山脈資源 (RRC) 2003 Q2 法說會逐字稿

Welcome to the Range Resources second quarter Earnings Conference Call. This call is being recorded. All lines have been placed on 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 John Pinkerton, President of Range Resources. Please go ahead, sir.

Thanks, Tina.

Good afternoon and welcome. With me today are Charlie Blackburn, our Chairman; Jeff Ventura, our Executive Vice President and Chief Operating Officer; and Rodney Waller, Senior Vice President. After reviewing results, I'll turn the call over to Jeff for an update on our E & P activities and then to Charlie for his comments, after which we'll open the call to questions. As you are aware, Jeff joined Range in early July. To give you a brief summary, prior to joining us Jeff was President and COO of Matador Petroleum in Dallas. Matador was recently acquired by Tom Brown. While at Matador, Jeff helped Matador grow to roughly tenfold of assets. Prior to Matador, Jeff held various positions, exploration, operations and technical position with Maxis Energy and Tenneco. In total, Jeff has roughly 25 years of industry experience, and he graduate from Penn State University with a degree in petroleum engineering. In addition to an outstanding work experience, one of the contributing factors for us choosing Jeff as our Chief Operating Officer was based on Charlie's input, as Jeff worked for Charlie for roughly eight years while at Maxis. While on board only for a month or so, Jeff has gotten himself pretty much fully up to speed. He's developed several new initiatives which I'm pretty excited about. Jeff's role is to basically oversee all of our technical and operating aspects of the company.

Turning to second quarter results, this morning we filed our second quarter 10-Q with the S.E.C. And you can access the 10-Q via our website. Before we review the second quarter results, I'll summarize a few key points. Overall we're pretty pleased with the results. Pretax earnings were up 27% despite several non-cash accounting entries. Excluding these entries, pretax earnings would have been up 65%. Production rose 5% on a year-over-year basis and was 3% higher over first quarter of '03. The production was higher than our previous guidance and higher than the average of the analysts. Lastly, our capital program has gotten off to a solid start. We're pleased with the drilling results so far the first half of the year. We're achieving exceptional results on capital invested. The results of our new wells have exceeded our original expectations. And lastly, we're continuing to grow our inventory of drilling projects as we initiate several new projects during the quarter.

That being said, we did have some disappointments. Production was negatively impacted by downtime at West Cameron 4520. The well encountered a down home mechanical problem in late April, which we advised you all in the first quarter call. The well was off 39 days during the quarter. In May we took over -- started work over. It was performed, and we got the well back on production in early June. The second thing is our operating costs, while falling from the first quarter levels, were still higher than the previous year quarter. This was due to significantly higher severance taxes as well as higher field level costs, such as electricity. Also, workover costs increased. This is primarily due to the workover at West Cameron 4520, which was fully expensed, adding $700,000 to our operating costs for the second quarter or roughly 5 cents per Mcfe. We expect operating costs to continue to moderate in the third and fourth quarters. Overall -- in summary, overall our more balanced approach to exploration, development, and acquisitions coupled with our upgraded technical team is having the intended impact. We are growing our production through the drill bit, and we're not having to rely on acquisitions for our baseline growth.

With that, I'll turn over to the second quarter results. In specific for the quarter, our revenues totalled $54.7 million. That's 9% higher than the prior year period. Oil and gas sales rose 14% due to increased production and higher oil and gas prices. All other revenues decreased by 2.1 million in total. This decrease was attributable to lower gains on debt retirement and the negative impact of ineffective hedging adjustment under FAS 133.

Turning to production, it increased 5%, averaging 158.3 million cubic feet equivalence per day. Gas production increased 3% to 116.7 million a day, while oil and NGL production rose 13% to 6,930 barrels per day. On an equivalent basis, 74% of our production was natural gas versus first quarter '03 production rose by 4.3 million a day, or roughly 3%.

Turning to prices, realized prices including the impact of hedging average $3.84 per Mcfe as natural gas prices rose 8% to $3.88, while oil prices rose 4% to $23.14. Hedging decreased our average price by $1.07 per Mcfe. On the expense side, for the quarter they totalled 47.7 million. That's 7% higher than the previous year, but still slightly below the 9% increase in revenues. As I mentioned, operating costs increased by $2.7 million. Exploration expense increased $515,000 due to higher dry hole expense. Interest expense was reduced by 1.1 million due to lower debt balances and lower interest rates. D&A expense increased $808,000 due to higher volumes and the rates stayed roughly the same. Due to the adoption of FAS 143 regarding asset retirement obligations, we recorded a $1.2 million accretion expense in the first quarter of '03 versus none -- I'm sorry -- in the second quarter of '03 versus none in the prior year period. G&A expenses increased $206,000 due to additional personnel and higher professional fees. And lastly, IPF expenses fell 1.6 million due to lower allowance for doubtful accounts, lower interest expense and lower administrative expenses.

