山脈資源 (RRC) 2007 Q4 法說會逐字稿

Greetings and welcome to the Range Resources year end earnings 2007 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 Mr. Rodney Waller, Senior Vice President of Range Resources. Please go ahead, sir.

Thank you, operator, and good afternoon and welcome.

Range reported results for the fourth quarter and 2007 year with record production, revenues, cash flow and earnings. 2007 marks our fifth consecutive year of sequential production growth with now 20 consecutive quarters of sequential production growth.

On the call with me today are John Pinkerton, President and Chief Executive Officer, Jeff Ventura, Executive Vice President, Chief Operating Officer, and Roger Manny, Senior Vice President and Chief Financial Officer.

We've posted on our website supplemental tables to assist you in understanding many of the numbers in the press release. In the press release we furnished some non-GAAP statements which allow you to compare our results to our historically reported numbers which include the Gulf of Mexico operations that we sold earlier in the year. In table five of the supplemental tables we have presented a summary of the reported numbers which are comparable to the analyst models, taking out the non-cash items.

Before turning the call over to John I would like to cover a few administrative items. First, we did file our 10-K with the SEC this morning. It's available on the home page of our website or you can access it using the SEC's Edgar system. In addition, we posted on our website supplemental tables which will guide you in the calculation of the non-GAAP measures of cash flow, EBITDAX, cash margins and the reconciliation of our non-GAAP earnings to reported earnings that are discussed on the call today. Tables are also posted on the website that will give you detailed information of our current hedge position by quarter.

Second, we are participating in several conferences in the next month. Check our website for a complete listing. We are-- be at the Raymond James Conference next week in Orlando on March 3rd and 4th, at the Simmons Energy Conference in Las Vegas on March 4th and 5th, the Lehman High Yield Conference on March 12th, Bank of America Small and Mid-Cap Conference in Boston on March 26th, and the Bernstein Conference in New York on March 31st. Now let me turn it over to John.

Thanks, Rodney. Before Roger reviews the financial results I'll review some of the key accomplishments for 2007.

Overall, as Rodney mentioned, we're very pleased with our results. On the production side, production rose 17% in the fourth quarter and also 17% for the entire year. That's slightly ahead of our 15% target at the beginning of the year so we're pleased with that. In terms of year end reserves, the reserves rose 27% to 2.2 Tcfe of proved reserves. This represents a reserve replacement from all sources of 537%. Most importantly, the reserve growth was accomplished and all-in finding cost of $1.82 per Mcfe.

On the drill bit side, including acreage, the drill bit cost came in $1.79. And basically, at least what we've seen today, this looks to be in the top 10% of our peer group and these finding cost numbers are a few pennies lower than what we previously reported. Some of the final cost numbers came in slightly lower.

In terms of the drilling program, we're continuing to generate very attractive returns and we continue to be very pleased with the results. This is evidenced by the drill bit replacement of 424% for 2007, so -- and which is clearly the highest in our Company's history.

When you look at it, we combined exceptional growth in production and reserves with low find development cost. That's really the hard part of our business is combining high growth with low cost. And this performance is I think directly related to the operating and the technical teams that quite frankly deserve all the credit.

As Rodney mentioned, we're pleased that we continue to deliver predictable transparent production growth. We've now extended our sequential production growth streak to 20 consecutive quarters. This consistency is really attributable to the long life nature of our reserves, our large inventory of low risk drilling opportunities and an organization focused on delivering.

At year end our drilling inventory had risen to 11,000 drilling locations. For 2008 we plan to drill nearly 1,000 wells, which is anticipated to deliver another year of double-digit production growth. Recently we set our 2008 production growth target at 15%. And it should be noted that the 15% target takes into account asset sales we currently have planned for 2008.

In 2007 we completed roughly $237 million of asset sales including all of our Gulf of Mexico properties. We believe periodically selling our more mature properties has several benefits. First, it helps to focus us on higher growth opportunities; second, it provides additional capital to spend on high return activities; and third, it helps to hydrate our overall property base. We plan to continue to sell non-core properties from time to time. Already in 2008, we completed one sale for $64 million.

Lastly, due to the rising production and strong commodity prices, we're extremely well-positioned for 2008 and, again, we expect another year of record results assuming we execute our plan. With that, why don't I go ahead and turn it over to Roger to get into more of the details in terms of the financial results.

Thank you, John.

Just as our 2007 operating performance led to our record 2007 financial results, our 2007 financial results helped set the stage for our 2008 operating accomplishments and hopefully another record year in 2008. In reviewing 2007, some of the key financial highlights include the divestiture of the non-strategic Austin Chalk properties acquired in the Stroud acquisition for $80 million and the sale of our offshore Gulf of Mexico properties for $155 million. These attractive sales helped fund our successful drilling and acquisition activity, manage our cost structure, and hydrate our asset base.

On the capital markets front we issued $280 million of common equity in April of '07 to help fund the Nora field acquisition and we issued $250 million of 7.5% senior subordinated notes in October of '07 to reduce our reliance upon short term bank debt. And to further enhance our liquidity we increased our bank credit facility borrowing base to $1.5 billion and extended the maturity date to October of 2012. We ended the year with a debt-to-cap ratio of 40%, our lowest year end leverage ratio in over 10 years. Along the way, we picked up two rating agency upgrades. And to top the year off, in December Range was selected for inclusion into the S&P 500 Index.

Looking closer at the numbers, revenue, cash flow and EBITDAX all reached record highs in 2007. Total revenue of $862 million was up 16% from last year, cash flow of $674 million was 44% higher than last year and cash flow per share for the year totaled $4.49. EBITDAX of $749 million was 43% higher than '06. Net income for the year was $231 million, 45% higher than last year. Adjusting earnings as analysts do for non-cash mark-to-market hedging entries and other non-cash comp expense items results in net income from continuing operations of $243 million, 63% higher than the like adjusted '06 figure. Per share of 2007 diluted earnings, calculated as analysts do, was $1.69 per share compared to the analysts' consensus estimate of $1.68.

