山脈資源 (RRC) 2012 Q4 法說會逐字稿

Hello, and welcome to Range Resources' fourth-quarter and full-year 2012 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 Mr. Rodney Waller, Senior Vice President of Range Resources. Please go ahead, sir.

Thank you, operator. Good morning and welcome. Range reported outstanding results for the fourth quarter with record production and a continuing decrease in unit costs. Both earnings and cash flow per share results were greater than First Call consensus. The order of our speakers on the call today are Jeff Ventura, President and Chief Executive Officer; Ray Walker, Senior Vice President and Chief Operating Officer; and Roger Manny, Executive Vice President and Chief Financial Officer. Also Mr. Pinkerton, our Executive Chairman, is on the call today.

After the speakers we will conduct a question-and-answer session. Range did file our 10-K with the SEC and is available this morning. It should be available on the home page of our website, or you can access it using the SEC's EDGAR system. In addition, we have 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 adjusted non-GAAP earnings to reported earnings that are discussed. Detailed information of our current hedge position by quarter are also included on the website. Now, let me turn the call over to Jeff.

Thank you, Rodney. We accomplished a lot in 2012, that really helps to set up 2013 and beyond for Range. We continued making progress with our plan of driving up production and reserves on a per-share basis while driving down costs. This is beginning to significantly flow through to our bottom line, and will do so in an even more impactful way in 2013.

Looking back at 2012, we sold $600 million of 5% senior subordinated 10-year notes. We also entered into an agreement with Sunoco and INEOS on Mariner East. To the best of my knowledge, Range will become the first Company to export ethane from the US by ship to international markets. This project also enabled us to export propane or to sell propane into the East Coast and Northeast US markets. Importantly, Mariner East, along with our first two ethane projects, Mariner West and ATEX, enables Range to grow our Marcellus volumes in the west portion of the play.

In 2012, we sold our Ardmore Basin assets and some other miscellaneous assets for approximately $170 million. Last evening, we announced that we entered into an agreement to sell our New Mexico assets plus the Powell Ranch property for $275 million. At year-end 2012, our proved reserves increased 29% to 6.5 Tcfe. We replaced 773% of our production from drilling at an all-in cost of $0.86 per Mcfe. Crude oil and NGL reserve volumes increased 64%, while natural gas reserves increased 20%. Our percentage of proved undeveloped reserves at year-end 2012 was reduced to 47%.

Our unrisked, unproved resource potential increased to 48 Tcfe to 68 Tcfe. This is comprised of 35 Tcf to 46 Tcf of natural gas, and 2.3 billion to 3.5 billion barrels of NGLs and crude oil. As a result of our development activity, we have moved 4.7 Tcf of unproved resource potential to proved reserves over the last three years. To put that in perspective, 4.7 Tcfe is more than our entire Company's total reserves just two years ago. Because of this excellent performance, our total DD&A rate has declined from $2.32 per Mcfe in 2009 to $1.62 in 2012, and the fourth quarter of 2012 was $1.46. Looking at the same time period, our operating expenses per Mcfe declined from $0.83 to $0.41, and the fourth quarter of 2012 was $0.38. We've also made significant progress with our other unit costs, which Roger will discuss.

Range turned in a very solid, profitable performance in 2012, marked by 36% production growth, a 32% reduction in unit lease operating costs, and a 9% reduction in total unit costs. We increased reserves per share, debt adjusted, by 22% over 2011, and increased production per share, debt adjusted, by 29%. The bottom line is that Range is becoming much more capital efficient and the results are beginning to flow through to net income. Looking forward into 2013, we believe the bottom line results should be even better. The lower DD&A rate for the full year, along with the lower per-unit operating expense for the entire year, coupled with improving well results, should result in a substantial increase in Range's cash flow and profitability for this year.

As we previously announced, we're expecting production to grow at a rate of 20% to 25% for 2013. More importantly, we believe that we have line of sight growth of 20% to 25% for many years. All of this projected growth is in our existing plays. The reinvestment risk is low, and the projected rates of return are very good. The growth is mostly driven by our approximately 1 million net acre land position in Pennsylvania. Specifically, by low risk, high-return drilling in the Marcellus Shale. In addition to the Marcellus Shale, we're projecting impactful growth from our approximately 160,000 net acre position in the Mississippian oil play in Northern Oklahoma and Kansas.

Given the high rate of return at our plays, which is led by our liquids-rich and oil plays, our cash flow should grow at a faster rate each year than our projected production growth of 20% to 25% per year. With our projections, using current strip pricing, we reduced our leverage with time as we drive up production and cash flow. In addition to the Marcellus and Mississippian plays, we believe that we have great prospectivity in the Upper Devonian, Utica, Cline Shale and Wolfberry. Ray will update you on the progress on all of these plays. I'll now turn the call over to Ray to discuss operations.

Thanks, Jeff. Our technical and operating teams have positioned us with large, high-quality acreage positions in the core sweet spots of some of the highest-quality plays, with the best economics on-shore US. We're continuing to see improvements in well performance, cost, LOEs and margins, resulting in increasing cash flow and higher returns. We've seen significant growth in reserves at a time where reserve write-downs are common.

We've made some highly innovative and strategic decisions in the midstream and downstream arenas that have opened up and solidified our logistics for marketing our oil, gas and NGLs, with market-leading economics. The result is a portfolio of opportunities represented by large-scale, low-risk, high-quality acreage positions that allow for long-term economies of scale. We believe these opportunities will yield consistent and significant growth for many years to come.

Let me start with a few comments on reserves. I think it's critical that we point out that even in light of greatly reduced natural gas prices, we had exceptional growth of reserves in 2012. We recognized a 29% gain in total reserves year-over-year, while decreasing our PUD percentage by 10%, and increasing liquids reserves by 64%. We decreased the ratio of PUDs to proved developed in the Marcellus from 1.7, down to 1.2. We think all of this speaks volumes about our asset quality. Especially when considering that we have moved 4.7 Tcf equivalent of potential to proved reserves over the past three years, and yet we still increased our resource potential in 2012 by 12%. Again, it's a true reflection of our large derisked and high-quality assets, as well as the exceptional performance of our teams.