Let's see here. First quarter EBITDEX, which is earnings before interest, taxes, DD & A, exploration, and other non-cash charges totalled 39.5 million, a 10% increase year-over-year. Cash flow totalled 34.4 million for the quarter, up 15%. And this represents the second highest quarterly cash flow in our company's history. Cash flow per share was 62 cents, 12% higher than last year. In our earnings release we included a table that sets forth the computation of cash flow from operations. Also on our website we've included supplemental schedules that provide additional information regarding the calculation of EBITDEX 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 rules set forth by the S.E.C. Pretax income totalled $7.1 million versus 5.6 million last year, representing a 27% increase. Income tax expense for the quarter was $2.5 million, which is a contrast to the $1.8 million in tax benefit we recorded last year. This represents a $4.3 million swing in deferred taxes. The swing in taxes was caused by fully utilizing certain tax benefits last year coupled with our higher level of pretax earnings in '03.

Looking to the remainder of the year, in terms of taxes we don't expect any material cash taxes, but we do expect to record deferred taxes at the full 35% rate. After you look at that, on a per share basis our fully diluted earnings were 8 cents a share. As I mentioned earlier, during the quarter we were required to record several non-cash entries for new accounting pronouncements which are in most cases ignored by the analysts. In order to reconcile our reported earnings to the first call earnings, we prepared a table which we included in our press release. The table indicates pretax earnings would have been 9.9 million after excluding the non-cash items, a 65% increase over the prior year. Earnings per share would have been 12 cents per share basic and 11 cents diluted. The first quarter -- I mean the first call earnings estimate was 9 cents a share, so we were slightly above that. When you take into account the adjustments and for cash flow, first call was 58 cents and our actual results came in at 62 cents. So, again, slightly ahead of those. To give you a little perspective for the latest 12 months our cash flow has totalled 128 million, or $2.33 per share. And for the last 12 months EBITDEX has totalled just shy of $150 million.

Turning to the balance sheet, total debt was reduced by almost $17 million during the quarter through the application of excess cash. Second quarter capital expenditures were funded out of 83% of cash flow from operations. Turning to debt statistics, our debt to EBITDEX was 2.4 times. This is based on total debt outstanding at the end of quarter, including the trust preferred divided by the last 12 months EBITDEX. For the quarter EBITDEX covered interest by 7.4 times. In terms of our borrowing base, it's currently under our parent credit facility currently $170 million at quarter end. We had 59.4 million of availability. As you're aware, in July we issued $100 million of 10-year senior subordinated notes. They carry a 7 and 3/8% interest rate. The proceeds will be used to redoom our notes on August 20th. The remaining $25 million will be used to pay down on the credit facility. So, today we have approximately $85 million of availability. We hope to use some of that availability to repurchase higher cost convertible debt and trust preferred, although the issuance of the 7 and 3/8 notes reduces our ongoing interest expense and lengthens our maturities by roughly six years. A key factor was redeeming the 8 and 3/4 notes. As we will eliminate certain covenants that currently prohibit us from repurchasing additional debt. It also precludes us from paying common dividends or repurchasing our common stock. So, as we see it, one of the really important attributes of the financing was to provide additional financial flexibility which over time should allow us to continue to simplify our capital structure. To give you a little additional commentary, we chose the $100 million level as it was really the smallest issue that we could do. Typically these senior subordinated notes are issued in minimum of $150 million lots. So, we actually kind of broke the mold there and went a little smaller. We also -- I guess the offering went actually quite well, and we were offered by the underwriters to increase it to 125 to 150, but we actually turned that down. In terms of the timing, we feel pretty fortunate. Right after we did the deal, the 10-year treasuries have moved up about 80 basis points. So, again, we feel pretty fortunate in terms of the timing. If we had to do the offering today, we'd probably be somewhere in the 8% range.

Turning to hedging, we have roughly 70 to 75 percent of our production hedged at NIMEX prices at approximately $4.00 at Mcf and $25.30 a barrel. During the second quarter we modestly added to our hedging position. And the new hedges for the quarter included a combination of both swaps and collars. As many of you all know, historically our hedging program was based on fixed price swaps. In the second quarter we modified our program to include collars, whereby the company is assured a minimum floor price, and we'll benefit from the price increases up to a predetermined ceiling price. In general we're looking to put on fixed price swaps for roughly a third of our production and collars for another third while leaving the last third to float with the market. Simplistically, this gives us downside protection on two third of our production while at the same time maintaining price to upside again on roughly two-thirds of our production.

Turning to IPF, we continue to make good progress in terms of monetizing the portfolio. We're using the cash generated to help fund our E&P capital program. During the quarter net principal repayments nearly tripled to 4.5 million versus 1.6 million last year. The increase was due to several receivables being paid off early as well as better portfolio performance. At June 30 the not portfolio balance was 16.3 million, a 33% reduction since year-end 2002. For the quarter IPF lost $140,000 versus last year's loss of 1.2 million. The roughly $1 million improvement was due to lower valuation allowance, lower interest expense, and lower administration expenses.