Looking at the fourth quarter, 4Q '07 brought new quarterly highs for oil and gas sales of $240 million, record cash flow of $190 million, and record quarterly EBITDAX of $211 million. Cash flow and EBITDAX for the quarter were 64% and 59% higher than the fourth quarter of last year, respectively. Cash flow per share for the quarter was $1.24, compared to an analyst consensus estimate of $1.17. Thanks to higher oil and gas prices and total cash cost per Mcfe that were flat with the fourth quarter of last year, fourth quarter cash margins improved by 41% from $4.24 per Mcfe last year to $5.98 per Mcfe this year. These quarterly and annual record results may be attributed to really the same factors that have been present at Range for over five years. Those are steadily increasing quarterly production volumes paired with improved prices and margins.

Quarterly earnings, calculated as analysts do, were $61 million, or $0.40 per fully diluted share, compared to the analyst consensus estimate of $0.45. The quarterly earnings results include one-time unproved acreage related impairments totaling $6.4 million that were taken to DD&A expense. Now I'll speak more about DD&A in a minute but the incremental non-cash DD&A expense explains why we exceeded the analyst consensus fourth quarter cash flow estimate, but not the consensus earnings estimate.

As always, listeners are encouraged to visit the Range Resources website, as Rodney mentioned, for a full reconciliation of all non-GAAP measures.

Fourth quarter cash direct operating costs came in at $0.95 per Mcfe, $0.04 higher than the $0.91 posted in the fourth quarter of '06. For the full year of '07 cash direct op costs were $0.92 per Mcfe, $0.08 higher than the '06 figure of $0.84. This is due to higher workover expense, higher salt water disposal costs and well service expenses.

Fourth quarter production taxes were down from $0.33 per Mcfe in '06 to $0.30 per Mcfe in '07. This partially offset the increase in cash operating costs per Mcfe. Production taxes for all of '07 were $0.36 per Mcfe down $0.02 from the '06 figure of $0.38.

Much of our Barnett Shale gas production qualifies for the Texas Tight Gas Severance Tax Abatement Program and Texas ad valorem taxes have actually declined slightly due the new Texas margin tax. So as our Barnett volumes have increased, these production tax benefits are becoming more apparent in our P&L.

Direct cash operating costs in the mid-to high $0.90 per Mcfe range is expected in 2008. General and administrative expense, adjusted for non-cash stock comp expense, was $0.42 per Mcfe in the fourth quarter of '07. This is down slightly from the $0.44 figure in the third quarter of this year but up $0.05 from the fourth quarter of '06. On a year-over-year basis, past G&A expense increased from $0.37 per Mcfe in '06 to $0.43 in '07. And the bulk of the increase in '07 G&A expense over the prior year is attributed to the staffing up of our operating teams based in Pittsburgh, Pennsylvania, and Abingdon, Virginia. We expect cash G&A expense to hover around the mid-$0.40 range in '08, depending, of course, on the rate of hiring and production increases we're seeing out of our emerging play areas.

Listeners will recall my quarterly explanations of the non-cash deferred compensation plan expense line of our income statement. Now, this non-cash expense relates to the mark-to-market gain or loss on Range stock and marketable securities belonging to our employees held in the deferred comp plan but fully consolidated into Range's financial statements as required by the accounting rules. During the fourth quarter of '07 it was determined that our quarterly mark-to-market adjustment should only apply to shares that are vested and the result of this determination is a favorable adjustment which essentially eliminated the non-cash deferred comp expense for the fourth quarter. For the full year of '07, however, because of the 87% increase in the Range stock price, non-cash deferred comp plan expense was $28.3 million, compared to $6.9 million in expense for '06. Now the news release and Form 10-K contain various expense tables providing a detailed breakout of all these cash and non-cash expense items.

Interest expense for the fourth quarter was $0.68 per Mcfe. That was level with the fourth quarter of '06. Interest expense per Mcfe for the full year of '07 was $0.67, $0.09 higher than the full year '06, due to higher debt levels and higher interest rates as we refinanced $250 million of our short term bank debt with ten year fixed rate notes.

Exploration expense for the fourth quarter of '07, excluding non-cash comp expense, was $12.8 million, $2.8 million over the fourth quarter of last year, mainly due to higher seismic expense and dry hole costs. The exploration expense for all of '07, excluding non-cash comp expense, was $39.9 million, $1.1 million less than '06, due to lower full year seismic expenses.

Now predicting exploration expense, especially this early in the year, is difficult, but based on our '08 capital budget we're anticipating quarterly exploration expense, including non-cash comp, to average approximately $18 million, and with the first quarter of '08 coming in likely slightly higher due to the timing of seismic purchases.

Depletion, depreciation and amortization per Mcfe for all of '07 came in at $1.95 compared to $1.62 in '06. Now the DD&A rate for the fourth quarter of '07 was $2.26 per Mcfe. As I mentioned previously, fourth quarter '07 DD&A included $6.4 million or $0.21 per Mcfe of one-time acreage impairments. The fourth quarter of each year also includes a resetting of our DD&A rate based upon the new year end reserve report. Now based on this year's reset, our DD&A rate per Mcf going forward into '08 is expected to be $2.10. This $2.10 figure includes $1.90 per Mcfe for depletion and $0.20 per Mcfe for depreciation and amortization of our other assets.

The '07 story on income taxes is very similar to prior years. While Range pays in excess of $40 million per year in cash, production and ad valorem taxes to dozens of states, municipalities and school districts where we operate, because Range consistently reinvests at least 100% of its cash flow in finding and developing new oil and gas reserves, we're able to defer most of our current year federal income tax expense into the future. In 2007 Range incurred $320,000 in cash, state and local income taxes and we hold a $204 million net operating loss carry-forward. Our effective tax rate for '07 was 37%.

