山脈資源 (RRC) 2002 Q2 法說會逐字稿

Please stand by, we're about to begin. Good morning, everyone, and welcome to the Range Resources second quarter 2002 earnings conference call. This call is being recorded. Statements contained in this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from the estimated filings with the Securities and Exchange Commission. At this time, I would like to turn the call over to Mr. John Pinkerton, President of Range Resources. Please go ahead, sir.

Thanks. Well, good morning, ladies and gentlemen. Thank you for joining us. With me today, Tom Edelsman, our chairman, , our EVP of exploration and production, Eddie LeBlanc, our CFO, and , Senior Vice President.

After reviewing the quarterly results, I'll turn the call over to to provide an update on our E&P effort, and then to Tom for his assessment of the quarter and the industry conditions. After Tom's comments, we'll turn the call over for questions.

Prior to reviewing the quarter, I should mention that the impact of the Great Lakes restatement has been incorporated in all the financial information contained in our news release and all amounts discussed in this conference call. With that, I'll turn to second quarter results. Starting with revenues, they totaled $47.1 million for the quarter, 20 percent lower than the prior year period. Oil and gas sales fell 11 percent due to a 10 percent in oil and gas prices, and a one percent decline in production. Net revenues from IPF fell 2.7 million, while interest and other revenues decreased 3 million.

Half the drop in interest and other revenues related to hedge accounting, as second quarter '02 included a 460,000 unrealized hedging loss while in the second quarter of '01 we recorded roughly a million dollar unrealized hedging gain.

The other item affecting interest and other in the second quarter '02, was an $850,000 valuation adjustment on marketable securities. With this adjustment the book value of marketable securities has now been reduced to zero.

Turning to realized prices, including the impact of hedging, they averaged $3.55 per MCFE as natural gas prices declined seven percent to $3.59 and oil priced dropped 12 percent to $22.27 per barrel. Hedging increased our average price by 26 cents per MCFE.

On the production side, as I mentioned, it dropped one percent at an average 150.7 million a day. Gas production dropped one percent to 113.8 million a day, while oil and production declined one percent to 6,149 barrels per day. On an equivalent basis, 76 percent of our production was natural gas.

This is essentially equal with last year. As compared to the first quarter of '02, production rose one percent or 1.6 million a day. Our second quarter production was negatively impacted by the loss of the L4 well at Island. Turning to expenses, they totaled 40.1 million, an eight percent decrease from the prior period.

Interest expense was reduced 25 percent due to the drop - significant drop in outstanding debt and declining interest rates. Direct operating expense including - which includes production decreased 15 percent equating to 72 cents per MCFE.

The decline in operating costs was due to lower field level cost, significantly lower work over expense and a decline in production taxes reflecting a drop in oil and gas prices. DD&A declined four percent to $1.43 per MCFE. Expiration expense actually increased by roughly $800,000 due to slightly higher dry hole costs and delay rentals.

Our G&A expenses increased 400,000 to higher personnel and information systems costs. With regard to income tax, if we record a $695,000 deferred tax benefit in the second quarter based on our projections, we anticipate using up our deferred tax assets sometime in the third quarter and we should begin to record deferred taxes as a 35 percent rate beginning in the fourth quarter.

That being said, we don't expect to be a materially taxpayer any time in the foreseeable future. In terms of our EBITDEX, which is earnings before interest, taxes, depreciation, depletion, amortization, expiration, other non-cash charges, it totaled 36.3 million for the quarter. A 13 percent decrease versus last year.

For the last 12 months, our EBITDEX totaled $143 million. Carrying a cash flow, it totaled 30.3 million for the quarter, 11 percent lower than the prior year. Cash flow per share was 56 cents and for the last 12 months, cash flow has totaled $2.23 per share.

Going to the bottom line, net income was 8.5 million a 50 percent decline from the prior year. Earnings per share were 14 cents for extraordinary gain on debt retirement and 15 cents per share after the extraordinary gain.

Turning to the balance sheet, the key point here is we continue to reduce debt. Total debt was reduced $15 million during the quarter. Parent bank debt dropped 1.3 million. bank debt dropped 3.1 million. And fixed rate debt was reduced 10.6 million.

Included in the above amount were 5.6 million of fixed rate debt retired - at a discount exchange of roughly 900,000 shares of common stock. We booked a gain of $845,000 on this debt retirement an additional three-and-a-half million of fixed rate debt has been repurchased for cash.

As we discussed in the first quarter conference call May of this year we put a new bank credit facility in place. In addition to reducing the bank group members from 12 to eight it also, the facility increased our volume base from 120 to 135 million. The term was extended three years to roughly July '05. The interest rate spread decreased slightly.