Turning back to production, as I mentioned previously, production increased 5% to 158.3 million a day. The increase was the result of our drilling program. Production at Southwest grew 9% and represents 49% of the total. Gulf Coast units production was essentially flat and represented 28% of the total. And Appalachia was up almost 4% and represented 23% of the total. For the third quarter we're anticipating production in the Southwest to again increase in the 9 to 10% range, for the Gulf Coast to increase in the 3 to 4% range and for Appalachia to increase 4 to 5. When you take all that and mix it around, this equates to a total company production target of the 160 million a day-plus for the third quarter. This is higher than our original plan and higher than the average of the analysts. Obviously a severe storm in the Gulf or mechanical failure like we had on West Cameron on a key property could affect this target. However, if we do hit the target, the rate of growth for the third quarter will increase over that of the second quarter so, we're right on target there, hopefully.

Now I'll turn to our capital program. For 2003 we originally set our capital program again excluding acquisitions at 105 million. This was a 17% increase over '02. The budget includes 89 million for drilling and recompletions, 12 million for land and seismic and 4 million for gathering systems and facilities. For the year we expect to drill 326 gross wells and undertake 37 gross completions. Approximately half of the spending is allocated to Southwest with roughly 25% being directed to each the Gulf Coast and Appalachia. With 6.3 million of property acquisitions completed in the first half of the year, our budget including acquisitions now totals right at 111 million. Based on current oil and gas prices, futures prices and hedges in place, this capital budget is expected to be funded by 80 to 85% of our internal cash flow. The excess cash flow as we stated before will be used to either retire debt to fund additional acquisitions or increase our drilling budget, if we have some additional successes.

Now let's turn specifically to the second quarter. We spent 30.3 million, this includes 29 million for drilling and recompletions, land and seismic, and 1.3 million for producing property acquisitions. This funded the drilling of 103 gross wells, all but three of which were successful. The three unsuccessful wells included two in east Texas and one in western Oklahoma. By quarter end we had all but 40 of these wells on production. The remainder will be turned on during the third quarter. On average we'd say that the initial rates for the new wells are encouraging and exceeding our original AFE estimates. And again, our strategy continues to be to grow our production reserves in our onshore loan-locked areas by exposing ourselves each year to several potentially high impact opportunities in the Gulf.

On the acquisition front, so far this year we've completed 6.3 million of acquisitions. The acquired properties are located in both western Oklahoma and Appalachia and are estimated to contain right at 5.7 Bcf approved producing reserves, which equates to an acquisition cost of $1.10 per Mcfe for these producing reserves. Along with the production came a number of drilling locations which we're in the process of inserting into our drilling program. Our acquisition effort is really focused, as we stated before, on properties within core operating areas where we have competitive technical and operating leverage. An example of this acquisition strategy is a purchase we completed in western Oklahoma last year. We acquired 10 producing properties and nearly 5,000 net acres of leasehold. And in areas where we had extensive operations, we paid right about $5.5 million. And at the time of the purchase the properties were producing about 2 million a day net. Since that time we've upgraded the surface facilities, we've drilled six wells, causing production in total to nearly triple. We've just recently spud the seventh well, which should reach total depth within the next week. In return on -- our return on this acquisition, including the development cost, kind ever blood, guts and feathers, should easily exceed 50%. To give you a little bit of a view of the future, our acquisition team is pretty busy under the leadership of Chad Stevens. We've got a number of potential purchases that were currently evaluated. Obviously the market's very competitive. However, we do see acquisition opportunities increasing as the recent amount of mergers, both with the majors and the large independents is providing an increased supply of properties becoming available.

Well, that's it for me. Why don't I let you all hear a little bit from Jeff and give us an update on our E & P activities?

Thanks, John.

Since joining the company I've spent my time working with the different operating groups reviewing a number of key projects. I've been impressed with both the quality of the projects and the people generating and implementing them. The 2003 program is on track to achieve these objectives and I'm focusing on working with the groups to expand on the areas where Range has had success to build the 2004 and 2005 programs. Most important, the company is ahead of scheduled with regards to production. As John mentioned, production for the second quarter averaged 158 million cubic feet equivalent per day, which is a 5% increase over the second quarter of 2002 and a 3% increase over the first quarter of 2003. This is primarily organic growth driven by the drill bit. The 158 million per day is comprised of 78 million per day from the Southwest division, 45 million a day from the Gulf Coast and 35 million per day from the Appalachia division.

I'd like to talk a little bit about the Gulf Coast production. The key is it's flat year to year versus the decline that occurred in the past due to both limited capital spending there coupled with the decline rates that you experience in the Gulf. And there's two things that I'm happy about. One is the on-shore success that they've had in the division. And I'll talk about that later as well as what's going be done to expand out from it, and also it appears that the past strategy of drilling a number of well offshore but higher quality prospects appears to be paying off. So, that's good news for Gulf Coast.

