山脈資源 (RRC) 2003 Q1 法說會逐字稿

Welcome to the Range Resources first quarter earnings conference call.

This call is being recorded. All lines have been placed own mute to prevent any background noise.

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 those in the forward-looking statements. After the speakers' remarks there will be a question-and-answer period.

At this time, I would like to turn the call over to Mr. John Pinkerton, President of Range Resources. Please go ahead, sir.

Thank you and good afternoon. With me today are Charlie Blackburn, our newly elected Chairman of the Board, Tom Edelman, Eddie LeBlanc, and Rodney Waller. After reviewing the results I'll turn the call over to Charlie and Tom for their comments. After their comments we'll take questions.

This morning we filed our 10-Q with the SEC, and you can access it via our website. Before reviewing the first quarter financial results I'll summarize some key points. Overall, we're very pleased with first quarter results. Pretax earnings were seven times year-over-year, and 1 1/2 times fourth quarter '02. Production rose a little over 3%, both on a year-over-year basis, as well as on a sequential basis. In total, came pretty much right on target.

Our capital program has gotten off to a fast start, we're extremely pleased with first quarter drilling costs. We're achieving rates of return on invested capital well over 50%. On average, the initial results of our new wells have exceeded our original expectations. Lastly, we're continuing to grow our inventory of drilling prospects as we've initiated several new projects in the first quarter.

That being said, we did have some disappointments in the quarter. Production in January and February was negatively impacted by the extreme cold weather. The most significant areas hit were in Appalachia, and to a lesser extent the Texas Panhandle.

Our operating costs also jumped quite a bit. This was due to higher severance taxes, or quite a bit higher severance taxes due to the higher commodity prices, and also our field level costs increased as well. Now, this was due to much higher work-over costs, weather-related costs, and higher energy-related costs, such as electricity. We expect both severance taxes and field level costs to moderate in the second quarter.

Overall, we believe that our more balanced approach to exploration, development, acquisitions, coupled with our upgraded technical team is having the intended results. We're on track to meet our production reserve and financial goals, for 2003.

With that, I'll turn over to first quarter financial results. For the quarter revenues totaled $57 million, 25% higher than the prior year period. Oil and gas sales rose 23% due to higher oil and gas prices and an increasing production. All other revenues increased by $2.1 million in total.

Production increased 3.3%, averaging 154 million cubic feet a day equivalent. Gas production rose 1% to 115.1 million a day, and oil and NGL production rose 9% to almost 6500 barrels of oil equivalent. On equivalent basis, 75% of our production was natural gas.

Turning to prices, including the impact of hedging, our average price for Mcfe was $3.92. Natural gas prices increased 21% to 3.95, while oil prices increased 4% to $23.64 a barrel. Hedging decreased our average price by $1.87 per Mcfe.

On the expense side, they totaled $47.9 million, 8% higher than the previous year. As I mentioned, operating costs increased 3.8 million due to significantly higher production, taxes and field level costs.

Exploration expense fell 2.8 million due to lower dry hole cost. Interest expense rose just a little bit, and that was due to higher amortization of bank fees. D & A expense increased 2.9 million due to higher volumes, a high depletion rate, as well as $1.1 million of accretion expense, related to the adoption of FASB 143. G&A expenses increased $376,000, a result of higher personnel costs, professional fees and legal fees.

First quarter EBITDAX, earnings before interest, taxes, depreciation, depletion, amortization, exploration, other noncash charges, totaled 38.2 million, that's a 16% increase over the prior year. Cash cash flow totaled 32.9 million for the quarter, up 21%. And cash flow per share was 60 cents a share. That's 18% higher than last year.

In our orange release we included a table that sets forth the computation of cash flow. Also on our website we've included supplemental schedules to provide additional information on the calculation of EBITDAX and cash flow. We, like the rest of the industry, have had to exclude the reference of cash flow per share in our news release based on the new SEC rules.

Looking at pretax income, it totaled 9.1 million versus just 1.2 million last year. This represent a seven-fold increase. Income taxes were 4.1 million for the quarter, an expense in contrast to a $3.1 million benefit recorded last year. Looking at the remainder of the year, deferred taxes are anticipated to be recorded at a 35% rate, and we don't expect any material cash taxes.

Lastly, we record a $4.5 million extraordinary gain reflecting the cumulative effect of FAS 143. The bottom line first quarter net income was 9.5 million versus 4.3 million last year, an increase of over 100%. And fully diluted earnings per share more than doubled to 17 cents.

Turning to the balance sheet, total debt rose by 6.7 million during the quarter due to timing of cash receipts and disbursements. Since quarter end, that has fallen 14.5 million, and it's now nearly $8 million lower than year-end. First quarter capital expenditures were funded with roughly 85% of operating cash flow.

On the debt statistics side, our debt to EBITDAX was 2.4 times. This was based on total debt outstanding at the end of the quarter, including the trust preferred divided by the annualized first quarter EBITDAX. For the quarter EBITDAX covered interest by nearly 7 times.

At quarter end, we also conducted our semiannual barn base review with our bank group based on higher reserves and production of the barn base under our parent credit facility was increased 23 million to 170 million. Currently we have nearly 60 million of availability under the facility. With that amendment, we also extended the term 18 months so the facility now terms out January 1, 2007.