Now let me point out a few things about the Marcellus. I'd like to make four points. Let me summarize first and then I'll go through in more detail. Number one, we have a large, high-quality position that we control. Number two, our position is largely derisked. Number three, well performance and economics continue to improve. And number four, our marketing team has us well-positioned for future growth. So now let me expand on those points. Number one. Not only do we have approximately 1 million net acres in Pennsylvania, of which a large portion is prospective for the Marcellus, we believe our acreage encompasses very high-quality reservoir rock in both the dry and liquids-rich areas. We've been working for years now to consolidate and high grade our acreage positions, and in essence, we believe not only have quantity, we have exceptional quality in core areas.

Number two. Our position is largely derisked in Southwest and Northeast Pennsylvania. To illustrate, in 2006, on my very first trip to Pennsylvania, I was up there to work on the very first horizontal well, which was the fifth well ever spud in the Marcellus. Today, there are approximately 7,000 Marcellus wells that are either drilling, completing or producing. Marcellus is producing close to 9 Bcf equivalent per day, and is now the largest-producing gas field in the US. And still growing.

For the last couple of years, Marcellus operators have begun exchanging data, analyses and results on a regular basis, resulting in everyone going up the learning curve a whole lot faster. If you look at slide 12 and also at slide 30 in our presentation on the website, you can see why we say that our acreage is largely derisked by thousands of wells with now up to seven years of production history. This is a large part of why we believe we have line-of-sight growth and can consistently grow at 20% to 25% corporately in the future.

Number three. We are continuing to see improving well performance, better efficiencies, and are implementing well designs that continue to improve our returns all across the Marcellus. In our Investor Presentation, we've updated our economics for the Wet and Super-Rich areas, reflective of our 2012 performance. The Wet area wells went up to 8.7 Bcf equivalent, which is made up of 712,000 barrels of liquids and 4.4 Bcf of gas, which calculates 49% liquids. For the Super-Rich area, our EUR is now 1.44 million BOE, which is 824,000 barrels of liquids, and 3.7 Bcf of gas, which is 57% liquids. Importantly, in the Super-Rich area, the condensate is 109,000 barrels as compared to 27,000 barrels in the Wet area. Also, the new economics for the Wet and Super-Rich areas now reflect full ethane extraction, as we will commence extracting and selling ethane this year.

Of note, let me point out a three well pad in the super rich area that came online since our last call, at a combined rate of over 6,100 barrels of oil equivalent per day. That's an average of over 2,000 BOE per day each. The wells on that pad had an average lateral length of 3,358 feet in 18 stages, and the combined production was 1,200 barrels of condensate, almost 3,000 barrels of NGLs and 11.7 million gas, which means the production is over 68% liquids, of which 29% of the liquids is condensate.

Just last month, we brought online another Super-Rich area pad with just two wells, that averaged 3,356-foot laterals with 17 and 18 stage completions, that produced a combined total of 6,866 BOE per day, which is 793 barrels of condensate, 3,200 barrels of NGLs and 16.9 million of gas, which is 59% liquids, of which 20% of that was condensate. I think these five wells clearly illustrate the exciting potential of the Super-Rich area. We're continuing to see improving well performance and EURs as we implement better landing targets, RCS completions, longer laterals, and more efficient frac designs. Our teams are continually introducing innovative technologies and strategic analysis techniques, and we still believe we'll see significant additional improvements in the future.

Number four. We have midstream infrastructure, transportation arrangements, sales contracts and marketing deals in place to handle our production well into the future. Our team has literally be been working for years on highly strategic and innovative solutions for all of our products. The recent ethane arrangements are excellent examples of these type of innovative solutions, which opened up entirely new markets like the international markets, via Mariner East. These solutions position us with industry-leading returns, and some of the lowest fee arrangements, connecting us to some of the best markets, including the premium-priced international markets.

So in the Marcellus, number one, we have a large high-quality position that we control. Number two, it's largely derisked by thousands of wells in actual production. Number three, well performance and economics continue to improve. And number four, our marketing team has us positioned strategically to move our products with industry-leading terms for years to come. In summary, we believe we're positioned for line of sight growth with great economics for many years.

In the Mississippian play, we have approximately 160,000 net acres located along the Nemaha Ridge. Like the Marcellus, we believe it's really important where your acreage is located, and we believe our position on the Ridge is highly prospective. Please refer to the press release for the he days of the wells brought online in the fourth quarter. I'd like to point out that we're still seeing great results, and we recently brought online a well with over 810 BOE per day.

Also, we're announcing the 30-day rates of the two fourth-quarter wells and those wells are averaging over 800 and 600 BOE per day for the 30 days. We have five rigs running and the current plan is to bring online 51 wells and 17 saltwater disposal wells this year. We will deploy the majority of our capital and resources in 2013 in the Wet and Super-Rich Marcellus and the Mississippian oil play, with the split being approximately 80% to the Marcellus, and 15% to the Mississippian.

I'd like to now move on and bring you up-to-speed on the other projects in our portfolio, namely the Wolfberry, the Cline and the Wet Utica in Northwest Pennsylvania. Our position in all three of these plays is predominantly HBP, and therefore, we fully control the timing of development. While we had to bear essentially all the costs of the learning curve in the Marcellus and to some extent in the Mississippian, we can enjoy a less risky approach in these three areas. Because we are largely HBPed, we can allow industry to move up the learning curve and bear those costs while we focus our capital and our resources in our lower risk, lower cost, and higher rate of return projects like the Wet and Super-Rich Marcellus. This is a great position to be in.

So in West Texas the Wolfberry and Cline continue to see significant activity offsetting our Conger Field. In the Wolfberry, we drilled and completed five wells in 2012. We saw the cost of the Wolfberry wells decrease by over 30% in just those few wells in 2012. Our plan in 2013 is to drill five additional Wolfberry wells, and do a few recompletions, while we monitor the considerable offset activity throughout the year. Our third Cline well had a max 24-hour rate of 620 BOE per day, and it was a 4,000-foot lateral with 16 stages.