Our hedging activity in the fourth quarter of '07 was much like the third quarter as we continued to layer in additional hedge volumes for '09. '08 is largely taken care of with hedges in place on 77% of our estimated gas production at an average floor gas price of $8.67 per MMBTU. For '09 we're up to approximately 64% of our gas volumes hedged at an average gas price floor of $8.29 per MMBTU. Those wishing to obtain specific price and volume information, as Rodney mentioned, can find it on the Range website.

Other than the previously mentioned October '07 refinancing of some of our bank debt with ten year notes and the usual price driven fluctuations in the value of our commodity hedges, the balance sheet remained relatively unchanged from the end of the third quarter. Bank debt at year end was $304 million with $596 million available under the $900 million committed portion of our bank credit facility.

So in summary, we posted record revenue, production and cash flow, with a stronger, more liquid balance sheet at the end of the year than at the start. We fought hard to contain costs and believe that our 2007 all-in unit cost structure will again be in the top quartile of our peers. We continue to hydrate the asset base which will simplify our operations and allow greater focus going forward on the emerging plays. These 2007 results allow us to enter 2008 on a solid financial footing. There's nothing we need to fix that is broken or that's holding us back. All of our attention will be focused on generating value for the shareholders and I'm anticipating another record year in 2008. With that I'll turn it back to John.

Thanks, Roger. I'll now turn the call over to Jeff to review our operations and our drilling results. Jeffrey?

Thanks, John.

I'll begin by reviewing production. For the fourth quarter, production averaged 343 million per day, a 17% increase over the fourth quarter of 2006, and a 5% increase over the third quarter of 2007. This represents the highest quarterly production rate in the Company's history and the 20th consecutive quarter of sequential production growth. For all of 2007 we achieved 17% production growth.

Let's now review three of our key projects. First I'll start with the Barnett Shale and the Fort Worth Basin. We closed on the acquisition of the BTE properties this quarter and we're off to a great start. The first two wells that we completed came on line at gross rates of 8.9 and 8.3 million cubic feet per day, which are outstanding. These two wells are located in southeastern Tarrant County. We have three more locations directly offsetting these wells. Currently we have six rigs running in the Barnett and are continuing to drive up production. Net production is currently 98 million per day which is a three-fold increase over last year. The fact that we have been able to significantly increase our production by only running five or six rigs speaks to both the quality of our team and our acreage. In total we now have 103,000 net acres in the Barnett Shale Our net unbooked potential on this acreage is 2.8 Tcfe which by itself could more than double the Company's proved reserves.

Another very impactful low risk project for us is in our Nora area located in Virginia in the Appalachian Basin. This is another project that has the potential to double Range's reserves. There is significant upside to all three horizons in Nora, coal bed methane, tight gas sands and the Huron Shale. Range continues to drill successful CBM and tight gas sand wells in the field. Production has grown from approximately 30 million a day a year ago to about 50 million per day, today. Drilling in the CBM and tight gas sand continues to ramp up. 285 CBM and 50 tight gas sand wells are planned for 2008. Finding and development costs net to Range continue to be less than $1 per Mcf which is amongst the best in the country. In addition, these wells produce very little water and have low lift cost. Given its location in the Appalachian Basin, these wells get a premium to MYMEX so the combination of the great gas price, low F&D and low LOE results in a very good rate of return for these wells. Given the large number of wells to be drilled on current spacing and with successful down spacing, there are approximately 6,000 wells left to drill.

The latest development in Nora is horizontal drilling in the Huron Shale. Our first well which was completed in the fourth quarter came on line at an initial rate of 1.1 million per day. It cost about $1.2 million to drill and complete. And although it's very early, initial reserve estimates are about a Bcf. Given our working and net revenue interest, and remembering that Range owns the minerals, our net F&D cost is about $1.07 per Mcf. This year we'll be drilling ten horizontal delineation wells across the 250,000 acre Nora block. We know that the Huron Shale has good thickness and good gas content across the 250,000 acres because there are 90 existing vertical Huron Shale wells on this acreage. The purpose of the ten horizontal delineation wells is to verify that horizontal drilling works and it's an effective way to economically develop these reserves. If successful it will de-risk about 1.5 Tcf net to Range by year end.

Another high impact opportunity for Range is our Marcellus Shale plain in northern part of the Appalachian Basin. This project represents the opportunity to add 10 to 15 Tcf net to Range. The 10 to 15 Tcf is the net reserve potential in Range's 650,000 net acres that we have acquired to date in this play. The 650,000 acres is a high graded estimate of our Marcellus acreage based on our current knowledge in the play. Range actually owns approximately 1.1 million acres in the total Marcellus play area. We have 921,000 net acres in Pennsylvania and 152,000 net acres in West Virginia. To date we've drilled and completed 63 vertical and 12 horizontal Marcellus Shale wells, and have an additional six vertical and three horizontals waiting on completion. We have recently announced our last three horizontal completions which came on line at rates of 3.3, 4.0 and 4.7 million per day.

Range was the first company to apply modern drilling and completion techniques to the Marcellus Shale and kicked off the modern exploration and development of this play in 2004. We are currently way ahead of the pack in terms of the total number of wells drilled. We were the first company to achieve rates in excess of a million per day on vertical wells and the first company to achieve success with horizontal drilling with several wells now in the 3 million to close to 5 million per day range.

Our current focus is to begin development of one of our core areas, continue to delineate our acreage and aggressively add to our lease hold in select areas. We currently have three rigs running and are targeting 60 wells this year. 2008 will primarily be a year of delineation, acreage acquisition and building infrastructure. Significant volume growth will occur in 2009 and beyond.

As I mentioned many times before, Range is in five shale plays. Our strategy is to be leaders in the Appalachian Devonian Shale plays and the Fort Worth Basin and Barnett Shale play and followers in the other three plays, which are the Permian Basin Barnett play, the Floyd Shale in the Black Warrior Basin, and the Woodford Shale in the Ardmore Basin.