On the hedging front, for the remainder of '03, we have roughly 70 to 75% of our projected production hedged at NYMEX prices averaging $2.96 and $24.83 a barrel. Because most of the counterparties are lenders, under the parent bank facility, we've had no margin calls so far, and we don't expect any. During the first quarter no new hedges were implemented.

Turning to IPF, we continue to monetize the portfolio. For the quarter, IPF lost roughly $80,000 versus a $600,000 loss last year. Most importantly, the net principal payments received this year totaled 3.7 million versus-- that was double last year, which was 1.5 million. The increase in payments was due to several receivables being paid off early, as well as slightly better performance from the portfolio.

Since quarter end, another 2 million of repayments have been received including some additional early payoffs. At quarter end, the net portfolio balance was 21.1 million. Over the past 12 months, the portfolio balance has amortized, right at roughly 50%.

As you recall, we fully repaid and retired the IPF credit facility in December of last year. We're using the IPF principal payments which, by the way, we do not include in the computation of cash flow to help fund our growing program. So, IPF is doing exactly what we hoped it would do in the first quarter.

During the first quarter, we also adopted several new accounting pronouncements. At this time, I'll turn the call over to Eddie LeBlanc, our CFO, to cover these changes. Eddie?

Thanks, John.

First quarter 2003 results include the effects of three recent accounting pronouncements. The first one is FAS 145, it is the easiest to understand. The adoption in January of 2003 required the reclassification of gains on retirement of debt securities from extraordinary line on the income statement, to now be included in income from continuing operations.

First quarter '03 includes a gain of $150,000 from the repurchase of $400,000 of trust-preferred securities for cash. First quarter of '02 included a gain of 1.2 million relating to both debt retired for cash in exchange for common stock.

In the fall of 2002, the emerging issues task force issued new guidance for recording retirement of convertible debt in exchange for common stock. Under the old rules, the economic impact of a transaction was recorded.

If the cost of a convertible debt retirement was at less than par value, a gain was recorded. Under the new rules, if the company issues more common shares than would have been issued under the original conversion terms, then an expense equal to the market value of the shares issued in excess of the original terms is recorded. This is done irrespective of the fact that the market value of the common stock is less than the book value of the convertible debt being retired.

First quarter '03, $880,000 of face amount of 6% convertible debenture were retired in exchange for common shares having a market value of $735,000. Under the old guidance, the company would have recorded a gain of $145,000. However, because the number of shares issued in exchange was greater than the original conversion terms, the company was required to record $465,000 of debt conversion expense in this '03 quarter.

Also beginning in 2003 the company adopted FAS 143, concerning asset retirement obligations. This FAS requires the recording of future P&A liabilities at present value, and provides for periodic accretion expense in order to accrete the present value to the future value at the time the property is to be plugged and abandoned.

The difference between the present value at the acquisition date of the properties and at January 1, 2003, is recorded as cumulative effect of a change in accounting principle and is included on the income statement as an extraordinary item. Since the company had historically recorded offshore P&A liabilities of the gross cost expected to be incurred, the effect of discounting the present values caused a cumulative effect to be recorded at a gain of 6.9 million pretax, 4.5 million net of taxes.

During the calculated quarter, the company included $1.0 million or 8 cents per Mcf equivalent of accretion expense on the income statement, and depletion, depreciation and amortization.

On an ongoing basis, we'll continue to record accretion expense in each quarter. It should be very similar to the first quarter, but will vary over time based on a number of different factors such as timing of plugging and abandonment, the drilling or acquisition of new properties, and the sale of the existing properties. In our 10-Q we have attempted to provide in significant detail the impact of each of these accounting changes.

Back to you, John.

Well, let's hope we don't have any more of those this year. It's certainly fairly overwhelming. It seems like they get harder and harder as we go along. But again, like Eddie said, I think we, in painful detail, we have tried to provide extraordinary detail of these in our 10-Q. So if you have any questions, feel free to give either Rodney or Eddie a call in the days coming they'll be happy to try to take you through it.

Let's turn back over to the operations side. As I mentioned previously, production increased 3.3% to 154 million a day. This increase was the result of our drilling program. Production in the Southwest grew 12% representing 48% of the total production. The Gulf Coast units production fell 11% and represented 28% of the total. And then Appalachia grew 3 percent and represented 24% of the total.

Despite being 11% lower than last year, the Gulf Coast was actually up over a million a day over our internal projection with Southwest being right own projection, and then Appalachia being about a million a day below projection.

As I mentioned earlier, the severe weather in January and February up in the Appalachian Basin really hurt us, but we're back, again, as we look back over projection, currently.

For the second quarter, we're anticipating Southwest production to rise 9 to 11% year-over-year, the Gulf Coast decline to moderate to roughly 3 to 4%, and for Appalachia to increase 4 to 5%. All in all, our field people are doing a very good job focusing on production and getting our newly drilled wells on production as quickly as possible.

Given the fast start of our 2003 drilling program, and the better than expected drilling results that we've experienced so far, we were becoming increasingly confident that second quarter production would exceed our original projections by a healthy margin. However, last week I was informed that we had a mechanical problem at our West Cameron 45 20 well, it was a down hole mechanical issue.

After a quickly assessing the situation during diagnostic testing, indicated that a cement job on a lower set of perforations had failed. Remedial operations to return the well to production have been initiated, as a rig was moved on to location over the weekend. While certainly not without risk, we're hopeful the well will be turned back to product shortly. If all goes well, it could be on production by the first week of June. But given the depth and pressures being dealt with, it could obviously take longer.