Industry is drilling quite a few wells in the area with much longer laterals and more stages. In fact, if you look at slide 53 in our presentation, you can see there's a lot of activity directly offsetting our position. In the Cline, we believe there will be close to 50 wells drilled, all around our Conger Field this year by Devon, Oxy, Apache, Laredo, Firewheel, and others. Our team is actively working with the offset operators to exchange data and better understand the play. Importantly, there are now significant tests near our position with impressive production rates, indicating that the play could have significant upside. In summary, we're excited about the potential and it appears we'll learn a lot more about this play throughout the year.

Let me now update you on the first test well of the Wet Utica in Northwest Pennsylvania. It had 285 feet of thickness, it's got all of the right liquids-rich characteristics, good reservoir pressure, and the initial test rate was 1.4 million cubic feet equivalent per day. Along with the course and logs, we did perform a significant amount of diagnostics during the completion. Those diagnostics determined that our completion was not optimal, as it fracked mostly out of zone. However, there is a good direction as to how we optimize the next step in order to achieve a better completion by moving the target and changing our frac designs. We have seen this in other areas like the Marcellus, and it certainly indicates a really good way going forward.

We're working closely with our partner, Cabot, and offset operators to exchange data and results. If you look at slide 46 in our presentation you can identify this well and our 181,000 net acre position, along with significant offset activity by operators like Halcon, Hilcorp, Seneca, Shell and Chevron. We believe there will be approximately a dozen wells drilled offsetting our position this year, and we'll of course be monitoring closely as we work on the timing of the next test. Being this is a new area, we have a lot to learn, and the good news is, we like what we see. The area has all the right ingredients, the right TOC, the right liquids characteristics, the right pressures, and we have a lot of science indicating what the next steps should be.

I continue to be very proud of our efforts in safety, environmental protections, community stewardship and communications. On the safety front, for example, our OSHA incident rate for 2012 was 19% better than the peer group. And our lost time rate was 21% better than the peer group. Although the only acceptable rate is zero, we are seeing steady and measurable improvement. It's a core value here at Range, and we definitely see it translate to the bottom line. Like Jeff said, 2012 was an important year. It sets the stage well for a terrific 2013. We believe that with our assets and our great team, we can grow significantly and consistently for many years to come. Now, over to Roger.

Thanks, Ray. Any way you look at it the fourth quarter was a great one, both operationally and financially. Strong production growth, improved capital efficiency, lower unit costs and better realized prices led to significant top line and bottom line growth. The fourth quarter of 2012 saw notable improvement in cash margins and cash flow from the prior quarter. Cash margin was $3.12 an Mcfe, up 22% from the third quarter, and cash flow was $248 million, up 31% from the third-quarter figure. Cash flow per fully diluted share in the fourth quarter was $1.54, $0.18 above analyst consensus estimate, and 14% above the fourth quarter of last year. EBITDAX for the fourth quarter was $287 million.

For the entire year, cash flow totaled $756 million, 2% higher than the 2011 figure, and EBITDAX for all of 2012 was $910 million. GAAP net income for the fourth quarter and full year 2012 was $53 million, and $13 million respectively. Fourth-quarter earnings, calculated using analyst methodology were $73 million or $0.46 per fully diluted share, that's $0.17 above the analyst consensus estimate. As Rodney mentioned, the Range corporate website contains detailed non-GAAP to GAAP reconciliations of these non-GAAP figures that I just referenced.

Looking closely at the income statement, there was a line item reclassification this quarter, as our Appalachian production volume has grown, we have engaged in limited third-party gas purchases and resales, solely to accommodate seasonal swings in regional supply and demand. To better reflect this activity, we have he reclassified the associated revenue and expense under the income statement caption Brokered Natural Gas and Marketing. This activity previously netted into other revenue, and it's conducted to support our marketing effort and it's not intended to operate as a separate profit center. We expect this activity on its own will at best be breakeven and seasonal.

Moving to the cost structure performance in the fourth quarter. Cash direct operating costs including workovers came in at $0.38 per Mcfe. That's $0.02 below last quarter, and $0.07 below the fourth quarter of last year. One of the truths in the E&P business is that it costs more to operate a wet gas well than it does a flowing dry gas well. With our liquids production rising, sooner or later our unit operating costs are going to flatten, and possibly begin to increase slightly.

Fortunately, quarter after quarter, our production teams have done such a terrific job reducing operating costs that we have thus far enjoyed the higher profit margins that come with liquids, without the higher unit costs associated with greater liquids production. If we're able to continue this trend, first-quarter 2013 cash direct operating costs, including workovers, should be relatively flat at $0.38 to $0.40 an Mcfe. Third-party gathering, transportation and compression expense was $0.71 an Mcfe, that's the same as last quarter, and $0.11 higher than last year, reflecting the continued build-out of our gathering lines and related systems. This expense is anticipated to be up slightly in the first quarter to between $0.75 and $0.77 an Mcfe.

Production and ad valorem taxes for the fourth quarter totaled $0.12 per Mcfe, $0.02 higher than last year due to higher Pennsylvania impact fees. The Pennsylvania impact fee amounted to $6.5 million during the fourth quarter, or $0.09 per Mcfe, based on total Company production. First quarter 2013 production taxes, including the $6.2 million impact fee estimate, should be in the $0.14 to $0.15 per Mcfe range, reflecting both higher prices and first-quarter Pennsylvania drilling activity.

Exploration expense in the fourth quarter, excluding non-cash comp was $17 million, or $7 million below last year, mostly due to lower seismic expenditures. Based on our 2013 seismic budget, first-quarter 2013 exploration expense should be in the $18 million to $20 million range. Abandonment and impairment of unproved property during the fourth quarter was $21 million, but we anticipate this quarterly expense to decline in 2013, with a first-quarter estimate of $15 million to $17 million.

Cash G&A expense was $0.40 an Mcfe in the fourth quarter, $0.06 lower than last quarter, and $0.17 lower than last year's fourth quarter. We continue to see improvement in unit cost G&A as we gain economies of scale in our high-growth, large-scale plays. We expect first-quarter cash G&A to be around $0.40 to $0.42 an Mcfe. As last year's Range capital program was heavily front-end loaded, our fourth-quarter production increased much faster than our debt, which effectively reduced our interest expense per Mcfe in the fourth quarter, down to $0.58 an Mcfe. First quarter 2013 should see this figure decline further to approximately $0.55 to $0.57.