In terms of capital, we're on target to spend on 105 million capital budget for the year. The 105 million excludes acquisitions, second quarter 2003 spending was $29 million bringing the total capital budget spending to 52 million for the first half 69 year. In addition to these capital expenditures, as John mentioned, Range spent 1.3 million on producing property acquisitions during the quarter, which brings total proven acquisition for the first half of the year up to $6.3 million. In the second quarter, Range drove 103 growths in 59 net wells. Only 3 growths two net wells were unproductive. 156 growths and 92 net wells were successfully drilled in the first half of 2003. As of June 30, 116 wells have been place on production. The remaining 40 wells are in various stages of completion or waiting on pipeline connections. Currently about half of these wells are on-line. As these wells are put on production and we drill new wells, I expect to see continued production growth in the third and fourth quarters. Currently we have 12 rigs running today, and we expect to be active throughout the third quarter. The fourth quarter will reflect some of the seasonal slowdown that we normally experience.

I'll now review some of the highlights of each of our divisions. I'll start with the Gulf Coast. In the Gulf Coast the number one discovery in south Louisiana came on-line in late May and is producing 14.5 million cubic feet equivalent per day. That's 4.6 million net to Range. The [INAUDIBLE] in particular had 42 feet of pay, excellent quality rock, great permeability, great porosity. The well came on-line at a rate of 17 million equivalent per day at 5,650 pounds flowing tubing pressure and currently is 14.5 million a day at 4375 psi flowing through the pressure. So, it looks like a strong well, great rock, strong production. And currently we're drilling an additional well in the area which is below 6,000 feet today.

Turning to the Gulf of Mexico, the West Cameron 45 number 20, which was off production in late April, was restored to production in June and is currently producing 20.7 million cubic feet equivalent per day at 4.1 million net to Range. And as John mentioned, the key there is the well was off-line for 39 days in the quarter. But despite that, the company was able to not only meet but exceed production targets it had for the quarter, which really speaks to the strengths of the portfolio, being able to overcome losing a key well like that. The rate before the workover was 25 million a day. And the rate post-workover 20.7 million a day. I really -- the well has the capacity to produce in excess of 25 million per day currently, but we're rate restricting the well to help insure the mechanical integrity. Net workover cost was $700 thousand. A little bit of what the workover was there as a channel and the cement water came up from below, and the workover cost was to go in and repair that and isolate the water. And it was very successful. In addition to the production I mentioned there, the Ship Shoal 28 number 40 came on-line in April. It's currently producing 16 million a day, equivalent, 3.1 million net to Range. Ship Shoal again found excellent quality of reservoir rock, great permeability, great porosity. It's producing that out of the [Chris K-2] sand at 94 feet of pay. It's important to note there are two behind pipe zones there. The Chris K-1 has 33 feet of net pay and the [INAUDIBLE], 34 feet of pay. So, there's a couple of good recompletions.

In the Southwest division production is up 9% year-over-year primarily through successful drilling in the Texas Panhandle and the [Corsen] ranch and [Sanhill] areas. Range is continuing on with its drilling program in the Texas Panhandle and plans to drill 14 additional wells there by the end of this year. Initial drilling in the James [lawn] formation in east Texas has been disappointing. But the good news there is that there's a lot of term left on the leases. They're generally three to five-year leases and the team is currently evaluating the acreage position to see what additional opportunities exist. The Southwest division is also continuing with its successful development in the Sterling field in west Texas. A six well development program was completed there during the first half of 2003 for a combined net initial rate of 2.9 million cubic feet equivalent per day. During the second half of this year five more wells will be drilled in this area. Range also continued with its water flood project in the [Ferman Mosco] field of west Texas. A 16 well program was completed which increased net production at the end of the quarter to 13,056 barrels of oil equivalent per day which is a 51% increase over the January rate. 12 well program of drilling additional producers and injectors began in July. Range is continuing to strengthen its technical team for the Southwest division and has recently added two top notch geologists which both have excellent geophysical skills, as well. One of the geologists will be doing regional work in the Texas Panhandle to expand off of the success that we've had there as well as doing some work in Blaine and Dewey counties in Oklahoma to grow what Range has there, as well. The other will be working on new projects to grow in strength Range's portfolio in the Southwest division. Both of them have about 20 years of experience and have excellent track records of finding oil and gas.

The Appalachian division is very active and on target to meet its goals for the year and is continuing to add value to its 1.3 million acre leasehold position. During the first half of the year they drilled 102 growths, 45 net wells, with an additional 131 growths and 59 net wells scheduled for the second half of the year. Most of the deeper wells are scheduled for the second half of the year, and so far they haven't experienced in dry holes. So, they're doing a great job there.