Let me quickly update you on the three plays in which we're followers. In the Floyd Shale play Range has 50,000 acres in Alabama. We drilled one vertical well there last year. We tested the Chattanooga Shale section and it was disappointing. The well was abandoned without testing the Floyd Shale. It was written off in the fourth quarter as a dry hole. Range does not have any drilling plan in the play for 2008. We have eight to ten years left on our leases and we'll be watching the activity of others.

Early on, Range acquired an interest in 20,000 acres in the Permian Basin Barnett Shale play. Our focus, however, has been on the Fusselman. We have identified good looking leads in the Fusselman based on 2D data coupled with subsurface geology. This was followed up with 3D seismic which was shot last year and validated the leads. We also saw (inaudible) potential in the 3D and have secondary targets in the Barnett and Woodford Shale's in the Delaware section. Range spud its first well about two weeks ago. TD for this well is 14,000 feet and testing should occur in the second quarter.

The third play is our Woodford acreage in the Ardmore Basin, and we have recently drilled and completed two horizontal wells. The initial wells are encouraging, however, we only have 16,000 acres in the play and will not be accumulating significantly more acreage.

We have many other high quality exciting projects which I'll be glad to talk about during the Q&A. But to summarize, Range is in a great position. We have a proved reserve base of 2.2 Tcf and on top of that we have identified an upside of between 16 to 22 Tcf primarily in low risk, coal bed methane, shale gas and tight gas sand plays. We have a track record of converting that to value for our shareholders. Range is where we want it to be -- a low cost producer with a lot of low risk growth built in with great hedges in place. In summary, we're in a terrific position to continue to build shareholder value on into the future.

Back to you, John.

Thanks, Jeff.

Now let's take a look at 2008. Based on what Jeff said, we obviously expect to see continued strong operating performance. As I mentioned previously, we have targeted 15% production growth for full year 2008. For the first quarter of 2008 we're looking for production to come in at approximately 355 million a day. That represents a 16% increase year-over-year if we can achieve that.

Our first quarter '08 revenues are expected to continue to rise due to higher production and stronger realized prices. So based on current futures prices, our realized prices should move up nicely in 2008. Assuming the futures prices in place and the hedges that we've got on currently, we anticipate first quarter 2008 price realizations to be in the $8.80 per Mcfe range. This is 6% higher than first quarter '07 and similarly 6% higher than fourth quarter of '07.

In our view the first quarter of '08 year-over-year comparisons will be important and that will bring together in a very tangible fashion all that has been accomplished over the past 12 months. It starts with production which, as I previously mentioned, is anticipated to increase approximately 16%. Second, realized prices are estimated to increase by about $0.50 or slightly more than $0.50 per annum, versus the fourth quarter of '07 and also the first quarter of '07. As a result, oil and gas revenues are projected to be in the $290 million range for the first quarter of '08 representing the highest quarterly revenue in our history.

Turning to cash flow, we expect for the first time in our history that quarterly cash flow in the first quarter of '08 will top $200 million. So that will be a really nice event. Hopefully we can get there.

Looking beyond the first quarter, we expect, again, we expect production increase towards our full year target of 15%. Depending on the timing of asset sales, quarterly production will likely be a bit more choppy than usual but still we feel comfortable with the 15% target for the year. Based on current futures prices, we anticipate 2008 cash flow from operations will increase by more than 20% over 2007. So as you can see, 2008 shapes up to be a very profitable year for Range and its shareholders.

While we accomplished a lot in 2007, I believe the majority of our efforts will benefit 2008 and beyond. As you heard from Jeff, we now have projects in our drilling inventory and emerging plays that have 16 to 22 Tcf of net un-risked reserve potential. This equates to seven to ten times our existing proven reserves. For example, we are now starting to see the upside of the Nora field that we at least internally had seen for a number of years. Besides the bread and butter CBM drilling we're now accelerating the tight gas and the shale gas potential on this 300,000 acre field. In the Barnett, we now have over 100,000 high quality net acres of lease hold and 2.8 Tcf of unbooked reserve potential. In the Texas Panhandle and western Oklahoma, we've identified roughly 200 Bcf of upside in the granite wash. And then lastly in the Marcellus play in Appalachia, we really made enormous progress over the last 12 months. From our first well in 2004 that came on production at roughly 800 a day, to today where our last eight horizontal wells achieved initial production rates ranging from 3.2 to 4.7 million a day, we made significant headway.

We've high graded our acreage position that now totals 650,000 net acres and we really put into place a very high quality team of professionals that work exclusively on this exciting play. In 2008 we're focused on taking the Marcellus play to the next level. We plan to drill 60 wells in '08 including 40 horizontals and we're working diligently on the infrastructure issues and hope to see visible progress in the second half of the year.

Lastly, we continue aggressively further delineate and expand our acreage position in the play. Obviously we are excited about the play and the potential, but I think the key is to stay grounded and to continue to make it happen every day, every week and every month, and our team's really doing a great job at that. And while there is considerable information that we're holding confidential to protect Range and its shareholders' interest in this play, the potential is obviously extraordinary for a company our size.

While all of us have talked a lot about growth, we're still focused on increasing NAV per share just not growing for growth's sake alone. To maintain our attractive per share growth rate and production reserves, we believe it's extremely important that we focus our capital and people on the right projects. This is precisely the reason why we are aggressive with pursuing sales of our non-core properties. Now that we're producing over 350 million a day and our proved reserves are over 2 Tcf, we have, at least in our view, we have sufficient size and scale to aggressively compete in all of our core areas.

Lastly, we fully understand the key is continued execution of our strategy. Day-to-day our team of professionals is focused on continuing to execute on our strategy and delivering attractive returns for our shareholders. As shown in the methodical building of our drilling inventory over a number of years, we will not sacrifice the long-term for the non-repeatable short term gain. We're fortunate we're in a superb position to add materially to shareholder value in 2008 and over the next several years and we're keenly focused on delivering.