The highly-favorable 2012 drilling results reported in our January 30 reserves release have already begun flowing through the income statement, reflecting continued improvement in our capital efficiency, our fourth quarter DD&A rate declined to $1.46 per Mcfe. This rate is $0.23 lower than last year, and places Range among the very best of our peer group that employ the Successful Efforts Accounting method. The DD&A rate will vary slightly from quarter to quarter, based on production mix, and we expect the DD&A rate in the first quarter to be between $1.46 and $1.48 an Mcfe.

Turning over to the balance sheet for a moment, there are two items to highlight. First, in late December, we used $259 million of our revolving bank credit facility to fully redeem, including expenses, our $250 million of callable, 7.5% senior sub notes, that were scheduled to mature in 2017. The early redemption will reduce interest expense, and with over $1 billion in available borrowing capacity remaining under the bank borrowing base, the redemption does not materially affect our liquidity.

Second, during the fourth quarter, we closed on our Ardmore Woodford asset sale, and as Jeff mentioned most recently, we entered into a definitive agreement to sell a portion of our Permian Basin assets for approximately $275 million, subject to usual closing adjustments. Now, adjusting our year-end 2012 debt balance for the completed and expected asset sale proceeds, reduces our debt to trailing four quarter EBITDAX ratio to a pro forma figure of 2.9 times. As we have said before, while we are comfortable with our leverage in the low 3 times range, bringing the ratio back below 3 times in 2013 has been one of our objectives, and when the Permian asset sale closes, we should be back below the 3 times level.

For many years, Range has relied upon a disciplined hedging program to provide certainty of cash flow, so that we may more effectively plan and execute our capital program. From 2009 through 2012, our hedging program has provided just over $900 million in revenue to help fund our projects. During the fourth quarter of 2012, and year-to-date 2013, we have continued to add to our hedge position, with approximately 70% of our 2013 natural gas hedged at a floor price of $4.18 an MMBtu and over 80% of our 2013 oil production hedged at a floor price of $94.65 a barrel. Please reference our press release and website for detailed hedge volumes and prices for 2013 through 2015.

In summary, thanks to the hard work of our employees, the fourth quarter of 2012 was an outstanding quarter by all measures, significant increases in production, at lower unit costs, driving improved cash flow and earnings. With one asset sale closed last quarter and another under contract, leverage has declined from its third-quarter 2012 peak. Going forward, continued capital discipline, cost control, and production growth should lead to another year of success. Jeff, back to you.

Dan, let's open it up for Q&A.

(Operator Instructions).

Our first question comes from Ron Mills of Johnson Rice. Caller, please proceed with your question.

Just on the Mississippian, you've talked about your portion of the play and the results in your portion of the play along the Nemaha Ridge have been different, and a little bit better than to the Western part, in terms of EURs and potential spacing. When you look at your Mississippian and the 80-acre spacing and the longer laterals, can you talk about some of the variability and how much of that is driven by the chat, and how the presence of that chat and if that creates variability, how you work through that?

Yes, sure, Ron. This is Ray. It's a good question. The Nemaha Ridge -- let me back up, and step out. The Mississippian, as Jeff said it before and I think most of us agree, is a huge stratigraphic play, and it's going to have structural enhancements, and we believe one of those structural enhancement is the Nemaha uplift, and one of the enhancements on the uplift is the fact that there's more chat present in general, and the chat has a lot higher porosity, better perms, IE more storage capacity for hydrocarbons there. It is a very diverse and unconventional-type structure, so we are still really, really early, when you look at the amount of acreage that he we have in our 160,000-acre position there, just a few wells literally that we drilled to date.

So what we did is very similar to what we did in the Marcellus. We're going to show you what the wells are doing, good, bad and ugly as time goes on. So what you see in our presentation is what the wells look like that we did the early vintage, 2009 to 2011, which were primarily shorter laterals, and came in around 485 MBoe-type wells. The 2012 wells, which look like they're around a 600 MBoe type curve, all of that's in our presentation. What we'll continue to do is set that out there, but literally, we don't have enough wells yet to understand and be able to predict what the whole thing will do. We're going to take, again, an approach we did very much like the Marcellus and just tell you what the data looks like as time goes on. So quarter-by-quarter, we'll continue to update those curves and we'll just put that data out there, and you'll know what we know going forward.

Let me tack onto that a little bit. I think if you look on slide 48 that's on our website, what it shows is the historical cumulative oil production per well from the Mississippian. This is looking at all the historical vertical wells, and there's a lot of them. By far and away the best vertical wells in the play are on the northern part of the Nemaha uplift in Kay county, Cowley, and Sumner, up into Kansas, right through that little area. The vertical wells in Kay County are the highest, at 85,000 barrels per well. If you think about the horizontal well, really it's a multiplier of a vertical. Horizontal could be in any play really, three times the vertical, four times, five times, six times, or whatever. One good indication of where the best horizontal wells are going to be is look where the best vertical wells are.

To compare that, if you go way off to the Western side of that map or that stratigraphic trap shown in green as Ray mentioned, the vertical wells, say in Woods, Barber and Comanche counties are 13,000 barrels, 22 versus 85. So they're significantly different. And then there's a slide right next to it on 49 that shows as you go far west, another thing that happens is the play gets gassier. We are where there's better vertical wells, higher oil cuts. Then the question is why. And it's back to those things that Ray said.

We think when you're up on the uplift or the things you mentioned, Ron, early on, when you're on the uplift you're higher structurally, which we think is a positive. Two, you have a chat component, that when you're on the uplift, when you're off it you tend to lose. It's not just being on the uplift, you've got to be on the Northern part of the uplift to have that chat component. Plus, you have a higher degree of fracturing on the uplift, which enhances permeability. So we think that's what supports better vertical, so far, or better horizontal wells. Like Ray said, we'll just update you with time as they are just like we did in the Marcellus.

Is that also driving a little bit tighter spacing on your portion, or what's driving the potential for tighter spacing?