New projects in the pipeline, I sort of like to talk about those as a package, just some of the things that are happening that are coming up. The first in the West Cameron area where we've had such good drilling success we're currently reprocessing the 3D there. It should be back this week. But based on integrated subsurface technical work production data as well as talking with our partners there, it looks like there's a chance that we might be able to do some additional drilling. So, it's early, but we're encouraged by what we see there and look forward to getting in to reprocess 3D. In the west delta block 30 field offshore, we're in the process of acquiring an existing 3D, and we think once we get that in house we'll be able to identify some relatively low and moderate risk drilling opportunities there. In south Louisiana we're currently in the process of acquiring an on shore site from the Database and we're looking at that as a way to follow up on the fault number one discovery and success we've had there. Up in the Texas Panhandle and [Corsen] Ranch area we're in the process of beginning to shoot a proprietary 3D to expand off of the successful drilling that we've had up in that area. As far as some additional drilling programs, the company's had good success drilling in the [Laura LaBelle] gas field in east Texas. Those are in Houston and Trinity counties. We'll drill seven additional wells this year, eight next year. Those are shallow Wilcox wells where we've had good success both drilling and enhancing production through artificial lift, high volume lift. We'll also be doing some additional drilling in the Powell Ranch area to continue off of past success of the company there.

In summary, the good news is that 2003 is in good shape. Production is above plan and the capital program is on track. I'm focusing on continuing to expand our prospect inventory. I mentioned some of the projects that we're moving forward on, and I'm excited about those as well as others. And what's very important, as I mentioned in my opening comments, is that my initial impression is that Range has a very high quality technical team. It's a good mix of geologists, geophysicists, engineers and land people who work well together and understand the business that they're in. I look forward to working with them along with John and Charlie to add value for the Range shareholders.

John, back to you.

Thanks, Jeff. Charlie, why don't you give us your thoughts?

Well, mine will be pretty brief. I'm really pleased with the progress Range has made in the first half, particularly in terms of growing production and in this case largely due to activities of the drill bit. No big acquisitions. We're on production with drilling wells.

A recent highlight, of course, in my view is the addition of Jeff to the company as Chief Operating Officer. We worked closely together for eight years at Maxis, and I'm confident he's going to be a great asset to Range. He has an established track record for growing production and reserves, and we expect great things. In particular, he and John make a very good team because of their complementary skills. We've got a really top flight management team in place.

As we strive to achieve consistent and predictable growth at Range, my focus is on the following key factors: developing and enhancing the technical team, generating a growing portfolio of projects, managing risk, and adding reserves and production at a reasonable cost. I'm excited now that I'm on Range's board just as the investments and efforts of the past few years are coming to fruition. I believe the company's on track and is adding value for the shareholders. In the first six months of the year we've exceeded our production targets, and we have a number of excellent prospects lined up for the second half of the year. Bottom line is we're on track and making progress. John, back to you.

Thanks, Charlie. At this time, Tina, why don't we open up the call for questions?

Thank you, Mr. Pinkerton. 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 one 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 your question, you may do so by pressing the star, then the number two on your telephone keypad. Once again, please press star one to ask a question. We will pause for just a moment to allow everyone a chance to respond. The first question is from Ron Mills with Johnson Rice.

Good afternoon, guys. I'm curious, John, if -- you provided some guidance for the third quarter in terms of production. Any idea in terms of or thoughts that you may end up -- I think you talked about 4 to 7% production growth was kind of your target for the year. Obviously you feel very comfortable in the second -- or in the lower end of that. But any thoughts that you may even bump up that type of production guidance?

Well, thanks, Ron. I think that when you look at it, I think where we are in terms of that is at the beginning of the year we were very comfortable at the low end. I think right now we're very comfortable at the high end of it. But if we do the things we think we're capable in the third quarter, I think there's a chance we'll increase it. But why don't we wait until we get the third quarter results, and then we'll give you some guidance. But bottom line is we feel pretty comfortable and feel the upper end of that range is where we'll end up for the year.

All right. And in terms of your overall cost structure, it sounds like on the Eloise side you still hope to see some moderation. But going forward, do you think you can get back to close where you were the last couple of years in that 75 to 80-cent range on a production cost standpoint?

Well, obviously production taxes are a big part of that. So, whatever you view production. But assuming, you know, prices in the range where we are today versus where they were the first of the year, we think the 80-cent range is where we'll end up. So, we feel pretty good with that. One of the things I think is important is that in terms of people talking about costs, there's a number of different ways in the industry that people do things. And one of the things that we're -- I think what we do that may be slightly different than others is that we try to go out of our way to get -- to expense things versus capitalize them. As I mentioned, the West Cameron recompletion workover -- pardon me -- you know, there's some question whether that should have been capitalized or expensed. We took the conservative route and expensed that. We don't capitalize any overhead, we don't capitalize any interest, we have no goodwill on the books. So, we try to do a fairly conservative -- I think a fairly conservative posture when it comes to those types of things. When you're analyzing different companies, I think it's important to try to see through that and spends a little bit of time trying to figure out how they treat some of those items. But all in all, an 80-cent number for LOEs assuming gas prices that we see today and oil prices is something I think is achievable and we're going to work hard towards.

