell assets, seek additional equity or restructure our debt |
| In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms |
| Our cash flow and capital resources may be insufficient for payment of interest on and principal of our debt in the future and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations and impair our liquidity |
| We exist in a litigious environment Any constituent could bring suit or allege a violation of an existing contract |
| This action could delay when operations can actually commence or could cause a halt to production until such alleged violations are resolved by the courts |
| Not only could we incur significant legal and support expenses in defending our rights, planned operations could be delayed which would impact our future operations and financial condition |
| Such legal disputes could also distract management and other personnel from their primary responsibilities |
| Common stockholders will be diluted if additional shares are issued Since 1998, we have exchanged 31dtta9 million shares of common stock for debt and convertible securities |
| The exchanges were made based on the relative market value of the common stock and the debt and convertible securities at the time of the exchange |
| Also in 2004 and 2005, we sold 33dtta8 million shares of common stock to finance acquisitions |
| While the exchanges have reduced interest expense, preferred dividends and future repayment obligations, the larger number of common shares outstanding had a dilutive effect on our existing stockholders |
| Our ability to repurchase securities for cash is 12 _________________________________________________________________ [69]Table of Contents limited by our bank credit facility, the 7dtta375prca and the 6dtta375prca senior subordinated note agreements |
| In addition, we may issue additional shares of common stock, additional subordinated notes or other securities or debt convertible into common stock, to extend maturities or fund capital expenditures, including acquisitions |
| If we issue additional shares of our common stock in the future, it may have a dilutive effect on our current outstanding stockholders |
| Dividend limitations Limits on the payment of dividends and other restricted payments, as defined, are imposed under our bank credit facility and under our 7dtta375prca and 6dtta375prca senior subordinated note agreements |
| These limitations may, in certain circumstances, limit or prevent the payment of dividends independent of our dividend policy |
| Our financial statements are complex Due to accounting rules, our financial statements continue to be complex, particularly with reference to hedging, asset retirement obligations, equity awards and the accounting for our deferred compensation plan |
| We expect such complexity to continue and possibly increase |
| Our stock price may be volatile and you may not be able to resell shares of our common stock at or above the price you paid The price of our common stock fluctuates significantly, which may result in losses for investors |
| The market price of our common stock has been volatile |
| From January 1, 2004 to December 31, 2005, the last daily sale price of our common stock reported by the New York Stock Exchange ranged from a low of dlra6dtta29 per share to a high of dlra28dtta01 per share |
| We expect our stock to continue to be subject to fluctuations as a result of a variety of factors, including factors beyond our control |
| These include: • Changes in oil and natural gas prices; • Variations in quarterly drilling, recompletions, acquisitions and operating results; • Changes in financial estimates by securities analysts; • Changes in market valuations of comparable companies; • Additions or departures of key personnel; • Future sales of our stock |
| We may fail to meet expectations of our stockholders or of securities analysts at some time in the future, and our stock price could decline as a result |