If you go to slide 47, what drives that because you have that chat component, you have higher porosity, you have better storage, and you have a higher oil cut, you have more hydrocarbon in place. On slide 47, when you look at where we are, the EUR under those various types of completions, even if you use 600,000 Boes per well, we're only recovering 6% to 11% of the oil in place. So a very reasonable recovery with that kind of well. So that's what drives the tighter spacing, is really two things. It's higher hydrocarbon in place, and then just simplistically, we have a higher oil cut.

Again, going back to where we are on slide 49 in Kay County, in Cowley County, Kansas, those two areas, 92%, 95% of the wells are oil wells. If you go up to the west side of the map, somewhere between 38% and 47% of the wells are oil wells. It's a lot gassier and generally speaking, the gassier you are, the wider the spacing. The oilier you are, the tighter the spacing. The more hydrocarbon in place, the tighter the spacer, the less, the wider the spacing. That's why we are -- that's why we think what we think. It's supported by the wells we've drilled so far, and we'll just keep updating you.

Just to clarify on the Utica, it sounds like technically it has all the characteristics you want. Is it just a matter of finding where within the 285-foot of pay is the optimal place to land the lateral to allow you to effectively stimulate the Utica, Point Pleasant, is there something if I look at your map, looks like a lot of industry activity to this point is really focused on the central to Southern part of your acreage, through Crawford, Venango and Mercer County. Is that just because we have more core data from vertical wells in that area, or is there something that you think changes as you move north and east into Warren County?

Let me start with the first question. We are very encouraged by what we see. It's the first well in a pretty big area and when you combine what we learned on this well with what we're -- the little bit of data we have so far from working with the offset operators, it's a very encouraging area. We saw TOCs by volume in the 10% range. We've got a good pressure. We got 63 gravity condensate. Everything is lining up exactly like it should.

But when you drill a first well like that, we went up the learning curve and we spent a lot of money in the Marcellus, trying to figure out the ultimate best landing target, and here we are, several years later, we're still optimizing that and making big improvements and a lot of these recent well improvements that we see in the super rich and wet areas is very much that. It's landing the target in the right place, and pumping the right size frac job, so that you optimally stimulate what you're trying to go after, and not stimulate a bunch of other rock and connect up a bunch of rock that does you no good. What we saw in the Utica was, we simply put the target in what we thought was the best spot at that point with the data that we had. But clearly, when it fracked, we now know that the frac did not go where we wanted it to. So that means we take that data, we have a lot of rock mechanics data, full core data, all that stuff that tells us we need to put our target in a different spot in the next test.

So our plan, again, is HBPed, so we can kind of set back and we can kind of control our own destiny. We have talked with our partner. They're very much on board with this. They also are very encouraged by it. We're going to set back and trade information with some offset operators, and you'll see what some of their experiences are, and then we'll figure out what the timing of our next test should be. The good news is, I can't say it strong enough. We're really encouraged and we think we know exactly what to do next time and 1.4 million cubic feet a day equivalent test, while disappointing, is not a bad test. I mean, it did make 1.5 million a day. So it's a pretty decent well. We're pretty encouraged by the area.

But again, it's HBPed, we can set it back. We don't have really hardly any capital allocated to it this year. This year we're really focusing on the super-rich and wet Marcellus. That's where 80% of our liquids are going, 80% of our capital and resources are going. I always want to direct you back to, did I tell you about those five wells that we just brought online? And then if you look at the super rich area in 2012 we brought online 51 wells there, and we're saying the average is 1.44 million BOE per well.

That's phenomenal stuff. That's where we're focusing our time and resources and science this year in that area, because it's really phenomenal. With these recent wells, we're getting real excited about what we've got there. So --

Let me, again, add on a little bit to what Ray's saying. To look at that first Utica test, 285 feet of pay, and we got 1.4 million, 63 gravity condensate, good pressure, all that kind of stuff. Go back and look at the initial Marcellus wells. To put it in context, the Marcellus and Washington Counties, about 80 to 100 feet thick, 110 feet thick, where a lot of the stuff we're drilling. Here it's three times thicker.

Going back to the first three Marcellus, I told the story several times and it's sort of fun telling. The first three wells, if you just look within that 100 feet, one of those wells was landed at the bottom it made 20 Mcf a day. The one in the middle made about 200, the one at the top made about 700. That was our first three Marcellus tries. We ended up just moving the fourth well, Bill Zagorski, now considered the father of the Marcellus, drew a little three point correlation. He said, move it up a little bit, change where you landed it. Within that 100-foot interval, move it up at the top a little more. The fourth well was 3.4 million a day. And then, now, when we're drilling and completing with what we learned right in that same area, the wells are 10 million a day, plus a lot of liquids. I'm doing it on an equivalent basis.

So you think about, here, now you've got, instead of a 100-foot to play with like in the Marcellus, you've got 285 feet. The fact that we got 1.4 million a day from something that's really ineffectively stimulated, if we land it properly and stimulate it effectively, what could the well be? Clearly in the Marcellus we cracked the code. Now it's the largest producing gas field in the country, that we have a million net acres in the state, a lot of which is prospective for it. We're excited about the position, 190,000 net acres, it has all the right ingredients. It's part of our degree factor, now, or part of the upside.

Like Ray said, we're going to be driven by that million acre position that's going to give us the 20% to 25% line of sight growth for many years. We're going to be delevering with time, even with a little bit of outspend puts us in a great position, and we've got great upside in the Utica, coupled with all the things that Ray said earlier. We're still excited about the Cline, the Wolfberry, the Upper Devonian looks very encouraging. And the Mississippian as well.

Great. Thank you for all the color.

Our next question comes from Doug Leggate of Bank of America-Merrill Lynch. Caller, please proceed.

I've got a couple. If I could go back to Mississippian, real quick. When you think about capital allocation, you guys have talked about of moving up to 10 rigs, maybe 15 rigs over the next couple years over the acreage. How should we think about how you're allocating capital in terms of, does that take money away from something else, in terms of activity levels? And just as a follow-on to Ron's question, can you just confirm if you are using geoscience at this point?

What was the last sentence? We heard you up to the last sentence.

Are you -- there's been a lot of debate over the effectiveness of using geoscience in the Mississippi. Just want to check where you are in that side of the debate.