And the last question, on your debt paydown, obviously you'll pay down a pretty substantial amount of debt over the second half of the year, just if I look at my cash flow estimates versus your cap ex. At what point do you start to feel pretty comfortable with your debt position, especially since you extended the maturities with the recent offering?

Well, quite honestly, we feel pretty comfortable where we stand on the debt side. I mean, our EBITDEX -- our debt to EBITDEX is 2.4 times. We'd like to get that down, let's say down to two times. And that, you know, given at least what we see through the last six months of the year, when you look at the end of the year, you know, we think we'll be close, if not at that. On the interest coverage, we're at seven times, probably going to eight or nine times by the end of the year. So, we feel pretty comfortable with the debts. Most of the debt, as you know, is pretty low rate, fixed in. So, we feel pretty comfortable with everything. I think when it comes right down do it, quite frankly we'd like to do a little bit more acquisitions, let's say another 10 or 15 million dollars in the second half of the year, which would use up some of that availability that we've used to pay down debt. So, again, I think the bottom line is we're in a position now as we want to spend our capital on things that are going to achieve the highest rates of return. And paying down bank debt, you know, 3, 4% bank debt versus, you know, an acquisition that would hopefully achieve a higher rate of return or drilling projects that are currently generating 40% rate of return are a better use of proceeds. So, we're right at that reflection point and we're going to be conservative and we're going to continue to kind of whittle down the debt the best we can. But if we do see an opportunity, we'll use up some of that excess availability in terms of the amount between our cap ex now and the cash flow. But I would think unless there's an exceptional opportunity, we'll still try to live within our cash flow for the year.

All righty. Great quarter. Thanks a lot, guys.

Your next question is from Chris Miller with UBS.

Okay. I just want to follow on this cash flow question a little bit. Given the flexibility that the new debt offering gives you, I guess you wouldn't necessarily have to go after the bank debt, but as I understand it basically you're looking just at the returns; is that correct?

Yeah. I mean, Chris, basically that. I mean, we do -- you know, of the 25 million of excess off the proceedings proceeds of the offering, we would like to use that to repurchase some of these junior securities that we have outstanding that historically we've bought back at fairly decent discounts to par value. So, we'd like to continue that. And we're going to be in the market from time to time doing that as those securities become available. So, you know, in the best of our worlds, I'd like to use the first 25 million of that to buy back the junior securities. If we could do more than that, I'd love to do that. But that's probably as good as we're going to get, I would guess, given our feeling as to where the holders stands in terms of that. But overall, you're right. It just comes down to where we can maximize our returns, and given the fact again we want to stay kind of in that two to 2.5 times in terms of total debt to EBITDEX. And the good news from that is from the perspective given our hedges, our last 12 months EBITDEX doesn't reflect 6, 7, 8 dollar gas prices. So, it's an EBITDEX that we think we can sustain over the next two, three, four years. So, again, all that kind of stuff, you know, meshed together, it all comes down to where's the best place to spend our capital, where we can make the highest rates of return.

Okay. Second question is you guys have had some good success with the drill bit this year. What do you think you can sustainably do on an EBITDA basis going forward?

Well, that's a really good question, and it's obviously the biggest challenge in this industry. And Charlie and I and Jeff were talking about that before the call as to where we think the industry's going. Obviously give than some of the acquisition prices you're seeing, it's going to be north, at least in my view it's going to be way north of a buck 50 for the year as an industry-wide number. But you know, we were fortunate last year. We had some really good discoveries. We had some good reserve adds. We keep a fairly conservative reserve book. So, we were able to get, you know, blood, guts and feathers under a buck. That's going to take some real work this year. You know, I think if we can keep on a dollar and a quarter range, I'll be very happy. Our internal target is a buck 25. And again, that's blood, guts and feathers. That's everything in the capital bud jet, including seismic land. And regardless of whether we drilled up this year, it's something we're going to keep in inventory for the next one to three years. So, if we can keep it at the buck 25 level, I'll be pleased.

All right. Thanks.

Your next question comes from Howie Slinker with Slinker & Company.

How much of your debt floats?

I'm sorry, Howie. How are you doing? What was the question again?

How much are the debt floats, floating interest rate?

Right now we've got -- let's see. We have 160 million that floats, but about 50 of that we've actually got interest rate hedges on, which we're pretty pleased about now given the recent jump up in interest rates. So, call it a third of our debt. It's floating. The other two-thirds is fixed.

A hundred to 110, something like that?

Yeah, that's about right.

And do you have any thoughts about fixing the last -- that 100 or 110 via swaps or whatever you can use?

Yeah. I mean, we were actually talking about that, too. Yeah, we may do a little bit more, but I wouldn't think we'd do too much more. You know, having two-thirds kind of fixed, that is kind of right in line with how we're looking at commodity prices, as well. So, it kind of fits in the overall view of the bored.

Okay. And second, in the properties you're examining, what are the general asking prices? Not what you're going to pay, but what are people generally asking? Are they asking more than $1.50 in Mcf or more than five times EBITDA?