Finally, I'd like to publicly congratulate and thank our talented team of roughly 750 employees for a job exceedingly well done in 2007. We set the bar high for 2008 and I am confident that with the talent, dedication and passion of the entire Range team, we will meet or exceed our goals for 2008.

With that, operator, I think that is all of our prepared remarks. Why don't we turn the call over to questions and answers?

The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We will pause for just one moment to allow everyone a chance to respond. Our first question comes from Nick Pope with JP Morgan Chase. Please proceed with your question.

Quick question, you were kind of hitting on some of these infrastructure items in the Marcellus Shale. I was hoping you could give a little detail on what really is going to be needed to bring the Marcellus gas fully to market.

Well, good question, Nick. You know, the play has historically been in Appalachia kind of tight gas and low rate gas end wells and so there's lots of infrastructure in terms of small pipelines in the basin. But what we're lacking are the larger systems so that's what's going to be needed is building out some of these larger systems. Now, the good news is, we already have smaller pipeline systems and infrastructure in place. So that we can test wells and we can put them on production and whatnot. What we can't do is just start full scale development in some of the areas where we've had some pretty decent success and that's what's going to take some more infrastructure build-out. But the good news is we've got a great team that's working on it. They're diligent. We're making some really good progress on some projects and hopefully we'll have some things to announce here over the next quarter or two that will give you some more insight in terms of some of the things we're doing. Another question is really -- so that's kind of an operational perspective. Another question really is from a financial one, is how do we and quite frankly the rest of the independents in the basin finance all this infrastructure. And you know, I'm sure all companies have their own views on it. Our view of it is at least initially here, and it obviously could change over time, but at least I think where we're coming out is that there are other companies that are quite frankly better and that have a fair amount of capital that can help us out in this project and so our theory is at least, again, in the initial period here is that we're going to team up with some of these other midstream companies and try to keep as much of that capital off of our balance sheet and onto theirs and really it's pretty simple. We really want to put our capital into the drilling of the wells and we really think that's what's going to generate the highest rate of return for our shareholders. I think that's another big issue and we thought about it a lot. We ran a lot of different numbers and whatnot so that's kind of where we stand today.

All right. Thanks. That's exactly what I needed. Thanks, John.

Thanks.

Thank you. Next question comes from Jack Aydin with KeyBanc. Please proceed with your question.

Hi, guys.

Hey, Jack.

Jeff, you're talking about 10 to 15 TCF of potential reserve in the Marcellus. What is your degree of confidence in those numbers and how do you arrive at that level and what makes you so sure that this is recoverable or achievable, that kind of potential reserve booking? So you could elaborate a little bit and give us some sense where you're coming from?

I'll give you some sense to how we backed into those numbers. And again, and probably more from a 30,000-foot view than the actual specific numbers. Let me talk more about data and methodology. There are some 400 penetrations in the Marcellus, in Pennsylvania before we started drilling, old well bore that had been drilled to other horizons or old shell pits that you had logged data in, information and studies from those. On top of that we're currently at about 85 wells ourselves. So we've got a lot of log data and the core data, and the production data, and test data. So, we sort of arrived at it two different ways. We started with looking at the data from our logs and cores to try and determine how much gas is in place and that considers things like porosity, reservoir pressure, shell thickness, total organic carbon, reservoir temperature, amongst other things. Taking all that data together and then volumetrically looking at it we said how much gas is in place and then giving -- then we applied to that a reasonable range of recovery factors in order to get the recoverable gas, netted back to our interest,, and that gave us a range of values. Then independently and sort of separately we looked at based on the data that we have from our wells and our oldest horizontal well now has been on line about 190 days, and then we have several other wells that aren't too far behind; and we looked at using decline curve analysis, what might the ultimate recoveries be per well and given the gas in place numbers that we know, for various spacing assumptions,we looked at what kind of recovery could we get from a certain spacing. Given various spacing assumptions, the amount of acreage we had, the amount of acreage we could drill, we backed in to what reserves could be from that point of view also. And from that we calculated a range of reserves sort of from low to high and really if you go through that exercise, you can calculate numbers that are a lot higher than what we put out that we put out, but we thought were very early in the play and given its enormous expanse and that we're early, we put out what we thought was a conservative, reasonable rate of reserve and that's the 10 to 15 Tcf number. Obviously a lot of upsides for us and we have and we're excited by what our team's been able to accomplish so far.

Thanks. Could I follow with another question?

Sure.

Those wells, the horizontal wells and the vertical wells that so far you drilled, could you give us the cost structure, what is your average cost per well for the vertical and for the horizontal?

Yes, for the vertical wells we feel that you can drill and complete a vertical well I think the number that I put out on the last call was $850,000, you know, maybe we can do it for in that rate, $800,000, $850,000 per well. And for the horizontal wells, in a development mode I think what I said last time is they should be somewhat similar to the Barnett in that you're looking at least in some areas reasonable correlations to depth and completions and things like that which would put you in a range of maybe early on, you know, $2.8 million to $3.3 million. So call it roughly $3 million per well, drilling complete in a development mode.

Thanks a lot. I appreciate it.

Thank you. Our next question comes from Ray Deacon with BMO Capital Markets. Please proceed with your question.

Hey, Jeff. Was wondering if you could talk about the decline curves on the existing wells that you've had online, the horizontal wells in the Marcellus. Has the decline curve basically been in line with what you expected, sort of a six year, first year decline rate does that seem reasonable?