Define what is using geoscience?

Seismic to avoid [bulking] basically.

Yes. Let me start with capital allocation. We've always been driven by the same strategy, and our strategy is we want to consistently grow production and reserves per share on a debt-adjusted basis with one of the best cost structures out there, build and high grade the inventory. Simplistically, we direct our capital into our highest rate of returns, best economic projects that we have, that are large scale and repeatable. Clearly that's right now the Marcellus. And no matter what happens, it's almost hard to think that it would be anything other than the Marcellus because we have 1 million net acres in the state of Pennsylvania, all of which is not only highly prospective for the Marcellus, but it's highly prospective, a lot of it is, for the Upper Devonian and the Utica. Really, because it's a little bit of a stack pace in the areas we're, in you could argue instead of having 1 million net acres, we have 3 million net acres or 2.5 million net acres or something like that.

The Marcellus has up to seven years worth of history. Like Ray said, 7,000 wells now have been defined. When we drill in there, we have great upside and great prospectivity. And just to drive home the point, when you look at slide -- I'm flipping through the package. When you look at just the south -- when you look at slide 13, this just considers the southwest portion of our position, it ignores, just looking at 540,000 net acres, using 80-acre spacing, which I think is extremely conservative, I would argue and we have pilots we haven't talked about, you can down-space that. We've got good evidence.

We just haven't put it out yet. Some of those down space pilots are two years old. Ignoring that, we still have 6,750 wells to drill. So if you look at what we've drilled so far, we've only drilled 6% of our acreage. As of roughly year end, on a net basis, we have 470 million per day, coming from 6% of our acreage. If you do the simplistic math, and assume it was all the same and you could argue there's enough data down there tell you there's going to be high quality wells all through there, and you divide 470 million by 0.06, that's 7.8Bs per day. I said many, many times, I think our Marcellus position, just looking at a part of it without down spacing, has the potential to get us to 2 to 3Bs per day.

We said corporately, we're going to grow line of sight, 20% to 25% for many years, which gets you to that rate in relatively short order when you're growing at that kind of compounded rate. Our capital is going to be driven, our capital allocation is driven by a high rate of return, large repeatable projects, that's why 80% roughly of our capital's going to go into the play. And at a high percentage of our capital will continue to go in there. That being said, if you look at the Mississippian, we said we have 160,000 net acres, we think is very well-positioned up on the Nemaha Ridge for all those reasons we just said, that I won't repeat when Ron asked. So we think all that acreage is highly prospective.

The difference is, the Marcellus has seven years worth of history with brand new horizontal wells and high quality data and there's 7,000 new wells that define it. In the Mississippian, we're just starting. We started there in 2004. We started in the Tonkawa, and then we started with our vertical program. We drilled a number of good vertical wells. Then we converted in 2009 to 2011 and drilled a handful of good horizontal wells and we reported those over 485,000 BOE. They're still hanging in there. They look good.

Last year, we drilled a handful of wells, more horizontal, but still a handful of wells and those wells were 600,000. And we'll update you with time. So it's new drilling, and it's really just across the southern part of our play, almost spans the width of the ridge. It's not seven years worth of history and 7,000 wells. It's a couple years worth of history and 20 or 30 wells. With time, if the Mississippi continues to drill out, and it may or may not, as we know more. Hopefully it's just like the Marcellus, and it does. If it does, we'll continue to ramp up our drilling, 5 to 10 to 15 rigs and we'll do that.

The big driver, the big gorilla is the Marcellus. It's the largest producing gas field in the country. We've got the dominant position in it, and we've got line of sight growth to grow for many years. These other plays are all enhancements to that. If the Cline drills out, or the Wolfberry, you'll see us allocate a little capital, and the capital allocation is really driven by rate of return, by economics, large scale and repeatability. That was a long-winded answer. It was a great question. That's how we think about it.

That's terrific, Jeff. I appreciate that. I guess my follow-up hopefully is a little quicker.

Alan Farquharson just reminded me, I didn't answer all of your question. You brought up the geoscience or seismic. We do use seismic in a lot of the areas we drill. We use them for different reasons. So early on, it goes back to the history of the Tonkawa Field, we got in Tonkawa, which is a big part of our Mississippian position, it's a group of wells on the Southern end. And when you look at that position on the Southern end, it was the largest light oil field back in the 1917, 1920, in that era. What we did was start reactivating it by redrilling Tonkawa wells.

After successfully doing that, a couple of years later, we shot a 3D over it, which at the time amazed me as Chief Operating Officer, and those guys, after a great sales pitch said, hey we want to 3D it. I said how in the world could you have missed anything? There's a gazillion wells out there, and being an engineer, I'm thinking -- sure enough, when you look it has that same characteristic like a lot of our plays. It's stacked pay. It's not just the Tonkawa, it was the Mississippian below. Remember, your Tonkawa was at 2,700 feet. The Mississippian's at 4,000. They had some neat stuff in the Red Fork and the Wilcox and the Woodford and so even though basement's relatively high, and you're looking at that interval from 2,700 feet to 5,000 or 5500 feet, there's 20 some stacked pays in there that are all oil charged. We started drilling deeper and the seismic was actually useful to help identify all those different upsides and targets.

Again, on a broader basis, if you look at the other areas we're in, like Pennsylvania, great stack pay potential, and we talk a lot about the Upper Devonian. We talk about the Marcellus. We talk about the Utica. I guarantee you there's tons of conventional pays that are stacked in there. Seismic helps us identify, look at those other targets, it helps us target wells. It's useful as a tool. It's not critical. It wasn't -- I won't say it's critical in the Marcellus or it's critical in the Mississippian but clearly it adds value, not only in those horizons, but helping us understand the full section and the hydrocarbon charge and what we have.

Jeff, I appreciate answer. I'll let someone else jump on. Thanks.

Our next question comes from Dan McSpirit of BMO Capital Markets. Caller, please proceed.

The question is often asked of producers, when will operations turn cash flow neutral or cash flow positive. Is that in itself a goal of Range Resources, or important to the Company? And if it is, how do you balance that with accelerating the resource capture and bringing the value forward?