Yeah. It's way above a buck 50 because what people are doing is they're doing just like what we would do. They're looking at the forward curve, you know, running those things out and using a single digit discount rate. So, that will get you again blood, guts and feathers, when you don't the development cost to develop the properties out, it will probably cost you two bucks.

Oh, boy.

In the acquisition market, at least what we're seeing is to be able to get acquisition costs down into the dollar quarter, dollar 50 range, overall what you've got to be able to do, you've got to be to find non-producing reserves through your technical team, whether you've been there or just have some proprietary talent to be able to get more out of those properties than the seller to make money in the deal. And so, from our view, that's why we're -- we feel fortunate, quite frankly, that we're fairly modest on the acquisition side in the first half of the year just given where prices are. Obviously they've moderated off fairly substantially to where they are today. So, we think the next six months will be a better time to buy than the first six months. But even regardless of prices, the acquisition markets are much more competitive than it was five years, 10 years ago, and you've got to have a really good technical team because if you buy the properties on Friday, you better start developing them on Monday to get your rate of return to a number that will get anywhere close to what a good drilling program will give you.

And finally, anything new in the Trenton Black River?

Yes and no. The company itself, all of our Trenton Black River drilling will be done in the second half of the year. So, there's really no news from our perspective. From the Basin in general there's been some more discoveries.

Oh, there have?

A number of new discoveries by some different independents. And I think the other thing that's most encouraging, at least from our perspective, some of the bigger independents are buying acreage in the Basin. Again, Charlie, Jeff and I were talking about that. And that encourages us. These are top notch independents, in some cases five and 10 times bigger than us. So, it's encouraging to see them -- while it gives us competition, it also encourages us because as they develop things, we'll be able to use that technology and use that experience to help us because, you know, as Jeff said, we've got 1.3 million acres in the Basin. If we're not the largest landowner, we're the second largest. So, we're in good position. It's a combination of letting the other big independents and the other companies in the Basin kind of drill up and prove up things around us while in at the same time the five or six key projects that we've got on the table, getting those things drilled up between now and the end of the year. But, you know, still very encouraged, very -- it's got a lot of upside. It's something we're pretty excited about, but it's not something that we're going to go crazy and bust our pick on.

Have there been any really notable wells of late?

Yeah, there have. I won't mention them, but there's one company on their website, it's a public company, and it's mentioned that they think they've got, what was it, Jeff, 50 locations that --

They were counting up to 10 beads a well.

500 Vs.

That's a lot.

That's a lot. That's pretty aggressive in our mind. But again, I think it gives you just a glimmer of the potential at least.

Well, I'm sure they have your phone number. They can always be your partner if they're that excited.

Yeah. And quite frankly, we are a partner on one project with them. So, we'll just see how we do.

Okay. Thanks.

Your next question comes from Rajan Rashid with Friedman, Billings, Ramsey.

Hi John. How are you. A real quick housekeeping question and then a broader question for Jeff. DD & A for the quarter was about 10 cents below the first quarter run rate. Is that something that we should be modeling in on a going forward basis?

Yeah, that's an ongoing rate we feel comfortable with.

Okay. Fair enough. Jeff, real quick, you've been here not too long, but taking a step back and drawing on your experience, you've got good production growth momentum for the rest of the year. But the real question in my mind and everybody else's mind should be what happens in 2004? Any particular things that you would want to do from the existing portfolio projects as far as divestitures or pursuing a bit more strongly than was done before and/or where else would you want to diversify the company in terms of assets going forward? Thanks.

Well, what I see right now, I think Range is in good areas. I like the areas we're in. I like the success we're having. I think what the teams are focused on is building off that success. I mentioned the additional 3D and drilling up in the [Corsen] Ranch, expanding the West Cam, the south Louisiana success. I think there's a lot of good things in the portfolio that are coming forward the rest of this year and will happen on into next year, including the Falcon prospect that was talked about. So, I think where we are are the right areas and I think growing and high grading where we are.

Okay. Thanks.

Your next question comes from Jack Eiden with McDonald Investments.

Hi, John.

Hey, Jack.

Some of my questions were answered, but I've got a couple questions regarding the balance sheet. I'm looking at the balance sheet. On the asset side, two questions. Turn to first tax assets, they have gone up to 25 million, December zero, and then in the oil and gas properties you've got, you know, increase in the properties nicely. I would like an answer for that. Then on the liability side, two items. What is a deferred compensation liability, 11 million? And then long-term assets retirement obligation of 38.9 million? Could you explain those things for me a little bit?