Before encountering the down hole problem production at 45 20, net to our interest was roughly 6 million cubic feet, 6 million a day on an equivalent basis. This is obviously a pretty decent hit to our production.

However, because a number of wells that have already been placed on production, and those in process being put on production, we currently project it will still achieve year-over-year production growth in the second quarter. And fairly confident the second quarter production will again exceed first quarter. This is, again, this is a reflection of the pretty good start we've had so far in our drilling program as well as our base production doing better than planned.

You know, stepping back and looking at the big picture, we're still on track. We believe, to have year-over-year growth and sequential growth in production each quarter of '03. And again, this is all driven by our drilling program.

Now I'll turn to our capital program. For '03, we originally set a capital budget of 105 million, excluding acquisitions. This was a 17% increase over '02. The budget included 89 million for drilling to completion, 12 million for land and seismic, and 4 million to be spent on gathering systems and facilities.

For the year, we expect to drill 326 gross wells, 173 net, and to undertake 37 gross, 27 net recompletions. Approximately half the spending we've got allocated to the Southwest, roughly the remaining 50% divided equally between Gulf Coast and Appalachia.

We did 5 million of property acquisitions in the first quarter of '03. And so we've raised our capital budget, just added that 5 million to the 105 so our capital budget now is $110 million for the year.

Based on our current oil and gas prices and our hedges, 110 million of capital expected to be funded with approximately 80 to 85% of our internal cash flow. We use the excess cash flow to continue to retire debt, to fund, you know, additional acquisitions, small acquisitions that have come up, and to increase our drilling budget if we continue to have success.

Looking specifically to the first quarter, we spent $28 million including $22 million of drilling and recompletions. 5 million for producing properties, acquisition, and a million dollars for land and seismic. This funded the drilling at 57 57 gross, 35 net wells, 7 gross, 5 net recompletions.

All but two of these projects were successful. The two that weren't, one was a granite wash well in Western Oklahoma, and the second was a recompletion out in West Texas. The capital for these two projects totaled roughly half a million dollars.

By quarter end, we had nearly 30 gross, 20 net wells, turned to production. And the remainder either had been or will be turned on sometime in the second quarter. On average, the initial rates of new wells is awfully encouraging and exceeding our original estimates. Knock on wood, I hope we'll continue to do that well.

Our strategy continues to be to grow our production reserves in our onshore long life areas while exposing ourselves each year to a few potentially high impact opportunities in the Gulf. So that hadn't changed and will likely not change.

Turning to some specific areas, we continue to increase our production drilling opportunities up in the Texas Panhandle. In the first quarter we drilled six successful wells. The program is entirely a result of some very meticulous integration of 3D seismic with subsurface geology, and integrating that in with reservoir engineering.

Highlights in the quarter include the third discovery at the Courson/Litz (phonetic) Ranch, which is producing at the [INAUDIBLE] commission, a top reliable of 340 barrels of oil per day. We also drilled the Pioneer #3, which was recently completed and is scheduled to go on production today at roughly 2 to 2 1/2 million a day.

Importantly, we continue to expand our Texas Panhandle drilling inventory, and we've recently added 4,000 gross acres of leasehold and authorized an additional 20 square miles of 3D, which we're going to get underway fairly shortly.

We've also added another seasoned geologist to our Panhandle technical team, which should help ramp up our drilling there. When we look at the area, it's really an area that we see has a lot of running room, it's an extremely good fit for Range.

I'd really like to compliment Paul Blanchard and Greg Quinan and Fred Standefer, (phonetic) who head up our Texas Panhandle and Western Oklahoma technical team. They've really done just a great job.

Also, during the quarter, we enhanced and expanded some of our key exploration -- exploitation fields out in West Texas. At Sterling we drilled four wells and currently have one rig running.

At Furhman Mascho, which is our Santa Andres (phonetic) oil redevelopment project, 16 wells were drilled, increasing production nearly three-fold to 1400 barrels of oil a day. A second round of drilling will commence in July, we're looking to increase production another 30 to 40% by year-end.

In Appalachia, we continue to focus on expanding our very large long life gas fields. We drilled 37 successful wells, most of which are now on production. Given our over million acre leasehold position up in Appalachia, we're also involved in exploring the deeper formations, especially as it relates to some deeper formations in and around recently drilled third-party discoveries near our acreage.

In 2003, we have 14, what we call, deeper wells planned and these are, you know, 7500 feet to roughly 12,000 feet, and the first three of those we hope to spud in the second quarter.

Turning to the Gulf, our ship Ship Shoal 28 #40 discovery well was turned production in late April and is currently producing nearly 12 million cubic feet a day equivalent gross, 2.3 million a day net to our interest. And that should continue to move up a little bit as we get more comfortable with the well.

Both West Cameron and Ship Shoal were the result of our technical teams working over 5,000 square miles of 3D seismic data to capture those opportunities. In addition to drilling our existing leasehold, Range and Partners added three blocks, offshore blocks from the recent March Gulf of Mexico lease sale.

Continuing a play that we initiated last year, we're expanding our onshore Gulf Coast production. In late March, we spud an onshore well which appeared to be a very significant discovery for us.

The well was recently tested at very high rates. We're not providing specific information on the well at this time, as we're on the ground attempting to expand our leasehold position, so we're keeping it confidential. The discovery should be turned on though in June, and once it's turned on, we'll announce it.