It also gave us better restrictive payment basket provision which enhances our ability and flexibility in terms of repurchasing junior debt for cash. Under the facility as other debt is retired, the borrowing base may increase their election. During the second quarter we elected to increase the borrowing base from 135 million to 141 million. As of today we have roughly $40 million worth of availability under the facility.

Turning to debt , by quarter end our total debt will have been reduced to 2.6 times the latest 12 months . In the second quarter our to interest coverage rose to more than six times.

Turning to our hedging program, it's having an exacted - the exact intended purpose as it's reducing price volatility and making our cash flow more predictable. In the quarter, hedging increased the average price for MCF by 26 cents. It increased - the average gas price by 39 cents while it lowered the average oil price by 82 cents per barrel.

For the remainder of '02 we have roughly two-thirds of our projected production hedged at prices of $4.03 per MCF and oil at $23.49 per barrel. We also have some hedges in place for '03 covering roughly 45 percent of anticipated production at just about $4.00 per MCF and $23.22 per barrel. We also have a small amount of '04 and '05 gas hedged at prices ranging from $3.80 to roughly $3.93 per MCF.

Turning to IPF, as you all recall it's receivable portfolio is heavy weighted to oil, not so much lower oil price but really reflecting poor performance of about five of the receivables. IPF earnings fell 1.5 million to a - from 1.5 million of income - pardon me, in '01 to a loss of 1.2 million in the second quarter of '02.

As I mentioned the poor performance the receivers cost a $1.4 million increase in the second quarter evaluation allowance. Each - in that regard, in each quarter we separately assessed the carrying value of each of our IPF receivables on a separate basis. At quarter end the IPF receivables had a book value of 37.4 million after deducting the valuation allowance.

Getting back to the production side, as I mentioned earlier, second quarter production averaged 150.7 million cubic feet a day, one percent lower than the prior year. As I mentioned, the decline was primarily due to the loss of the well at Island. To give you perspective, the loss of the equated to roughly 3.5 million cubic feet a day for the quarter. Comparing to the first quarter of '02, production actually rose by one percent. Gas production rose by 342 MCF a day, and oil rose by 214 barrels per day.

These increases reflect that production from our newly drilled wells is now fully overcoming the natural decline of our production base. For the second quarter '02, production was 71.6 million cubic feet a day, or 47 percent from the Southwest, 45 million a day, or 30 percent from the Gulf Coast, and 34.1 million a day, or 23 percent from Appalachia. On a year over year basis, Southwest production grew 14 percent, while Appalachia production grew eight percent. More than offsetting these increases was a 23 percent decline in the Gulf Coast. Obviously, we're quite pleased with performance of the Southwest and Appalachia units so far this year.

The decline in the Gulf Coast is really a result of the high intrinsic Gulf Coast decline rate, coupled with a very modest amount of capital expended in the Gulf Coast over the past two to three years. While the increase in drilling activity in the Gulf Coast, we expect the decline rates to begin to flatten, and the second half year we expect to continue to grow production in the Southwest and Appalachia by substantially moderating the decline in the Gulf. As a result, we expect to achieve a 5 percent growth rate on company-wide production by year end.

A little bit more short term, looking to the third quarter, we currently anticipate production to be in the 152 to 150-odd million a day range, depending on how quickly can get our new wells put on new production. Now, let's turn to our capital expenditures. For 2002, we currently have a budget of $100 million. That's $10 million over what we spent in 2001. As we discussed in our first quarter call, the 2001 capital budget focused on bringing undeveloped crude reserves onto production, with only roughly 1/3 of their capital -- of the '01 capital budget focused on new projects. In '02, roughly 2/3 of our capital is attributable to new projects. Therefore, in 2002, we're spending roughly twice the capital on new projects versus 2001.

Assuming we continue to achieve the risk results that we've achieved so far, we anticipate replacing 110 percent or more of our production in 2002 to drilling. Of the $100 million capital budget for '02, 86 million is dedicated to drilling new wells and recompletions. Eleven million dollars for land and seismic, and $3 million for pipeline facilities. The '02 budget currently includes the drilling of 288 gross wells, 156 net, 34 gross recompletions, 25 net. The capital has allocated $50 million to the Southwest and $25 million each to Gulf Coast and Appalachia. Through the first half of the year, we've spent roughly $37 million of the capital budget, funding 112 wells and 18 recompletions. In the third quarter spendings going to jump quite a bit to a projected $31 million.

Terry will talk about this in a little bit, but due to lower service cost and the substitution of certain lower cost projects for higher cost projects, we currently anticipate that our actual expenditures for the year will more than likely be in the $90 million range.

And on the capital budget doesn't include any material acquisition component, if and when we complete some acquisitions we'll adjust out budge accordingly. Based on the current futures prices for oil and gas, we expect the capital budget to be funded with approximately 75 to 80 percent of internal cash flow.