Well, in terms of the first one, the deferred tax asset, at the end of '02 we had 15.8 million of deferred tax asset that was long-term that has since gone the short-term in '03 and has increased to 25.2 million. So, it's gone up -- instead of going up from zero to 25, it's really gone from 15 to 25. And that's just based on the tax attributes and the profitability of company. In terms of the oil and gas -- increase in the oil and gas properties, a portion of that is the adoption of FAS 143 where you had to increase your property values as well as the asset retirement obligation under FAS 143, which, to be honest with you, in my view is one of the world's most complicated accounting pronouncements ever developed by an accountant. And if you really want to understand the debits and credits to that, what I'd refer you to, Jack, is either you or your assistant call our office and they can take you through all the specifics. But that's the reason for that. And I'm sorry, Jack. What was your last question?

The last two questions was the deferred compensation liability and retirement obligations on the liability side.

Oh, the deferred compensation liability. That's the other -- one of the other kind of new and, at least in my view, strange accounting principles that we've had to develop. And just to give you a little background, as parts of our compensation plan, the board requires that the officers of the company take a portion of their bonus in restricted stock of the company valued at 100% of the market value. And it goes into a deferred compensation plan which is under a trust. And under some new accounting rules, we now have to put that onto our books, even though it's really stock that's owned by the officers, but it's technically in this trust, though technically under the accounting rules we have to put the liability onto our books even though, at least in our view, other than the vesting of all is the employee stock. And it's something, Jack, that the board looked at hard when this new accounting rule came out. And the board just decided that it was really important that we continue to require the officers to take a portion, and they take more than the minimum amount, but a minimum portion of their bonus compensation is taken in stock unregistered at 100% of market just so we align the officers with the other shareholders of the company. So, what the board decided is to go ahead and do what we were doing even though it ends up in what we call a strange accounting entry. But, you know, the bottom line is it's a number as the stock price goes up that number will go up. As the stock price goes down, that number will go down.

j is it a [INAUDIBLE] trust?

Yes, it is.

Okay. Now I understand it.

Okay.

We are nearing the end of today's conference. We will go to Arthur Winston of Pilot Advisors for our final question.

Hi, everybody. Following up on Jack's balance sheet, if I add up the two liabilities to do with hedging, it says that we have liabilities of 83 million adding them together. Is that, and I hope it isn't, equivalent to our hedging losses, the 83 million, or is it something different?

Art, that's right. At the end of June the mark to market on your hedges would have been 83 million. As of yesterday it was 50-something.

Given two things, given that, what you said, the decline in prices of natural gas and given the high price of oil on one hand, given all the new people working in our company who said they're working for the shareholders, are you thinking of buying back those hedges and changing your hedging strategy, and given, also, that the debt has become more fixed and is a little bit less of an issue?

Well, in terms of buying back the hedges, we don't think the prices have dropped enough to prompt us to want to do that. But it is something we've talked about. Number two, I think we have changed or modified our hedging program. You know, historically what we did was just use a very simplified straight swaps at a fixed price. And again, most of the hedges that we've added, you know, since the first quarter, in the second quarter and throughout the third quarter so far have been collars where what we're doing is, you know, covering our downside but we're trying to maintain a fair amount of the upside, as well. So, again, I think that's something that we -- at least in my view it's a fairly material change to our hedging program and one that hopefully will been fit the shareholders. And to give you a little bit of view, Art, I spent quite a bit of time kind of reviewing other companies' hedging strategies, and where our strategy kind of -- just to give you a feel, it's most like kind of an XTO and newfield is where quite frankly where at least our new hedging strategy falls out when you do a third in swaps, a third in collars and leave the last third open. So, that's kind of where we're headed. And the good news is that, you know, we have done some pretty decent collars where we have a $4 floor and something over a $6 ceiling. So, you know, we'll see. As I mentioned before, $4 and above, we make some very high rates of return on capital expended. So, the good news is that, you know, hopefully as these old hedges roll off, and a lot of them will roll off by the end of the year, we'll take more and more -- we'll keep more and more on the upside but still try to protect ourselves on the downside.

Very quickly because time is running out, is the answer to my question that our company is less interested in hedging than it used to be, or is it just that we've changed the mix of how we're going about it?

I'd say we're slightly less interested in hedging because financially we feel like we've got more flexibility. And then, also, we're taking a hedging policy that quite frankly exposes us to slightly more downside but also exposes up to more up side, too. So, we're kind of trying to move to what I'd say the middle of the road there.

Thank you.

Thanks, Art.

At this time there are no further questions. Mr. Pinkerton, are there any closing remarks?

Operator, thank you. Well, shareholders and -- fellow shareholders, I should say, you know, it's been an interesting second quarter. We're -- we feel like we hit the ball right down the middle of the fairway. We're in good shape. I'm real excited about having Jeff on board. The other thing I should say is having Charlie on board has really been great. He has enormous contacts in the industry. In fact, we just through one of his contacts have put a consultant on the board that's probably one of the best offshore geophysical consultants in the country that we're very excited about. He's going to help us in the upcoming lease sale. So, again, there's lots of things going on at your company that are going to bear fruit over the next two quarters, three quarters and four quarters down the road. We look forward to staying disciplined with our approach and recording good earnings cash flow and production growth in the months ahead. Thank you, operator.

Thank you for your participation in today's conference.