On the acquisition front, we completed 5 million of purchases in the first quarter, the acquired properties are located in Western Oklahoma and Appalachia. And we're estimating it to contain 4.7 Bcf preproducing reserves, which equates to an acquisition cost of $1.07 per Mcfe, again for proved developed producing reserves.

Along with production gains, several drilling locations. On the Western Oklahoma properties, we should initiate our first recompletion and spud the first drill well sometime later this month.

You know, our acquisition effort is really focused on properties within our core operating areas where we have, what we believe to be, technical and operating leverage. An example of our acquisition strategy is the purchase we completed in Western Oklahoma late last year. We acquired 10 producing wells and 4900 net acres of leasehold in the area we had operations ongoing.

We paid 5.5 million. At the time of the purchase, the properties were producing roughly 2 million a day net. Since that time, we've upgraded some surface facilities, done some recompletions, and drilled six wells, causing production to more than double net to our interest. We hope to spud the seventh well within the next few weeks. You know, as we look at the return on that acquisition, including all land development costs, and everything, kind of blood, guts and feathers, our return's going to be well over 50%.

Our acquisition team, which is headed up by Chad Stephens (phonetic) is busy reviewing a number of potential purchases. We had very nice one mast week that we were working on but got outbid, so we'll continue to work on things. It's obviously a very competitive acquisition market. But we do see acquisition opportunities increasing as the recent [INAUDIBLE], at least in our view, is providing us a fresh supply of properties becoming available.

Lastly, I'll spend a moment, we have begun the interviewing process to fill our EVP Exploration Production position that was vacated with Terry Carter's (phonetic) resignation. A number of qualified candidates have been identified and we're in the interview process. And Charlie Blackburn has obviously been a big help in this. We're doing this on a joint basis and he's got lots of good insight.

Speaking of Charlie, why don't I turn it over to you, Charlie, and you can give your comments.

Thanks, John. I'm going to be very brief because I haven't been around very long.

But I've been spending a fair amount of time becoming familiar with the company's operations and the technical staff. And the issue, of course is, are they going to be able to implement the strategy, which is to grow reserves and grow production, mainly through the drill bit supplemented by acquisitions, as John has indicated.

I'm very encouraged with what I've seen. I'm convinced that they're on the right track to do precisely that. They've got the staff in place, and they're having great results right now. And I think going forward, you see a lot of very interesting things that are going to develop.

The Gulf Coast provides high impact wells, and that's a good mix with the long life production in Appalachia. And it's also, both those things are provided a lot of balance to the kind of production that's developed in the [INAUDIBLE] Basin and the Southwestern area of the company. A lot of good prospects down the line and, as I say, I'm very encouraged by all of that.

The candidates to replace Terry, there are a number of them, so I don't think we're going to miss a beat, particularly, although Terry's obviously a very outstanding young man, I will be able to find somebody that can fill his shoes.

Now, I'll turn it back to John.

Thanks, Charlie. Tom Edelman, would you like to give your comments?

Sure, thank you, John and Charlie.

Just a couple of closing thoughts as usual. Despite the wildly confusing accounting that Eddie went through, it seems that the people who prepared our tax returns are now dedicated to preparing our financial statements that no reasonable person can possibly understand what they're talking about, this company's financial position is improving and improving rapidly.

The second, as mentioned, is that the development programs are gaining increasing traction and producing solid results and high rates of return, and the small acquisitions are beginning to contribute on a more regular basis.

Finally, and absent this down hole problem John alluded to offshore, it seems, at least for the present, as if we're going to get some nice contribution from the exploratory side of the business, as well. So all the cylinders, although it's still early days of the long-term plan, seem to be firing as planned.

I think, in many ways, the most significant fact from all of your perspectives, and from ours as well, is that the company continues to be very attractively priced, based on most of the metrics, at least that I'm familiar with, with this company trading at less than 2 1/2 times run rate cash flow.

If we can achieve our goals, if we can demonstrate not only consistent reserve growth, but production growth, and if, as I strongly suspect, despite the accountant's best efforts, the company's financial position continues to strengthen. I think there's a good chance that within the year the company, and its shares, will be, in effect, rerated by the market, and achieve a higher multiple on what we hope will be steadily increasing results.

So I, at least, have some fairly considerable optimism, at least in anything like the current commodity environment, that we all have a very attractive investment here looking ahead over the next 12 months.

As all of you know, this is my swan song, my last public appearance as a Director or Officer of Range. It's a matter of considerable regret. First of all, if you've done anything for 15 years, it is a fairly shocking change to alter that.

The other side of the coin is, I believe I am still the largest, or certainly one of the largest, individual stockholders. I have entered into an advisory agreement, as we've indicated, with the company for the next three years, and I think I will probably get at least a full opportunity to put my 2 cents' worth in.

Just as importantly, probably far more importantly actually, I think John leading the company, Charlie joining us as Chairman with the kind of background and expertise that is far better suited, frankly, than mine to the direction of the company as we see it going forward, and backed up obviously by Eddie, whose waded through hell and back between reaudits and the daily accounting pronouncements that have been coming out, Rodney Waller, Ellen Ferguson and the entire technical team that remains with the company, that we have some very talented people who have fought hard to bring the company to where we have it, and I'm, at least, convinced will fight at least as hard, maybe harder, to take it to the next level.

So I bid a dieu, in terms of, at least, the public aspect of this, with regret but with enthusiasm. So thank you all.