When you look at our E&P objectives for '02, they were pretty simple. It really - they were three major ones. One was to continue to expand our inventory of growing projects. Two was to increase our production, year over year by five percent and achieve a 110 percent plus reserve replacement.

So far we're ahead of schedule with regards to expanding our growing inventory, which Terry will talk about. We're also on track to receive - to achieve 110 percent plus reserve replacement. That's the good news. The bad news is that given the interruptions in the Gulf, we are simply not going to meet our target of increasing production by five percent for the entire year.

We do, however, anticipate reaching the five percent growth rate by year-end and we think - we're hopeful that will be late in the third quarter or early in the fourth quarter. With that, I'll turn the call over to Terry and let him review our exploration and development program in more detail. Terry.

Thanks John. We'll with a noble exception of the production interruptions that we had earlier in the year and the disappointments that we've discussed that at five 19. I'm really very pleased with our EMP progress so far this year.

Our 2000 drilling program we've executed thus far has actually preceded our pre drill expectations for those wells that we've drilled and our success rate is about 94 percent and initial production rates on the whole have been better than what we had expected prior to drilling the wells. And our costs are coming in a little bit less than what we anticipated.

As a result, production has began to rise to offset and overcome those problems that we had in the first quarter. I'm particularly pleased with how our technical and operating staff have continued to develop good ideas, bring them to the table and implement them quickly in reducing our cycle time on projects. In looking at production and reserve growth, certainly will continue a discipline approach.

We're not going to do things that grow production at all costs. We're rate of return driven and we're looking to make sure that we balance our risks to make sure we can achieve attractive returns on investments. Our strategy continues to be accelerating and expansion of the production asset base in Southwest and Appalachia, and offsetting the intrinsic decline that we have in the Gulf.

As John indicated earlier, we're making good progress at growing our production reserve base in those areas where we have significant operating control. Up 14, over 14 percent in the Southwest and up eight percent in Appalachia. In addition, we now have a number of projects on the slate for both onshore Gulf Coast and the Gulf of Mexico that could significantly impact or alleviate our decline in the Gulf Coast.

I'd like to talk to you about several key projects and properties just to give you an update. Some of these I've discussed in the past. Some are new to the conference call this time. Just indicating that we're continuing to make progress and add new projects as we go.

We previously talked about the Texas Panhandle Morrow play in existing Ben Hill Pioneer area. We're currently drilling the Ben Hill #12 which would - should reach total depth of somewhere in excess of 11,000 feet later this month. The well is located adjacent to Range's pioneer property where the pioneered number two came on earlier this year at 5.6 million a day. And it's still producing over four million a day net to Range.

The Ben Hill #12 will target Morrow pay zones including the Pioneer number two . We plan at least four additional wells in the area this year. With success, it could be a larger number than that. As is mentioned in previous calls, we're looking to expand in the area and we just recently completed a cost free farmout agreement that added approximately 22,000 net acres to our Panhandle acreage inventory. Our Panhandle land position now totals in excess of 50,000 acres net to Range, almost - somewhere in excess of 70,000 acres total gross acreage.

This new acquired acreage lies approximately 13 miles from our existing Ben Hill area and it's in the same geologic trend. Along with the acreage we also received 32 square miles of seismic. We've already begun our technical interpretation and we're reprocessing that seismic data as we speak and mapping the new acreage.

I was in Oklahoma City recently to review progress with our technical team. And from what we've seen thus far I expect that we could start our first well on the new acreage as early as early October or late September.

Range is the operator of the project and owns a 75 percent interest in the new acreage. We're still looking at additional opportunities to further expand in the region and if we have the success we expect in our drilling program, I believe this will be a source of production reserve growth for the foreseeable future.

Other areas in the mid continent and western Okalahoma we drilled two new wells in the Granite Wash area of Washita County. We had some success last year in this area and the success was good enough that we decided to continue and try to expand and these two wells were successful.

We should bring them on production in the next week or so at a collective rate of 1.6 million a day net to Range. We're continuing to - our geoscientists are continuing to study that area and I believe there's good potential for us to expand additionally.

We've been in west Texas for - Range has been in west Texas for quite some time and we're continuing some successful development projects in west Texas. First, we recently completed a multi-well drilling program at Sterling. In total the program has performed better than our barrel expectations and we've increased production to a current rate of 15 million a day in the field.

That compares to a July 2001 production of 11.2 million a day. So, it represents a 33 percent increase over that period of time. Interesting one-third of the production at Sterling now comes some wells that we drilled and completed this year. Later this month we expect to begin a five to seven well program to continue this development and we think we'll continue to increase production throughout year end.