Again, I am going to answer it more from a 30,000 foot level due to the competitive nature of the trend and the fact we're acquiring acreage, talking to companies, and doing all kinds of things. What I will say is obviously we've released the rates and all of our rates are maximum 24 hour rates into sales lines, usually, and in a few cases against simulated reservoir pressure, so you know what the initial rates are. Oldest well's been on about 190 days. What I will say is that I'm very happy and pleased with performance so far. But it's early. In terms of, I know what you want to get at, is the shape of the curve and then ultimately reserves, leads to rates of returns, and all those kinds of things. And that is what we are going to keep tight, at least for a while longer since the acreage is competitive. We've got a great position. We are excited by it but we are still adding to it and adding to it and adding to it aggressively. So that is sort of answering your question, but sort of not. Hopefully you guys will understand based on what John said earlier, some of the data, because we're trying to capture maximum value for our shareholders ourselves, so we want to make sure we capture that before we disclose it. In time we'll put on great technical shows and tells with maps and cross sections and decline curves; but it is a little too early for that.

Would you know the number from industry of horizontal wells that have been drilled so far? Are you the only guys drilling horizontally at the moment or -- ?

You might know. I can tell you what I know from scouting data and talking to friends at various other companies and things like that. So I won't guarantee that these numbers -- these are just as I described. I think probably the next most highest numbers of horizontal drills from another company is probably three to four and there's a number of companies that are just starting their first, one or two.

Got it.

Those companies I'm sure in time will disclose that data.

Got it. What in your view is going to be required before these midstream companies will be able to step up and make large investments in infrastructure, do you think, is it a year from now or more than that?

Well, this is, John. We've had some -- a number of discussions with a number of them. They seem very anxious to get in the play and very excited and they see the real potential of it. And the good news is, is the basin, where it's situated, is a huge plus to the play, in that it's closest to the best gas demand market in the world. And there's a lot of -- I think four of the largest six -- four of the six largest pipelines in the U.S. run through the basin. So there's -- the macro part of the infrastructure is there. You're located right and you've got some big pipelines already in the basin. The next step is really just building out, gathering in the mid stream side and again, it's just there's a lot of midstream companies with a fair amount of capital that are interested. They're all trying to get up to speed. They're trying to understand the play, they're all trying to understand the economics and again, we're early in the play so it's--there's not a lot of statistical data so you have to make a number of assumptions. We are very pleased with the input that we have gotten from the -- from those companies. In fact, we're in discussions with a couple of them on a fairly serious basis in terms of doing something. So again, as those discussions turn into things that are actually agreed to and signed, we'll obviously at that point in time then release that data to the public once we get there. But I'm--on a scale of one to ten, I'm at eight or nine in terms of being pleased with the progress and the -- at least what we're seeing from that side of the business.

Got it. Thanks very much.

Thank you. Next question comes from Kent Green with Boston American Asset Management. Please proceed with your question.

There's been some comments by some similarly positioned companies that they still think acreage or acquisitions are attractive, particularly tight sands, and conventional, that kind of thing. So with the company in such a strong financial position and low debt, do you think that you'll be stepping up acquisitions or do you a agree with that assessment or do you find acquisitions in the areas of interest too expensive so far.

That's a great question. And you know, we look at our capital and we look at where the best places are to make the highest rates of return and we have from time to time made acquisitions where we felt that we were going to make good rates of return. I think-- we just completed an acquisition earlier this year and Jeff just mentioned a couple of completions, quick like a bunny we went out and did so we're pretty pleased. Again, I think we'll be opportunistic when it comes to acquisitions. I think a couple things--one, they will be, if we do any, will be in our core areas. I think we'll be highly disciplined like we have been in terms of pursuing those. And we really, we really care a lot more about our stock price than our market capitalization, therefore we're really not looking for things that on an NAV per share basis get us bigger but no more valuable on an NAV per share basis. We really focus on NAV per share. In fact, the way we're compensated at the senior executive level, the two biggest components are reserves per share on a debt adjusted basis and production per share on a debt adjusted basis. So, doing acquisitions that might just make us bigger really don't do much for us. Especially for the fact that we fully realize that as you get bigger, it's harder to grow. So to keep our double-digit growth profile in check we really need to be very careful. It also answers the question of why we're doing asset sales, so -- and again, what we're trying to do is, we're trying to take capital or the more mature assets out of our portfolio, hand them down the food chain and then take that capital that we receive or that money that we receive and reinvest it into some of these higher rate of return plays that we have. So it's all a pretty central strategy. We're just trying to build reserves and production on a double-digit basis at a low finding cost. If we can find a cheap acquisition and there aren't any keep cheap ones out there. But if we can find a really attractively priced deal, we will pursue it, and if not, then we'll stick with our drilling and let that drop away.

Clearly at Range, what's going to drive our future growth is our -- is the assets we own today with the people that we have today. We've got big acreage inventory, a big drilling inventory, some emerging plays that are quite exciting, so we're really going to focus on that and not try to get too sporty, quite frankly, on the acquisition side.

Just one follow-up question on Appalachia. While everybody is very enthusiastic about this particular play, wondered if you would comment about the environmental problems that you're faced over there. It seems to be more prominent in some states than other ones. And two, whether you have oil service capabilities, if you've got fracing and that kind of stuff when you start to work with the shales. And three, talking about midstream assets, you know, processing plants, anything to get this gas into the big eastern markets more effectively.

Well, I'll deal with the service issue and the service company issue and the midstream and I'll let Jeff deal with the environmental one.

In terms of the midstream, I think I've been I think hopefully pretty open in terms of where we stand. There needs to be a fair amount of investment, at least from what we're seeing is that there's several companies that are very interested in doing that and taking it forward. So I think that's just -- I think it's just a matter of time. To me it's just time and a little bit of money and getting after it and making it happen.