Thanks, Tom. At this time, I guess, operator, we'll turn it over to questions.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please indicate by pressing the star or asterisk key followed by the number 1 on your telephone keypad. We will take as many questions as time permits. If you are on a speakerphone, please pick up your hand set before asking your question. If you would like to withdraw, you may do so by pressing the pound key. Once again, please press star 1 to ask a question. We will pause for just a moment to allow everyone a chance to respond.

Your first question comes from Ron Mills of Johnson Rice.

Good morning, guys. A question on just the West Cameron 45 and, I guess, combined with the Ship Shoal 28, sounds like the West Cameron 45 gives in back to your production by about 6 million a day net, and the Ship Shoal should offset, you know, roughly almost half of that.

What -- can you all provide a little guidance in terms of whether it's second quarter or full year, where you -- how you expect your production profile to look over the remainder of the year? Are the jumps going to be pretty even throughout the year, and are you still looking for that 4 to 7% production growth you had talked about?

Ron, this is John. I think I'll try to answer that, given kind of the variables we're dealing with. Obviously, before West Cam problem we were becoming increasingly comfortable at the top end of our production growth range through the drill bit.

Now the -- let me back up a little bit. The work-over, or the immediate work at West Cam has started, it's going, you know, at least based on my conversation with our Gulf Coast unit as of 30 minutes ago, is going as well as they had expected. That being said, as I mentioned, it's very deep, overpressured. So we're being very cautious in terms of what we want to try to provide guidance for the market.

But to try to step back from all of that, I think the analysts' estimates for second quarter is roughly 156 million a day of production. Even if West Cameron doesn't come on, we feel comfortable with that number. And think that we'll meet or exceed it.

I'm sorry, can you repeat that?

Well, the analysts have it, I think, on average, our production for the second quarter at 156 million a day of equivalent.

Okay.

And even if West Cam doesn't come on, and just stays, for whatever reason, stays off the entire rest of the quarter, we still think we'll meet that 156 number.

Okay.

So what that tells you is that we've had a number of things that we've drilled that have come on that we're pretty pleased with, plus we've got that onshore discovery, that you know, we, hopefully, are going to get on in the first week of June, which should add quite a bit of production as well.

So to answer your question, we probably would have taken a pretty healthy little jump in the second quarter. Hopefully, if we get West Cam back you'll see that healthy little jump in the third quarter. But again, that's just based on the information we know today and it could change, you know, dramatically.

As soon as we get a better handle on production from West Cam, and some of the other wells that we put on, we will likely give better guidance and issue a news release, sometime, hopefully, within the next 30, 45 days, you know, well prior to the second quarter results. In terms of where we are.

And then, I'm long winded, but in terms of your I think your real question, are we comfortable with this 4 to 7% production growth for the year, and the answer to that is yes

Okay. You touched on it earlier, obviously the first quarter production expenses were -- you had a pretty big jump up in terms of the second quarter, are you all expecting that to return closer to that? And this would include your severance [INAUDIBLE], as obviously that kind of 80-cent range, or so, which you all had been running beforehand?

Yeah, we -- yeah. [INAUDIBLE] production taxes, which should come down fairly dramatically if we stay with the [INAUDIBLE] prices that we've got, kind of, in the market. The only thing -- we would expect, just us you said, those to come down. The only wild card of that is going to be at West Cam 45 20, which, you know, that remedial work will be expensed and, you know, that number could be, I don't know, a million to a million 1/2 net to our interest. So that's kind of the wild card out there.

And we still are doing some offshore work-overs, believe it or not, just at the end of them, out of the hurricanes from last year. Some of the -- up two or three wells we're working over, so that will hit in the second quarter. But I do think, you know, it will be lower than the first quarter, and then I think third quarter will be lower than second quarter. And then, I think fourth quarter will be lower than third quarter, so production will be going up hopefully in the -- on a per-unit basis, it should be driving that number down.

Okay. And finally on G&A, the run rate that you announced here in the first quarter, is that a pretty good run rate for you going forward? I know most people have seen it jump just due to insurance and personnel costs. Is that well under 5 million a pretty good number for you all going forward?

Yeah. I mean, -- yeah. I mean, to be conservative, I'll answer that yes. I think typically the first quarter is a little higher than the rest of the quarter's year. We would, you know -- to be honest with you, I would expect it to drop slightly in the second quarter.

Okay. Thanks a lot, guys.

Your next question comes from Arthur Winston of Pilot Advisors.

Hi. John, I saw that there's about $50 million of some kind of pension liabilities that came on to the balance sheet. And I was curious if you -- I don't think you described it, so what is it, and is there any offset on the asset side of the balance sheet?

Yeah, this is all part of this unbelievably confusing FAS 143 relating to plugging in abandonment where we used to have accrued up the plugging cost on offshore and then we would just net that liability against the carrying value of the assets. Now what they're doing is under 143, making us break that out and showing, you know, the liability side and the asset side.

This is asset retirement obligation.

Yeah, that's exactly what FAS 143 relates to.

You mean, it has to do with the wells?

Yeah, it's not retirement, Art, in the sense of pension, it's getting rid of an offshore platform type of retirement.

I see. And the asset side is somewhat close to it, not a big difference?

Yes.

Yeah, that's what I thought. From what we see then, the stockholders' equity's been going down consistently. If you remain profitable, that will probably stop now, probably start to go up, rather than down?

It all depends on our friendly accountants, if they tell us to expense nuclear war, it will probably go down, if we start paying attention to the business, it will go up.