Yes, that's a great question. And I think if you look at our plan and what we're saying today, and I think we're saying consistently is we believe we have 20% to 25% line of sight production growth for many years. It's all that stuff and part of the answer to the previous question. And based on our modeling, and based on current strip pricing and with all the assumptions that go in it, a very bottoms-up driven plan based on thousands of wells and all the guys in the divisions, led by Ray and Alan and others, when you look at that plan, we can outspend cash flow by $250 million to $350 million per year, still grow at 20% to 25%, but importantly, we're delevering with time. I'm going to talk a little bit about it then turn it over to Roger.

When you look at our debt to EBITDAX, even with that outspend, continues to drift down with time. If you think about NAV and pulling the value forward, just simplistically, if we're drilling at 20% to 25% on a compounded basis, roughly every three years we'll double. So we would double in three years and double again. So if you take our fourth-quarter volumes, roughly rounding down to 800 million or 0.8Bs per day net, in three years, you're looking at roughly 1.6 growing at that compounded rate. If we can successfully do that, and we've gotten the database and all those wells saying we believe we can, led by our 1 million acre position in Pennsylvania, then we're doubling from 0.8 to 1.6 in roughly three years. In roughly another three years, we'll be at roughly 3Bs per day, which is a number I talked about earlier.

To me that pulling forward a heck of a lot of value. And then what's great about that, it's in largely low risk plays with strong economics and strong returns and a very low cost structure. When we talk about our resource potential being enormous, and we put a number out there, but it's based on a ton of data and a ton of support, and the best play, best gas play clearly out there, I would argue one of the best plays overall. So we think we're pulling forward a lot of NAV. We think we're aggressively driving up production with time, and delevering by out-spending by $250 million to $350 million per year. Roger, do you want to tack on with that?

I will, thanks, Jeff. Dan, I think becoming cash flow positive or cash flow neutral in and of itself is not real high on our priority list. We're much more concerned about bringing the NAV forward, drilling up our high return projects, and there's a lot of companies out there that are cash flow positive, because they don't have anything economic to drill right now. We're not that Company. So deciding where we set the drilling throttle, where we allocate capital, as you probably know, having followed the Company, every AFE over $200,000 is signed off on by Alan, Jeff, me, Ray, all individually. So we're very granular and very thorough in our capital allocation decisions. So at this point in our growth cycle, I think just as Jeff described, you're going to see us keep the drilling throttle, at we consider an optimal setting. We're probably still slightly over-spending, but still delevering and keeping leverage in check.

Got it. I appreciate that answer. I look at cash flow neutral state more of a result than a goal myself. So in agreement there. Another subject often discussed is the difference between returns at the field level, and of course those at the corporate level, there being a disconnect between the two. Where do you see returns at the corporate level, maybe measured by a return on capital employed trending over the next several years?

Another good question, Dan. Return on capital employed is a tough one. You can reduce your capital spending and you look like a rock star and you're not really bringing NAV forward or creating the value that you could. It's a suboptimal way to develop your resource base. I think it's a troublesome measure in and of itself. In my case, it's a little like NAV, you want to adjust the inputs and see what happens to the outputs. It's the relative measure that counts.

When you look at the relative measures at Range, the DD&A rate falling, I think is a really key and under-appreciated metric. When you look over the last year, it used to be the DD&A rates of the E&P sector moved somewhat in tandem, albeit differences between the full cost and the successful methods guys. Lately, what we've seen, is companies with big ceiling tests right now, the DD&A rate actually goes up, which is very odd. Range is one of the few that has consistently seen our DD&A rate go down. And that's clearly an indication of our improved capital efficiency and lower cost structure, which to your point, will flow to the bottom line. It's why we just had our second year of consecutive profitability on a net income basis, despite really low prices the last two years.

Okay. Got it.

I think as we continue to build volumes in high quality plays like the Marcellus, more and more of that's going to flow through to the bottom line or to net income. You're seeing it now. You're going to see it a lot more next year and into the future.

Understood, and one last one for me, if I may. Do you have the itch to sell more Permian Basin properties based on the attractive price received in the recent deal here? I ask, simply in context of present value. Why not monetize the asset today and recycle the cash, the capital into higher-return drilling opportunities found, say in the wet gas Marcellus or the Mississippian?

That's a great question. We look at that stuff all the time and we're constantly looking at what we think adds the most value for the Company. I think near a great shape. Again, 20%, 25% line of sight growth. We've got a great balance sheet. Roger does a fantastic job monitoring that.

Periodically, look back, we sold $2.3 billion worth of property. We're not in love with our assets. We're trying to be one of the best-performing companies out there. Not just growth for growth's sake, but better is better, not necessarily bigger is better. So we have a great opportunity and where we're positioned now, we have the ability with that small outspend to continue to grow significantly with time.

That being said, we've cleaned up, and clearly New Mexico for us was only 7,000 net acres. It was a relatively small position. We got a great price for it. We didn't see a lot of upside. It wasn't going to move the needle for us. The Ardmore Basin sale was the same thing, I think it was 14,000 net acres. What really we have left in the Permian is Conger.

Conger is different, I think, and it's something to look at. And we need to understand a little bit better, Conger is basically 100,000 net acres that in essence, almost all of which is held by production. It goes, and it has those same characteristics. We own all depth rights, it's stack pay, rich hydrocarbon charge. It worked well for us in the canyon, for the people that have been with us for a while, it worked well in the Cisco. It's worked in the Wolfcamp. It's worked in the Leonard. We have drilled some great strong wells.

Now we're looking at a couple other horizons or techniques. One us the Cline. The Cline has roughly 300-foot of net thickness across the entire 100,000 net acres. Like Ray said, it's really important. There's going to be a lot of data points coming out this year. We have really high-quality operators surrounding us. They're going to drill roughly 50 wells that are going to impact our position. The results of their wells will be very meaningful for what we have on our property.

Like Ray said, we carried 100% of the R&D in the Marcellus. We don't have to do it out in Conger, but to the extent that works in the Cline, we got 100,000 net acres. You could drill oil wells, could you drill oil wells on 80-acre spacing? I think, clearly. And you could argue, maybe it ought to be tighter, 40 or something. If you used 80-acre spacing there's over 1,000 wells. If you use 40, it's over 2,000 wells. You can pick numbers. What if the Cline works, and the Cline, the wells stabilize at 50 barrels a day a year out or something, even on the low end that's over 60,000 barrels net to us. It's predominantly oil. On the high end it could be double that.