In terms of the service company side, we were the pioneers of talking to the different service companies and moving them, getting them to move equipment up to the basin. And the good news is that we've got Mark Whitley on our team who came from Mitchell that helped really discover the Barnett. So he had lots of experience in terms of that so he was a big help in that, in talking to the service companies and so that's, again, it's happening and is it happening as fast as we'd like it? No, but it's happening at a solid rate of speed and we're -- we're reasonably satisfied with what's going on. I think, again, I think it's a self-fulfilling prophecy. As other companies continue to have some decent results in the play, then I think you'll see more and more of the service companies and also the midstream companies get involved with it. So I think it's just a matter of time. It's just a matter of them positioning the assets in places where they in turn can make the highest rates of return and the highest return on capital for their shareholders. I think it's a matter of time. It happened in the Barnett. It happened in the Fayetteville. No reason at all why it's not going to happen in the Marcellus.

Jeff, do you want to talk about the environmental?

Yes. I would just say, remember, Range's roots are in Appalachia. That's really where the Company was founded. Been doing business there since the late '70s. We've drilled lots of wells up there. In the last few years, we have drilled on the order of 600 wells a year in the basin. So we're an active driller. We've been there for a long time. We operate a lot of wells up there. This is our home turf. We have 2 million acres in the basin, 5,000 miles of pipeline and a real strong team. Converting some of that to more shale drilling, you know, the biggest issue like John said we already addressed. It was bringing up some of the proper equipment and proper services which we now have in place and filling it out with the midstream which we'll do this year. So that's our home turf, and we've got a great team and I don't see the environmental things as an issue. Not only do we want to be good stewards for our shareholders but we want to be good stewards for the environment as well. And I think we have a good track record of that.

Wondering if you would comment on this spectacular rise in natural gas prices. I think near the first of the year I was with six analysts and all six said gas prices weren't going up. I was the only bull in the bunch. Now of course Boone Pickens is out and says energy prices are going to go down and (inaudible) say gas prices are going to go up. I wondered where you feel on this, particularly after this 30 some percent rise of 681 at the end of last year.

Well, I think in general our view I think what we've said at the end of last year is that we -- you know, that over the long-term, at least I believe and I think the rest of our team believes is that energy is energy and that BTUs, people are going to pay competitive prices for BTEUs and but what we're seeing now is people are starting to focus on which BTUs are the cleaner burning BTUs, and therefore which are going to be more environmentally sensitive. Where we are today is over 90% of our transportation system in the U.S. is run by oil. Irrespective of that, oil is going to be a big commodity. It's a worldwide commodity. There's factors in terms of demand from other countries now for the first time that really put us in competitive disadvantages when it comes to oil. That being said, that's what's driven up oil prices.

On the natural gas side, I really think natural gas is going to be hydrocarbon for the future over the next ten to 15 years in terms of the U.S. What I mean there is that, one, it's domestic. We have a lot of natural gas reserves still remaining in this country. That's the good news. The bad news is, they're in things like these unconventional plays that takes a lot of capital and a lot of people working really hard to get that gas out of the ground. The second thing is is that for a while there, and it continues to trade at a discount on a BTU basis, compared to oil. So even if oil falls a lot, I think natural gas is going to have an upward bias just because it trades at such a big discount to crude oil. That being said, I think there is lots of things I think happening in terms of natural gas and uses of that and electric generation and transportation generation of that, in terms of making all that happen. Overall we've seen upward bias on the gas side. That being said, we don't try to take huge positions either way.

Where we really think people make money at Range is going to be whether we can take, 2 Tcf approvers first and turn it into 5 to 10 Tcf, three to five years from now. That's the real reason why I've got all my money in Range and why everybody else around this table is fully invested in Range. Whether gas prices are six or they're ten or 12 will matter on the margin. What's really going to matter to our shareholders over the long-term is can we turn this big bucket of potential that Jeff spoke about, into something that ends up as proved reserves. That's the real challenge here. And if we can make it happen, that's going to drive the stock price up irrespective of whether gas is six or it's ten

Good answer for somebody who sees a lot of Ts ahead.

Thank you very much.

Thank you. We are near tend of today's conference. We will go to Rehan Rashid of FBR for our final call. Please proceed with your question.

Good afternoon, gents. On the Marcellus Shale side, did you mention how many horizontal wells you're going to drill, Jeff, this year?

We have 60 wells planned of which we said that 40 of those would be horizontal. Of course then as we go through the year, that mix might change. And if anything, probably will slide more towards the horizontal side.

Got it. Got it. So while we're building infrastructure really can't measure the cash flow impact from a new flow standpoint, just how do you guys plan to attack this? Are we to expect two, three well results at a time? Are you going to batch it up? This thoughts on that front.

I think, Rehan, what we tried to do, and whether we accomplished that I'm not quite sure, but what we tried to do is to be relatively transparent in terms of what progress we have made. As we drilled wells, kind of quarter-to-quarter, we've announced the rates of those wells, whether they're good, bad or ugly. The good news is that the recent horizontal wells have been fairly pretty. So that's a better thing to announce. But you can remember, we announced our first few wells and then we rushed out vertical wells, then we rushed out and drilled three really stinky horizontal wells which we announced. So we have tried to be relatively consistent, relatively transparent in terms of that.