There's no reason now that you know of things that should drive it down rather than up if the company remains in the black?

Absolutely not.

If production goes somewhere near where you're thinking, the debt will continue to go down for rest of the year?

Yes.

Good. Thank you very much.

Your next question comes from Sam Kitston of Blackrock.

Hi guys, just a couple of quick points of clarification on the balance sheet here. One is on the borrowing base, could you tell me what the borrowing base has been increased to again?

Yeah, the borrowing base was increased from 143 million to 170 million on the parent credit facility.

And how much of that is drawn right now?

About 110 to 111 million.

All right. And then you said you've paid down $14 million in debt since the end of the quarter?

Correct.

Where was that paid at? Was that just off the bank line or --

Yeah, we would have paid down the credit facility.

Okay. And then what were -- could you just one more time clarify what the 465,000 debt conversion expense was?

It's one of the kind of magical mystery tours of the new accounting pronouncement that Eddie talked about in his discussion. Basically, what it is, it's a very confusing entry we're required to make when we exchange common stock for convertible securities. And it's kind of the phantom expense that we have to book. It's not -- doesn't have anything to do with cash.

So, and probably the easiest way, other than me taking 15 minutes to try to explain it, if you don't mind calling Eddie or Rodney after the call, they can probably take you through the debits and credits and get you through it. But it's another one of those bizarre new accounting rules that, at least in my view, and I think the rest of management's view, don't make a whole lot of sense. But we're going to -- they're GAAP and we're going to do what GAAP tells us to do.

Right. And just finally, which is the convertible, is that the subordinated notes, or which line item does that appear in on the balance sheet?

There's two. We have two convertible securities. One is a 6% convertible debenture, which there's about 20 million outstanding, then we have a 7 3/4% trust-preferred, and there's about 5 3/4, pardon me, percent, trust preferred, and there's about 84 million outstanding.

Okay. Thank you.

Once again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad.

Your next question coming from Rehan Rashid of Friedman, Billings, Ramsey.

Good afternoon, John. How are you?

Hey, Rehan.

Real quick, maybe some thoughts on the Appalachian production, and possibly even on what kind of realized prices are you seeing? Are you seeing the differentials widen from prior quarters prior to prior years, any thoughts on that?

Well, as I mentioned, we got beat up pretty hard in January and February in Appalachia. If I can just kind of give you a little bit of a thumbnail sketch,.

In Appalachia, one of the peculiarities up there is that, under most of the oil and gas leases, the landowner has the right to take a certain cubic feet of gas per year to heat his house and barn or whatever else he has. These are contractual arrangements we monitor quite vigorously. And if they go over their allowable, we collect money back from them.

Given how cold it was in January and February, and it was awfully cold up there, I just -- it was almost incredible, the house, what we call the house gas usage was pretty dramatic. That was in comparison to prior year which we had obviously a mild year and it was pretty low.

So between the house gas usage and just the frigid weather having, you know, playing bedlam on our gathering systems up there, it was have a very tough January and February. So we were reasonably under budget in January and February. They had -- they came back pretty strong in March and they were over in April.

But, you know we're still looking for a real solid, you know, 4 1/2 to 6% increase in Appalachia this year. Their drilling program's probably 10 wells ahead of schedule. So it's just -- it tends to just click along like clockwork. They've done a good job and still very enthusiastic with what they're doing up there, creating a lot of value.

We've got a number of new projects we're working on up there, new development areas. So it's an area that we're keenly interested in, and one that we think will continue to add a lot of value over time.

In terms of differentials, in general, and this is in general, then I'll -- I think Rehan, your question was relating specifically to Appalachia, but in general, as gas prices move into the, what the six, seven, eight, $9 range, the basis differentials compared to NYMEX tend to expand fairly dramatically.

A perfect example would be where, you know, in some areas, for example, we're being paid 95% of Houston's ship channel, the 5% at $3 gas is 15 cents, at $9 gas, it's three times that, 45 cents. Your basis differential expands three times. There was obviously some of that in the first quarter. Now, that's come back down quite a bit.

In general, we're not seeing the basis differentials. Other than that we're not seeing them move much. We did in Appalachia, our basis differentials did get hit a little bit in the first quarter just to do the -- a specific contract on some properties, a small amount of properties we bought. But that will resolve itself in the second quarter. So that's not a big item, it's not something that will continue.

But my own opinion, in terms of Appalachia, I think as you and I have talked about Rehan, I do think over time, especially where this Knox emissions hits in '04 and in reality, in '05, with the gas -- I mean, the coal-fired electric generators up there, I think the May through September basis differentials in Appalachia are going to jump fairly dramatically to the positive. But again, that's something that we'll have to see, and if it happens, we'll, obviously, try to take full advantage of it.

Got you. In terms of finding a replacement for Terry, any time line, or just wait for the right person to come along and take however long it takes?

Well, I think we've got -- I think we've got a fairly high sense of urgency here. We -- you know, Terry has been around, he's going to be around still a few days, to the end of this week, so we've had the comfort of having him here.

But I would hope that we'd get this resolved. As Charlie and I mentioned, we've got some very good candidates, you know, one of which used to be with -- used to work for Charlie at Maxis as a young engineer, now he's gone off and done some wonderful things at some other companies.

So we've got, I guess, a list of what I'd call the A list, there's somewhere between four and five people on the A list and we've got a B list that probably has four or five as well. But I don't know, Rehan, I'd certainly like to have this done, over, completed sometime in the second quarter.