Also in west Texas we've initiated a new water flow at west . It's a - 3,600 oil production unit that Range acquired in 1998. The depth is about 4,600 feet.

Our internal study indicated that there was significant water flow potential and we've drilled four new producing wells, four injection wells, at 10 acre spacing for the pilot program.

The current field spacing that existed was 20 to 40 acres per well. The initial pre-flood production results are pretty encouraging. We've increased production just from these four wells that we've drilled, from 435 barrels BOE per day to 615 BOE per day net to range. We should begin injecting water in the pilot in August. It will likely be six to 12 months before we have any real good indication of performance of the flood, but if successful, the project could lead to increasing production in the field for a number of years. In addition to , we also operate two other units in the same area, and we'll be looking at potential there as well.

Going on to east Texas, we've discussed our Peak discovery before. It consists of three wells thus far, presently producing 3 million cubic feet a day. In the first quarter conference call, I stated that we'd like another well in July, but we've done some work there that caused me to believe that we needed to look at optimum drilling spacing. It appeared that some operators had over-drilled the field and we wanted to make sure we didn't repeat that mistake. We haven't completed that work yet, but I expect that we will finish it shortly and we will still expect to drill one to two wells there later this year. We're continuing to evaluate the potential and see opportunities to get outside our lended property itself.

We're also progressing with a technical evaluation of our . It's been a little bit of a disappointment, it took me, not technically, and not operationally, but it's taken us longer to get permitting and joint operator partner issues resolved than I had hoped. So I don't expect that we'll a well there until late in the third quarter. But I still expect that we'll drill three wells before the end of this year. As you know, we have over 20,000 acres in the , and interestingly, all three wells will be drilled through multiple pays as we go to test the James line. And it is a very broad regional trend. So with success, we have continued running room, not only on our own acres, but outside our acre position as well.

Finally, the Gulf Coast, as we've mentioned earlier, it's one of our most significant challenges is to overcome and alleviate that Gulf Coast decline rate. There are a number of significant projects that we think will help accomplish that aim. We've discussed the 45 exploration test before. We are prohibited, under confidentiality provisions of the operating agreement, from releasing any details. The well is drilling currently. is the operator. Obviously, if it has success, it'll have material effect on the company. If the operator chooses to reduce additional information, that may occur. We'll obviously be working with them to release information in the future since we are covered under the same operating agreement, same confidentiality.

We should also the ship shoal later this month. We have a 25 percent working interest in this project. It's a 1200 foot exploration test to test multiple horizons that were identified by 3D seismic. This is the first well that we'll be drilling in the joint venture we have with two other Gulf of Mexico independents that utilizes reprocessed 3D seismic to identify and capture opportunities. In addition to that, we expect to drill a well at . It's a very shallow test. We have a 16.5 percent working interest. The well will be drilled only 2400 feet, and if successful, tied back to an existing platform to produce.

We could have first production as early as December. And finally END

... 2,400 feet and its accessible tied back to an existing platform that produced. We could have first production as early as December. And finally, we discussed briefly in our last call the prospect that we were operating in South Louisiana is currently underway.

We have reached TD and unfortunately we are logging today the results that we saw - or indications we saw in the mud log as we were drilling the well looks encouraging, but we won't have definitive results until we complete logging the well. As you know, this could mean an eight to 10 BCF net to range increase in our reserves as well as significant production later this year if it's successful.

In summary, I am pleased with how our EMP personnel have continued to identify projects and I believe that this is ultimately what drives the success of any EMP company. And that we'll be able to replace reserves and meet those goals that John mentioned earlier.

As a side, we're also actively looking for solid acquisition opportunities to augment our drilling program. All of our growth in the key areas that we've mentioned before, have obviously come to the drill bit over the last few years. Most of our acquisition focus right now is in and around our existing core areas.

Although it's impossible to predict timing, I believe this effort also will ultimately prove successful. I'll turn the call over to Tom, and if you have any questions I'll be glad to answer them.

Thank you Terry. I think three overriding issues confront Range. One, and probably in the long run, the most important by far are the projects that Terry has talked about and that he and his staff have continued to successfully put together as well as to exploit more historical assets such as the Sterling and positions in the company.

And while we've had the setback from the fumbled operations in the Gulf of Mexico at Island, in terms of disrupting or attempt to achieve smooth production growth this year, we believe there is a good chance we will put that behind us shortly. And that if this program can be continued with a degree of success that has so far that we can develop predictability both in production and reserve growth over the next few years.

The second, obviously, as we faced enormous challenges over the past three years in the financial area and as John alluded to earlier in the call, certainly from a perspective of coverage and leverage ratios that is becoming less and less of an issue. We currently have total indebtedness of less than three times cash flow. Our coverage exceeds six times and while our debt to capitalization ratios still have a ways to go before we're satisfied with them.

