Range Resources touts simplified balance sheet after Memorial merger, expects deleveraging

By Paul Deckelman

New York, Oct. 26 – Range Resources Corp. took on a sizable chunk of debt when it merged earlier this year with rival energy company Memorial Resource Development Corp.

But Fort Worth, Texas-based oil and natural gas exploration and production company Range said Wednesday that its third-quarter results showed some improvement as a result of the merger, even though the transaction only closed in mid-September, barely two weeks before the quarter’s end.

And Range executives pointed to the positive net effects of balance-sheet transactions that the company engaged in as part of the merger process.

“Range has an even stronger balance sheet, with ample liquidity and a strong hedge position for the remainder of 2016 and into 2017,” its chairman, chief executive officer and president, Jeffrey L. Ventura, declared during the company’s conference call with analysts following the release of its 2016 third-quarter numbers.

Range’s chief financial officer and executive vice president, Roger S. Manny, told the analysts that “investors will note many positive changes resulting from the Memorial merger,” which was announced in mid-May and which closed four months later. The all-stock transaction was valued at $4.2 billion, including the assumption of $1.1 billion of existing debt of Memorial Resource Development, a Houston-based E&P operator.

Manny said that Range’s ratio of debt as a percentage of total capitalization had declined to 41% at the end of the quarter on Sept. 30 from 49% at the end of fiscal 2015 on Dec. 31.

He said that the company’s leverage ratio of debt to trailing 12-month EBIDAX – the standard EBITDA earnings measure plus exploration costs –including the Memorial debt and historical four quarters of that company’s EBITDAX, was 3.6 times at the quarter’s end.

“The combined Range and Memorial balance sheet limits our debt-to-EBITDAX leverage to the mid-3 times range, with the ratio getting better next year, as higher cumulative cash flow improves the ratio moving into 2018,” Manny said.

He said “by the end of 2018, we expect the debt-to-EBITDAX ratio to have declined at least [1] full turn, from continued growth at or near cash flow.”

Manny said that the merger deal “also provided an excellent opportunity to further advance our balance sheet structure.”

He explained that before the merger, Memorial had a partially funded, fully conforming $1 billion bank credit facility and $600 million in unsecured senior notes outstanding. Pre-merger, Range had a $3 billion bank credit facility, with only $3 million outstanding, against its $2 billion commitment amount. Range also had one issue of unsecured senior notes outstanding, and three series of unsecured subordinated notes.

A successful exchange offer

The merger allowed Range “to re-simplify the company’s debt structure into a single bank credit facility and a single tier of unsecured senior notes through a comprehensive bond exchange and tender offer.”

That offer, announced at the beginning of August and continuing until mid-September when it concluded concurrently with the merger’s close involved Range issuing some $2.13 billion of new senior notes. Holders of the three series of existing Range senior subordinated notes exchanged a total of more than 97% of their existing paper into the new notes, which carried the same coupons and maturities as the notes they were being exchanged into.

The holders of Memorial’s $600 million of 5 7/8% senior notes due 2023 meantime could exchange their bonds into either a like amount of new Range 5 7/8% senior notes due 2022, or could take cash for those bonds. Nearly 55% took the new Range notes and 45% took the cash.

Besides the bond exchange, the Memorial bank credit facility was canceled at the merger closing, the collateral was released, and the outstanding balance was moved to the existing Range bank credit facility.

Manny proclaimed that the exchange “was very successful. The Range subordinated notes are now senior notes. The Range and old Memorial senior notes are now all pari-passu Range senior obligations and share the same covenant package as the existing Range 2025 senior notes. This allows bond investors to trade feely across the entire Range maturity spectrum without making structural credit adjustments due to price.”

He said that the exchange allowed Range “to utilize some of our low-cost unused bank commitment, while still providing close to $1 billion of committed liquidity.”

Following the exchange, Manny said, “all of the Range bonds traded at tighter spreads than before the exchange, and both Moody’s and S&P moved Range to ‘stable’ outlook.”

The CFO concluded that “while Range is not yet investment grade, the bond exchange aligns our balance sheet closer to what is expected of an investment grade company.”

He said that “this complex and highly successful series of transactions ... makes our balance sheet even easier to understand and positions us well for future growth and credit-quality improvement.”

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