Okay. Good. Thanks, John.

Your next question comes from Douglas Jones, who is a private investor.

Thank you. A question, could you tell us what the Board of Directors was thinking in the area of options increase from 6 to 8 million compared to the 3 1/2 million outstanding? And also, Mr. Edelman's, it looks like a 2 1/2 million dollars total value of his departing package, particularly the options, though, it seems potentially excessive. How are you going to use them?

Well, let me address the options. Back in, I believe in 1990, we adopted a philosophy of providing stock options to all the employees, this includes down to the lowest level field hand, as well. And so that's something we've been doing, even before Starbucks starting doing it.

So that's something we feel proud of, it's something that we believe, over time, creates a bonding between the shareholders and all the employees, because they all have a vested interest. So, I mean, philosophically, we believe stock options is a great way to incentivize the employees and get them thinking as shareholders. Just like you, Mr. Jones.

In terms of the overall number, we also have a kind of a -- I don't think it's written anywhere in terms of the bylaws or anything, but we have kind of an unwritten rule from the board level that we keep our number of outstanding options down to below what the industry average has for companies in our peer group. The number of options we have, at least in our analysis, would suggests that we are below the rest of the companies in our peer group.

So, again, the quest for the options, as you issue options, as they get exercised, or as they expire, you have to issue new ones under the stock options plans, and just like we have in the past, come to the shareholders and ask for permission. One thing we have done, though, which should, you know, at least from your perspective, take the sting off of it, is we provide a provision in our proxy statement that specifically requires that we never reprice stock options and we never have.

But we have put that now in writing, it's in front of the shareholders for them to vote on. If that comes to fruition, we'll be one of the few companies that has a provision in their stock option plan where we can't reprice stock options. So that's it on the stock options. I think we're reasonable and I think the provision on the repricing is clearly in the best interests of the shareholders, and management agrees with that.

In terms of the compensation to Tom, that was a Board of Directors' decision, based on 15 years of hard sweat and tears at the company, we all thought it was reasonable. Given that line, I'll let Tom speak to that.

Well, as a severance package, it might be appealing, unfortunately I've committed to earn it. So for the next three years, at least, I've indicated that I will make myself available under these rules. It can only be make myself available, as opposed to proactively take responsibility for things.

But all in, it's roughly a two-thirds reduction in compensation, and if the company works as well as I hope, it will be a two-thirds reduction in work. But we shall see.

Thank you.

You're nearing the end of today's conference.

We will go to Jim Dorsey, who's a private investor, for our final question.

A couple of quick questions. What's the working interest in this very high rate onshore discovery?

Jim, we own slightly over 40% working interest and a 31% net revenue interest.

31, you said?

31% net revenue interest.

Okay. And real quickly, has there ever been any consideration to expensing all these options? It seems to be the conservative approach to it these days.

Well, I mean, I guess we chatted about it. I think, you know, given where Range is in the landscape of public companies, I don't think it's appropriate for us to kind of jump out there and be a --

I think the majority of companies are doing it now.

May I, John? No, certainly not even remotely close to a majority. There's a small group of marquis companies, sort of Philip Morrises of the world, who are trying to get Brownie points for this. To my knowledge, there's not a single independent oil company.

The trouble is, it doesn't really matter whether you expense them or not. If the stock doubles and they dilute, we'll all be quite happy. But much more importantly, we, like everyone else, get compared to our peers, not to cigarette or railroads. And there are no independents doing it yet.

When it's done, hopefully the SEC and FASB will be smart enough to do it all at one time so we can all put these companies side by side and have some idea what it means. We don't care, we're happy to do it tomorrow, just as long as everyone plays on the same rules.

Okay. One thing that really did bother me that hasn't been discussed is cash flow from operations, before changes in working capital, was actually down $2 million year-over-year in this quarter. And I'm real perplexed by that.

I started looking through there, I think part of its -- I mean, obviously, we left something like $26 million in revenues under the hedging program. That, obviously, was the big hit. But -- and I guess severance costs were up quite a bit due to the higher costs, and we didn't get the benefit of it because of the hedges. I don't know if there were other reasons, but, man, you know --

I think you're misreading the statement, sir.

No I'm not. No I'm not, it's right there, you can look at it yourself, 18 versus 20. And I looked at it several times. And I didn't misread it.

Do you know about changes in working capital?

Well, changes in working capital sort of, to me, that's -- you can add those in, but those are, to me, not that significant when you're --

If you do, you'll find it changes the direction.

Well, it does but that's not cash flow from operations before working capital. And the most important number is before working capital.

Cash flow from operations before working capital were solidly up.

They were 18 --

No, I'm sorry, you're misreading the statement, sir. Look at both.

That's what both your statements show.

Look on page four of the release, look at the bottom of that table that you're reading, you see net cash flow provided by operations?

I don't have it in front of me, but I looked at it several times.

If you look at it you'll find that included in that number is an $18 million swing in working capital that reversed during April. It's an irrelevancy.

Well, yeah, but if you back that number out, then the number was 18 million.

I'm sorry, that's incorrect. But if you'll look at it, I think you'll find it.

We'll see, because it's -- I looked at it several times but if I'm incorrect, that's fine.

But anyway, we're still left with the 26 million on the hedging and I just was curious, if I understand, we didn't write any hedges in the first quarter, which is too bad, because that's when it would have been the best time to write the hedges, but what is being done to examine this? Because this is clearly not acceptable.