Certainly the financial threat that we lived under for an extensive period of time is largely, if not wholly behind us. The third and probably final challenge that we are beginning to make considerable progress on and that I think will be a dramatic change in the coming year from where we are even today and certainly where we've been in the past. Is to return to a situation where we have as high a degree of predictability in earnings and performance as one can achieve and still be in the oil and gas business.

And one aspect of this has been, and we expect to continue it, our hedging program and the smoothing effect that having a rolling 50 to 75 percent hedge position on a 12 to 18 month basis certainly reduces. It does not and cannot eliminate the volatility in the prices, but it certainly has the effect of smoothing it.

A number of things continue as mentioned in his quarterly review to make that challenging. One, the new hedge accounting rule which at least from my perspective is entirely counter intuitive meaning as prices rise generally considered good news for the business you tend to record losses in terms of your hedges. And conversely if prices drop generally bad news you report gains.

That's an area of volatility that has been imposed on us by the new rules and regulations while ultimately the world will get used to it and we'll certainly be working to eliminate this ineffective portion as it's called hedging so that it has less or none ultimately affect on our quarter-to-quarter income statement. It will still unless the rules are changed continue to bounce shareholder's equity around given day-to-day and minute-to-minute changes in the commodity market.

The final piece is the combination of IPF and the miscellaneous assets that we accumulated in our acquisition program. Up until about three years ago and we are going to work hard by year end to put all or as much of that as possible behind us as will. As mentioned the securities portfolio which are in very small liquid company has now been written to zero based on poor performance. So there is certainly not likely to be any further variability there.

IPF we're going to be dedicating additional time and energy to as we move towards the end of the year to try and put that into some long term position inside or outside Range where it will not have the kind of impact on the volatility of earnings that it's had so far. It's less than 10 percent of our asset base and it certainly is not contributing to the kind of stability that we'd like to see here.

So, you can clearly from my perspective see the light at the end of the tunnel. has been with us for 18 months and has fully redesigned and redirected the emphasis of the side of the business. And hopefully the benefits of that will become increasingly evident in the next few quarters.

The financial side is not totally but is largely behind us and it simply remains for us to develop and we assert the historical position of having a very predictable company and that is and will remain the company's objective.

One final note before I open this for questions is most of you know as part of the Enron/Arthur Andersen debacle we went through an extensive process led by the audit committee, appointed new auditors in KPMG. As part of that process, two material things occurred.

One at , they as well as the other firms that presented were told as a condition of coming on board that we insisted on a full three year re-audit of our results. That really has two purposes. One, to give a high degree of assurance to our shareholders of the integrity of our financial statements in this situation where our historical auditors essentially have ceased to exist.

And, two, to insure that we have every possible flexibility in terms of the capital markets and our access to it and the credit markets by having a clean three years of financials. Obviously, Arthur Andersen is no longer in a position to give comfort or bring down to prior statements. And certainly, given the events of the last nine months, no one else is going to particularly rely on them. So our feeling is, we needed a clean slate. That re-audit is underway as previously indicated. That will be released and files under all conceivable circumstances before the end of this quarter. So in less than 60 days, we will have fully put the Arthur Andersen issue behind us.

As part of that, however, they indicated on a pure policy basis, nothing to do with the transaction itself, that their view was a different set of accounting rules should apply to the Great Lakes transactions formation in 1999. And that as a result, they would require a restatement of our earnings from that year. That restatement, as John mentioned at the beginning of the call, has been fully rolled through the financial statements, as well as the numbers that we've been discussing on this call.

It is possible, as a result of finishing that re-audit, that there will be other adjustments, all of them, at least to my knowledge, simply would relate to timing, if there are any, not to the actual substance of transactions. But it's an incomplete work and obviously there is no way we can bring you up to speed on that until it is done, which will be completed shortly. The final, or more accurately, I guess, latest to drop out of Enron, Arthur Andersen, WorldCom and friends, is the Sarbanes- bill that was passed and signed into law this week. That bill has some very valid emphasis on Chief Executive Officers and Chief Financial Officers of companies attesting to the completeness and accuracy and not misleading nature of financial statements that are being filed with the SEC.

Part of that requires the SEC, which as we understand it has to happen within 60 days, to issue rules and regulations under which that should be done. Part of it in a separate section seems to make a contradictory rule in terms of separate from anything to do with the SEC requirement to attest these statements. And our lawyers have suggested that despite our historical pattern of promptly filing our 10-Q upon issuance of the quarterly results, that we wait and let many of the larger companies go ahead of us and figure out whether the SEC, possibly as early as next week, clarifies the situation as to how this should and can be complied with. Many of the companies that have filed to date, as we understand it, their filings have been rejected. It's fairly chaotic, and we'd much rather let GE, Exxon, and friends clear the way here, rather than launching a major legal effort.