The Wolfberry, stack pay area out there, we're doing a lot of interesting things in the Wolfberry. Our Wolfberry, wells are better than competitors so far. Again, it's HBP. We're learning a little bit. That could become a very repeatable play, and really even expand beyond what we talked about publicly so far. It has a lot of upside. We want to understand what that is before we decide what to do.

I can tell you as a shareholder, and the bulk of my net worth I'm rooting that it works, it's another great opportunity for us, because going back to that simple strategy of growing production and reserves on a per-share basis debt adjusted and building and high grading the inventory, who knows, it may be a hybrid. The Marcellus for us, back in 2004, 2005, 2006, was a huge hybrid to what we were doing, and really helped to drive results. I think Conger has the ability to be a significant high grade, and it's clearly oil which could be beneficial.

Very good. Much appreciated. Thanks again.

Our next question comes from Pearce Hammond with Simmons & Company. Caller, please proceed with your question.

How should we think about lateral length in the Marcellus, and the balance that Range has to strike between holding acreage and maximizing well economics? Essentially do you think your laterals in the Marcellus will increase further over time, or lateral length remain unchanged but frac spacing will narrow?

We have definitely seen horizontal lateral lengths increase over time, and I think it has to do with a lot of different factors in Southwest Pennsylvania, namely. And Northeast Pennsylvania I think is a little easier to drill longer laterals. You have much bigger tracts of land, and it's easier to put those together. It's dry gas and so forth. In the wet and super-rich area, I don't know, did I tell you guys about the five wells that we just brought online?

They're pretty darn good for 3,300 feet or so, and this year, I think our target, we put in there and the economics are what we expect our average laterals to be this year, and going into next year, and right now, rather than look at like I've said in previous calls and so forth, rather than look at well-by-well economics and IPs and such, we're much more interested in the total project and how we ramp that up with the infrastructure, so we keep our transportation costs down and our compression costs down, and we fill up the plant at the right level at the right timing, and we HBP acreage all at the same time. Our teams are getting really good at drilling multiple pads from a single surface or multiple units from a single surface pad and different things like that. So we're getting more and more efficient every quarter, every year that goes by on HBPing acreage. We're beginning to see that focus more to a development mode type well.

We're still a ways away from that. We still have a lot of infrastructure to build. We still have a lot of that kind of thing to happen. I would forecast that our lateral lengths probably continued to get a little longer over time. I don't see them getting a lot longer any time soon.

We have drilled a lot longer laterals, and we will drill some in special cases, whether it's a land situation or it's just a science test, or the reservoir characteristics are a little bit different where we think we need to drill longer. Right now we're pretty happy. I think what we're seeing in the super-rich area, we're just knocking it out of the park there. I'm overly excited about that, and I'll probably tell you about those five wells again before the meeting's over.

Thanks Ray. My follow-up is just staying in the Marcellus. How tight a spacing are you drilling in the Marcellus right now, and how tight do you think it can go?

On average, I think in Southwest PA, us and most of the offset operators in that area are pretty much anywhere between 1,500 feet to down to 700 feet between laterals. We, typically when we drill multiple laterals today on a pad, we'll not generally get closer than 1,000 feet. Like Jeff said earlier, we have some pilots out there that are 500-foot spacing which would basically be a 40-acre type pilot. Those have a couple of years. We haven't released the data on that yet, but I think today we're more interested in trying to HBP acreage, while at the same time, building production as efficiently as we can. And like those five wells, I told you I'd say that again, those five wells, that was three wells that's holding at 640, and then the other one is two wells holding at 640. They're clearly more than 1,000 feet apart.

But in general, if we're drilling multi-well situations on a pad, they'll be about 1,000-foot today. And I do think that there is significant potential, at least in some areas, that it's going to go denser than that, and I know UPT and CNX from time to time have talked about that also, and so I think there's clearly no question, we'll be there. When you look at the Barnett, the grand daddy of all of them, where it all started, there's literally some areas where they're 125 feet apart, and they still think there's more gas in play. Who knows where it will eventually go.

The one thing I can say is it won't be the same everywhere. We sometimes get caught in a trap of thinking the Marcellus is the Marcellus everywhere, and it's considerably different. When you just look at the map of our acreage position and the dry and the wet and the super rich, they're significantly different between those three regimes and even from one edge of one area to the other edge, you see a lot of difference. So I think they'll get longer, but again, we're pretty happy with what we're doing today. So it's pretty exciting.

Like Ray said, I think clearly we're in a core area. There's other core areas. At the end of the day, whether you can infill comes down to what the hydrocarbon you're getting out of the well bore versus hydrocarbon in place. There are some areas based on that ratio that will support 40 acres. I don't want to get into all the details, if you want to call us later, we'll talk about.

Let's go to the next question, and I believe final question.

That was it. Sorry. I apologize. I see a lot of other people teed up, so let me say then, for all the people that didn't get to ask questions, that we want to make sure we talk to you, make sure to call the IR guys. Our team will be on call. We want to make sure we get to all the people who didn't get a chance to ask questions.

I'll go with my closing comments then, which is a lot of what I've been saying, is given Range's large, high-quality, low-risk acreage position and drilling inventory, we believe in addition to growing production 20% to 25% this year, we have 20% to 25% line of sight growth for many years. Given the high returns in our liquids-rich and oil plays, and assuming current strip pricing, our cash flow is expected to outpace our production growth. We're also projecting that with current strip pricing, we'll be reducing the leverage of our Company with time as we drive up production and cash flow. Led by our approximately 1 million net acre position in Pennsylvania, we project we'll consistently drive up both production and reserves on a per-share basis, debt-adjusted for years to come. Plus, we continue to be one of the lowest cost producers in our peer group and are still improving. We believe this plan will translate into substantial shareholder value in the months and years ahead. Thank you for participating on the call.

Thank you for your participation in today's conference. You may now disconnect your lines at this time. Have a wonderful day.