The other thing I think is important is that in terms of the acreage position, again, which is another fact that you can use; is that what we try to do is provide not only what we own in the trend area, which I think Jeff mentioned is 1.1 million acres but really after what we've done is what of that 1.1 million acres do we really think is prospective and we've narrowed that down to about 650,000 acres and whether it's Range or it's another company, not all of our acreage is going to be -- not all of the acreage is going to work. And at times, you're going to condemn some and going to add acreage in areas where we've had success. So what we tried to give you there is we've got 1.1 million acres. We have done testing on a lot of that in terms of delineation, in terms of geology, looking at other well bores and also looking at what other companies have done, so we have kind of narrowed that down to 650,000 acres. What's going to happen over time, as Jeff mentioned, is we're going to continue to do our delineation of wells that we did last year, we're going to continue to do those, so there will be acreage from time to time that we will put higher in the queue or lower in the queue. But again, I think that's one of our competitive advantages, is that when you're kind of the leader in the play, kind of ahead of everybody, you have more of an ability to do that. Like I said, to make it relatively simple, the key here is going to be as quick as we can to try to figure out where Johnson and Tarrant County is in terms of relative perspective in terms of Barnett. If we can find the Johnson and Tarrant County per se, the first company that finds that will be the one obviously is going to that is going to be the big winner in the play. So that why continuing drilling delineation wells is really important. We've got hundreds of land men running around like crazy buying acreage and leasing acreage. Where you place them and how you deal with that is critically important. The delineation wells help you trying to figure out where the better areas are versus the poor areas. This play is too big for all of it to be good. It's too big for all of it to be bad. There will be good areas and bad areas and the key is just trying to figure all that out, and obviously, we're very early in the process. The good news is that some of the areas we drilled we're very excited about and are convinced are eventually going to be commercial and hopefully making some progress on the midstream side and like Jeff said, we'll really start cranking up the volumes starting in '09.

So last thing I would like to say about it is we've been working on this play since '04 and really appreciate the patience that all of our shareholders have shown here in terms of us getting here. The good new is that we're right -- we're knocking on the door and we're very close. It's going to be a very exciting '08 when it comes to the shale play and also into '09 when you're going to start seeing some pretty exciting production volumes that come along with that. So, what you're going to see this year is continued well results as we drill wells, we'll keep you up-to-date in terms of the midstream things we're working on and hopefully later in the year we'll be able to start giving you some ideas of what we expect in terms of '09 in terms of production rates and things like that. So it's going to be kind of a transition year so-to-speak, but it's going to be very exciting, though because I think there's going to be a lot going on and there's obviously huge competition for acreage and services and everything else. So it is going to be very competitive but exciting environment.

You're going to announce the results as they go along, basically.

Correct.

And how many rigs drilling horizontal wells, Jeff?

Three in the Marcellus and I know you're focused, Rehan, on the Marcellus. There's a ton of upside there. But there's also going to be good well results I believe coming out of the Barnett and coming out of Nora. As I said earlier, we'll have by the end of year, I think, we'll understand the Huron Shale and Nora. That could be a P and half. You are going to have a lot of more information on the other horizons at Nora as well as our acreage in the Barnett, which alone could by itself, double the Company. It comes back to Range has a strong portfolio, good story. And we are talking about the big three, but there is granite wash and other things behind that, that are exciting as well. So, I think we are off to a great start. I think this is going to be a great year.

If you were to take your whole reserve portfolio approved reserve today, what percent of that do you think you might ultimately divest. Is there any particular percent you're heading toward, tendence to shrink to focus on the Marcellus side and by when should we have a feel for kind of the divestitures that might come along?

I think it's just -- we don't have any really set percentage or goals or anything like that. I think we just, you know, [Arnold Parkson], and some of our other guys that run our units, business units, just, periodically look at their portfolio and we look at it pretty hard every day in terms of what's meaningful, what's not meaningful, you know and quite frankly, it's just like the property we sold at the beginning of the year, it was kind of hard to let that go away. That was one of the properties that Chad and I first bought when we really started Range. And it was a little shallow oil property in East Texas. Somebody came in and paid us $64 million, and to give you perspective, our tax basis was $1.4 million, so it was a pretty good deal, and we're going to have a pretty nice gain, book gain in the first quarter on it. Again, while it was important back in the '90s, it's not important in 2008. So that's really the question is. And we'll continue to do that. I think it's just like any portfolio, whether it's stocks or bonds or oil and gas properties. You have to constantly work it and you're constantly trying to generate the highest returns and the thing that I think that at least what my view of it is, just in the industry, at least my conclusion, we tend to hang onto properties too long. And I think the more that you let those properties go, it simplifies your business, it allows you to have capital, additional capital, so you don't have to leverage up your Balance Sheet or run off and sell a bunch of stock. It lets you fast forward the projects that are really going to drive your growth over the next two to three, four years. That's what we're doing.

That being said, you know, every asset of Range is potentially for sale including the entire company. So we look at this -- this is the shareholders' property, this is the shareholders' Company/ We're big shareholders. We've got big stake in this country. We're going to do what's in the best interest of the shareholders and the stock price.

One quick question on the Barnett side. Ellis County, an extension, any kind of updates there, drilling a second well, when are we going to drill some more? Any thoughts there, please?

Let me give you a little update there. We've drilled our second well and the guys did a good job drilling it, getting it to TD, casing it, cementing it. We will be fracing it here in the first couple weeks of next month. So we're literally a couple weeks away from fracing it. The good news is, so far -- we talked about the first well having good thickness, the second well has good trickiness, and even more than that looking at all the science that we did, we know not only does it have good thickness, it has good gas content. One question as you get close to the faults and thrust, is--was the gas leaked out of it or whatever. The answer is no. There's good thickness. There's good gas content. Another question is what is the rock property like? The rock properties actually look pretty favorable. So now the question is, can we go out there and put a good completion on it and make a good well. So team's done a good job I think of setting us up and putting us in a position. It will be real interesting to see how -- when we frac it and how it produces back. If it makes a good well, then we'll probably park a rig there for the rest of the year and let it drill, if we don't we will go back to the drawing board and probably pause a little bit and come back and drill a third well and dry again. We're making good progress. I think the project has a lot of merit and we'll know a lot more probably that we'll report on the next quarterly call.

Thank you.

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

I would like to thank everybody for taking time out of their busy day to join us today. We had a terrific '07. But that being said, we know that the bar is set very high for us for '08 and we take that very seriously and we're working hard and we look forward to another great year in '08 and we know the pressure is on and we need to perform and execute our plan and the good news is though that we've got a great team of people and they're excited about it and I think we're in good shape and I really look forward to future calls this year and I think you'll hopefully-- we'll all be pleasantly surprised with the results. Again, thank you and everybody have a great day.

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