So we will not be able to -- we've completed it, but we will not be able to file, on that advice, our 10-Q, until there is some clarity out of Washington as to how this should be done. So it's waiting to be filed. We will hit the switch as soon as our lawyers can tell us how we are intended to do this.

That is all that I think is significant to touch on on our overall effort. At this point, Operator, why don't we open the call up for questions?

Thank you, Mr. Edelsman. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star or asterisk key followed by the digit one on your touch tone telephone. We will proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, please press star, one to ask a question. And we'll be pausing for just a moment to allow everyone a chance to respond.

And we'll go to .

A couple of questions. Do you discuss who our hedging counter parties are now and what we're doing with them?

Sure. Eddie, would you like to take that?

Sure. We use major financial institutions such as Bank One, JP Morgan, Chase, Deutsche Bank. We use Morgan Stanley a little and Fleet Capital.

And I believe Credit .

Yes. We have a policy about how much we do with any one institution or how's ...

Well, we're trying to spread it out between them. Obviously this is a very new world. We're not use to worrying about the credit worthiness of our banks, rather than our banks worrying about the credit worthiness of us.

So I don't want to pretend to you we have some bonded credit department capable of analyzing Deutsche Bank's financial statements. But we are highly sensitive, at least, to the public level information as to those counter parties strengths and we have migrated fully away from the industry type counter parties such as Reliant and some of the utilities trading arms, et cetera.

We've moved to the banks and financial institutions, that's not a guarantee, but we at least feel it's a substantial step safer than industry counter parties.

We have none of the industry country party contracts outstanding currently. Or is there still some ...

Are there any left over that are still outstanding? John or Eddie? I don't recall.

No. There is not. Just to reiterate what you said, Tom, is that, you know, at least once a week if not more we have a report that provides our counter party exposure on a gross to net basis by counter party that we review.

So as we put on new hedges, we do try to spread it around to make sure that we don't get all tilted to one or two firms.

But our feeling is that the risk of not hedging is greater than any reasonably conceivable counter party risk and therefore we're - it's our firm belief that we ought to continue, although carefully.

OK. I'm trying to understand the internal cash flow projection. If I understood everything, our cap acts budget will probably come in around 90 million and that with that 90 million we intend to replace 110 percent of production. And that the 90 million is 75 to 80 percent of projected internal cash flow, which I guess would put us at 112 to 120.

Is everything I said accurate? Or am I missing something?

Well, given the volatility of commodity prices as well as the timing of some of Terry's more recent wells, we're still just in July as opposed to November, so those numbers probably all in fairness have ranges attached to them but I don't think anything you said was untrue.

OK. So it's in the ballpark.

Yes.

Then my last question is, there wasn't any cash flow statement with the current release. I meant to look before the conference call. Is that something new or is that an omission or ...

There wasn't any cash flow statement, help me. Meaning? In the press release, a separate table?

There was a balance sheet, an income statement but there wasn't a statement of cash flow?

I think that's the norm. Rodney, help me here.

Jim, if you'll remember we don't formally publish anything in the press release. But as you know on the web site under analysts tables under table one you can see the cash flow calculation which is posted there for each quarter for the last three years.

OK. Do we - it seems to me when I looked at that there wasn't a reconciliation to determine this 56 cents. Is - do we show that anywhere in the spirit of transparency or anything?

It's on table one, .

OK. So if I look there I'll see it. All right. Thank you very much.

Once again, if you do have a question today, it'll be star one on your touchtone telephone. And we'll take our next question from with .

Good morning guys.

Good morning.

Question on the cap ex. I think you mentioned - I missed the first half number of what you spent on cap ex. And, second, as it relates to your drilling in particular in the Gulf of Mexico over the second half of the year with the exception of the well, I'm assuming the remaining wells would be such that the timing would be more - would be a 2003 production impact?

No. All of these - well, depending on obviously a number of circumstances, we would expect the wells that we're drilling in the Gulf of Mexico to come on sometime before the end of the year. Obviously, if we have - it really depends on how large the discoveries are and what kind of facilities you need. For instance, at West Cameron.

The other thing is they are for the most part exploration wells and so we're not really predicting significant production in this year just because of the risk associated with them.

I think right. I - to the extent that we have production from those wells, we'll get some modest amount . . .

Yes.

. . . in the fourth quarter and the full impact . . .

Will be . . .

. . . will be the first quarter of 2003.

Right.

, to answer your question, we spent $37 million in the first half of the year.

So, it's clearly more heavily weighted to the second half in terms of the overall budget. The authorized budget is $100 million. We currently believe, although it could certainly change in the next five months, that we will under spend that by as much as 10. Some of that is because of price reductions with some of the recent softness in the market.