You know, the -- I mean, we're -- that's a lot of money for the shareholders to have sucked up. And I have to tell you, I think that the people running the company are -- have to be responsible for the hedging program.

So is there any change, are we going to examine it, are we going to be talking to getting some help in assessing where the natural gas markets are going, or are we just going to write hedges at $4 and 23 bucks for oil? I'm very disturbed by that. And I'd like to hear what you'r going to do about it.

Jim, would you be distressed if gas prices were $2?

Well, the point is, nobody makes money at two bucks. So I doubt if they're going to two bucks. And I don't pretend to be an economist that examines this, but there are a lot of people that examine it greatly, and we don't appear to listen to these people and to employ them and look at it.

And I, you know, I have seen a lot of companies that even saw the crash of this perfect storm coming and were covering their hedges in the fourth quarter of last year and instead, we were writing them. We went the wrong way.

It's 26 million, you got -- I'm not -- you know, what was our return on equity this quarter, less than 10% in one of the best pricing markets around. It doesn't work. Something's got to be changed.

Well, Jim, you know, we review our hedging policy quarterly with the board. It's not something that management just goes off, willy-nilly, does on their own. We also have a very disciplined approach, that all hedges and all transactions that we do are compared against our internal budgets and forecasts. And I agree, I mean --

I mean, you've talked about this--

Jim, if I knew the gas prices were going to be $6 and $5, would we have hedged? No. But look, the gas prices are very volatile. You'd have to admit to that. On our numbers, we make 40 and 50% rates of return on invested capital as prices approach $4-plus.

Well, that's -- let's talk about that. That's interesting, but then how do we get down to a 10% return on equity with book value collapsing?

Okay. Well, just wait a minute. If you take all the hedges that we have in place, we have hedged less than 10% of our proved reserves that this company has. I just don't think it's prudent for a company that's in a business, a commodity business, to go out there on an unhedged basis. I just think it's unresponsible to the shareholders. Jim, just wait a second.

Okay.

And you know, we look at our hedging program against other companies and compare it and whatnot, and there are some other companies that have essentially the same type of hedging programs we've got that, you know -- so I don't think we're out there on the limb, so to speak. Our brother in Fort Worth, XTO is hedging programs, and the amount they had hedged, wasn't too much different than where we were.

So again, it's something that we review with the board every quarter, management's not out there willy-nilly decided what to do on the hedge front. We do it based on returns on invested capital, that will come through the income statement over time.

And again, we're trying to protect cash flow, make sure that we have our -- we can fund our drilling program and our capital budget through cash flow. We haven't put any hedges on in the first quarter of '03. So, I understand your concern, I understand your disappointment. You know, I would have wished, you know, I was smart enough to know gas prices were going to be where they were in the first quarter of '03. I just don't happen to be that smart.

Well, the problem is, there are some people that are that smart and have called it, a number of them, and, you know, you go by track record. It would be great if we started listening to some of those people and refined our hedging program.

But what really bothers me is, if we talk about a 50% return on investment, and then somehow it's boiled down to a less than 10% return on equity, there's a problem with the business model. I mean, it doesn't do us any good.

How are you calculating a 10% return on equity? We made [simultaneous speakers]

We made 9 cents before the accounting changes, which are accumulative accounting changes. So our basic diluted earnings were nine cents. Four times nine is 36, and quite honestly, the first quarter, in some respects, given the higher prices on nonhedged production, should have been one of the better quarters, unless we have a big jump in production. And what was shareholders' equity, under four bucks. That's less than 10%.

And shareholders' equity, due to the comprehensive income rules, has been falling. So I mean, the whole thing is problematic to me, as a shareholder. We used to do 20% return on equities, and now we're doing 10.

Well, I, in my final two weeks, I don't think we ought to tie everyone else up any longer. I'd be happy, if you'd like, I'm sure Eddie or John would do the same, but if you would like, I'd be happy to take you through, at least my view, of the hedging theory, A, and B, how a 40 and 50% rate of return translates through an income statement at this point in time, if you'd like.

I'd like. Because I don't see it.

Let me give you a phone number. It's 212-371-1117. I'd be at your disposal.

Sometime next week, I'll try and get a hold of you. Or the week after, I'm a little bit tied up. Thank you very much.

Thank you, Jim. And we really do appreciate your comments.

I guess that's all the questions we've got. The last one certainly was interesting.

In terms of just wrapping this up, I do have one final comment and that is: On behalf of the Board of Directors and the officers and the staff of the company, we really want to thank Tom Edelman for all his many years of dedicated service to the company.

Over the past several years, he's really been a very helpful hand, and his tenacity and wisdom were of great benefits as we were dealing with the issues we had to address over the last two or three years. I personally plan to continue to have -- call Tom and get his thoughts in the weeks and months ahead. I do think he's a very bright man and has a very particular viewpoint of the business that is outstanding.

I also want to thank Charlie for jumping in, kind of, with both feet. He's been with the technical people looking at prospects, looking at seismic. He was instrumental in looking at an acquisition that we worked on that we didn't get, but we were close on. So he's really been a big help. And been in our office quite a bit over the last two or three weeks.

With that, I want to thank everybody for joining us today and we look forward to reporting continued progress in the second quarter and beyond. Operator, this ends our call.

Thank you for participating in today's conference call. You may now disconnect.