More dramatically, is one or two plays that were originally budgeted as more substantial and they'll turn out to be where there has either been a lack of success or at least not enough assurance to spend as rapidly as we originally planned. But it still could be as much as 100 million. Our current best guess is we will under spend that by five to 10.

OK. And then on West Cam 45, , you, just to clarify you have a 25 - or you end up having a 25 percent interest in that prospect? Is that the . . .

Initially we'll have 25 percent working interest.

There's been a payout clause where if production was sufficiently significant, we could rise to I believe 37?

Right.

But our starting interest would be 25 beginning with completion of the well.

All righty. Thanks a lot, guys.

And we'll be going next to with .

Hi, .

Good morning.

I just want to know why nobody's asked about an audit committee.

Meaning do we have one?

No.

I think given the events of the last six months, A)We do have an audit committee, and B)I'm sure they're all sorry they're on it.

I was going to say, I don't want to be on it. Shareholders and other firms may want it.

The audit committee is chaired by , used to be one of the senior officers of Credit Suisse First Boston, joined by and , three of our outside directors. is sophisticated both in oil and gas, and in finance. And came from, originally, way back, the financial community and was a senior officer of Union Pacific. So everyone on the committee not only is independent but should be about as sophisticated as you can get in terms of looking at this both in terms of the re-audit and the ongoing process of auditing that I think we all have to assume is going to be astonishingly thorough, probably to the point of being painful, at least for the next year or two.

Yes, that's a natural reaction to a few bad apples sort of spoiling the whole business community.

Absolutely.

Yes, all right. Nice work, guys.

And we'll being next to with .

Hi, could you discuss the marketable securities? It might have been covered in a previous call, but as far as the original cost, and why they were owned, and what they were?

Should I take that, John, or would like to?

I think I can, pretty shortly. , several years ago we did a transaction where we were selling some properties. In exchange for some cash, we also took some stock in a small E&P company. And so under the accounting rules we have been marking that to market based on the price of that stock. At quarter end, we reviewed and came to the conclusion that the prospects for this company were relatively bleak, so we decided to go ahead and assess the value and it to zero. So that's the long story. There are no more marketable securities of that type, so there will not be any more adjustment ...

I don't believe there's marketable securities of any type on our books at this point in time. The company, and we'd rather not go into it just because we don't want to influence, in any way, it's trading, but is a very small, less than 5 million currently capitalization company. It's growing concern opinion was qualified by its auditors this past year. It has some significant debt and liquidity issues, and its price has declined by better than 90 percent over the last few years. We are unclear on its viability at this point and simply eliminated the book value in the current quarter due to a number of those circumstances.

OK, thank you.

Once again, if you do have a question today, it'll be star, one on your touch tone telephone. And we'll be going next to with .

Yes, hi, guys. First, just a point. In terms of shareholder relations and disclosure and from what I've seen in terms of the integrity of management, I've seen only good things as compared with a lot of the other different companies I follow. So that would be the first point I'd like to make. Secondly, my question on the -- the well adjacent to the Pioneer well that's at 12, I guess. I know that you're going to be testing that in mid-July. Assuming success, when could that well potentially be put on production, and what kind of potential target in terms of MCF per day would you be looking at there?

Well, first of all, it's drilling now so it's not likely going to reach TD until sometime later in August. I misspoke earlier. I'm sorry.

OK.

And the range of production is relatively broad because we're testing, we're going to penetrate multiple intervals. But it's going to range somewhere between one and four or five million cubic feet a day gross.

A net - our net interest is around 79 percent so somewhere between three quarters of a million to three million a day. It would also prove up additional locations as well, though, so it's not just this well. It's other off set locations that it would help us with.

And we should have it on production sometime in September.

One thing that I think is worthy of note here and it is true in this company in a number of respects. We are very much balanced on the razors edge in about four different respects.

We're about to start providing the course of this year based on our projections, a normal tax rate. We've eliminated, now, any exposure on our marketable securities account. Our production is plus or minus right at the moment, one percent from the historical period. And I think one of the things that is at least disorienting from my perspective as we try and convey where we are to our shareholders is that we're so close to this balance point.

If we were growing this production at five, seven or nine percent a year, as much as obviously you'd like each of these projects to succeed. Their impact on the overall picture of the company would not be nearly so climatic. So we do have the peculiarity that any one or more of these wells or projects that Terry's been surprising to get back to your point - describing, to get back to your point, could have a material impact because we're so close to the zero point.

And that's the situation that we fully expect to be out of within the next six month in time, so that some of the wells, as in all oil and gas projects, will work. Some will not. Some will be surprisingly successful and some disappointments, but we have to get out of the position.

Let every material well going down, can swing you from a positive to a negative or visa versa. And that's one of the things that we're working for. Not just for business reasons, but so that there is a clear picture in the markets mind as to what's being achieved.

OK. Thank you.

We are nearing the end of today's conference. And we'll go to of McDonald Investments for our final question.

Hi guys. IPS with two the prices holding up here nicely and natural gas prices reasonably well. Why the lulls in IPS?

Sure. Well IPS is a peculiar animal. One reason that we don't think it fits longer term in a traditional EMP company. There is several levels of issue. WE hold these receivable, which are backed by dollar denominated overrides in about 42, I think it is, Rodney, help me if I'm in error there.

About 42 different property groups, and those property groups, obviously like all oil and gas are influenced by oil and gas prices. Influenced more frankly than our business is because they're too small to be able to access the hedge market. They have counter party issues themselves. So, there's no hedging in that portfolio. So, they are particularly sensitive to oil and gas prices.

But as you properly point out, and as eluded to this quarter that was not really the issue. Prices while down from a year ago are still very respectable from a historical basis. What we had is we had four or five of these deals where the operator often for unrelated reasons did not get their capital work done, over spent their budgets, had various other problems unique to the company or to the property that has curtailed the cash flow from that receivable. And particularly in this climate we've immediately moved as we do each quarter to reserve against them.

So, it's not this time and it's pretty much I think the first time I can remember where operational and capital issues of the individual operators dominated over oil and gas prices. And we're watching the situation carefully and we're possible we're working with those operators to try and resolve the problems.

OK. , do you of those posted to different property operators what kind of control do you guys exercise on those people? Do you have a say on it on what they do, what they don't do?

Remarkably little. The way these transactions were originally structured and ironically they were originally structured because they were worried about earning 20 percent plus type returns, they could not be structured as debt. They were structured as .

And as a result you have unfortunately in effect a negotiation where we're a very large often dominant economic interest holder but we don't have the rights for example of a bank or a secured creditor where you can foreclose and say unless you do X we're taking the property.

So, our working with these operators is largely a give and take where we say all right we're willing to forgo our payments for the next three months if you get X or Y done or we won't provide you any additional funding unless you do X or Y. We don't have the rights of a secured creditor. And in certain of these transactions that's been a major negative. This is not necessarily the most distinguished universe you could be dealing with.

OK. Well I'll talk to you on that side line a little bit more later.

I think just to be sure we're clear here as I said and want to reiterate, our objective is to this in terms of its ongoing impact on Range's results and financial statements. It shouldn't really be here. We've never wanted it to be.

But given other things going on and things that have gone on in IPF it just has not been the top priority. But it's increasingly getting there and on a net basis I guess this is down to about three percent of our assets on a gross basis about seven. And it's something we need to put aside so that the proper focus gets on the area of the companies that really do matter longer term.

If you discount your you know interest to you know value to the present value, did you guys do any calculation on that basis? What you think . . .

We . . .

. . . worth?

Well we have - I prefer not to quote some of those numbers because it's very much a work in progress and it is very specific, not just -- it's not a property interest in just a sense like our other property interest is. It's a receivable backed by a property interest, and when that little operator doesn't pay his bills, all hell breaks loose. So we're doing more and more and more detailed work no that portfolio, partially to be sure we have our hands around it, but also partially to help us come up with a long-term strategy. So you could certainly analyze this in ways that would be worth far more than our book value, but our experience is that there is a disproportionate number of problems that have to be addressed on an operator by operator basis. So we're working on it, , we just don't have answers that we, or you, would be satisfied with.

Thank you very much.

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

Well, thank you, Operator, and thank you John and in particular. This obviously, with the decline in revenue income and cash flow, is not the kind of quarter we can crow about. I do think there are elements of the quarter, particularly on the operational side, that we are gratified by. There are others, such as some of these write downs, inefficient hedging, and the IPF swings that we are very unhappy and unsatisfied with. And we intend to address all of them. It is my firm hope and belief that between this re-audit and between the clean-up process that has been going on non-stop for three years, that we can very clearly here see the light at the end of the tunnel.

And if we can perform, as we're increasingly confident we can, in the E&P segment of the business, that the financial side, the audit of our numbers, some of these historical accounts that I've alluded to, can be solidly put behind us in 2002, and we can go back to being hopefully a growing and profitable E&P company that we cannot find to talk about in these calls come 2003, other than our drilling and production.

So we thank you very much. We think that we are in an increasingly strong position to build shareholder value, and much of the confusion and static of the last three years is largely behind us, with the objective of being entirely behind us by the end of the year. Thank you all very much for joining us.

Thank you for your participation in today's conference, you may disconnect at this time.