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By Mark Hanson, CFA | 11-10-2011 12:00 AM

Range Resources: Infrastructure, Safety Concerns Biggest Bar

Range's Rodney Waller and Ray Walker see soothing community concerns about drilling safety and more infrastructure build-out as keys to further growth in the Marcellus shale.

Mark Hanson: Hi. I'm Mark Hanson, equity analyst with Morningstar's energy team. I am here today with two members of Range Resources' senior management team Ray Walker and Rodney Waller. Gentlemen, welcome.

Rodney Waller: Good to be here.

Ray Walker: Good to be here.

Hanson: So, we're at the Morningstar Management Behind the Moat Conference, and two of the elements that we think about with economic moats are: how much is the cost to produce the oil and gas that you have rights to, and what can you ultimately sell it for. Range excels on both accounts. Maybe walk us through some of the factors that contribute to your outperformance on those elements?

Waller: Well I think the company has always been focused on the cost structure, even when we were in high-commodity-price environments. We've also achieved this by selling some of our more mature properties and being able to reinvest that cash into higher growth. In 2011, our operating cost was probably about $0.80 per Mcfe at the 1st of the year, and at third quarter it was $0.58. So you sold off the Barnett shale which was about $0.83, while the Marcellus shale is $0.35-$0.40 in operating cost. So you significantly improved your profit margin on that.

If you look at $3.50 gas in the wet-gas area with a Btu and the cost, you've got about $0.80 finding cost for a Marcellus well. When you look at the cost to produce it, at $3.50 you basically have a 50% profit margin, and at $5 you have a 70% profit margin. So when you have high-rates-of-return projects and you make those very, very repeatable is going to translate into big shareholder growth. But you've got to be focused on that every day, and Ray and a lot of his staff and his teams are focused on that every day. How you reduce costs.

Walker: It's really a cultural thing, I think that comes from the top down and very early at Range. Back in 2003 or so, we put a real focus on generating consistent double-digit production growth at a top-quartile cost structure. What that really means is taking things of the bottom of the pile, monetizing them, and taking that money and investing in high-rate-of-return projects. I think that real consistent focus on per-share growth of production, reserves, on keeping our balance sheet very simple, and doing things right, that permeates to the whole team. It's like your mother used to tell you, it's a lot cheaper to do it right the first time, and we see that.

Hanson: So you've got several years worth of inventory, a decade plus. What's the biggest governor to growth right now especially in the Marcellus, you core area?

Waller: Well, I think day in and day out its building infrastructure in the midstream. We are blessed with great rock, great productivity, which is different than what Appalachian has seen. So even if you had infrastructure in an area, it cannot accommodate the volume and the pressure.

So with our midstream partners, we are building those, but with our very large area in the Southwest, we probably have 500,000 acres. In the wet-gas area, we own 80% of that. So you are building track-by-track, pad-by-pad all the necessary compression and gathering. So you've got an upfront task, but as you get to 2013 and 2014, it actually gets easier because you've built the initial infrastructure in there.

So we're still evaluating. It's still very, very early, but it's just really being able to get the necessary connections to the existing pipelines that are very large and have been there for 50 years to utilize. But the resources keep getting bigger. What we built three years ago, probably is a little bit too small today, but it's rightsizing all of that and really being able to move that forward. We have good partners and great rock, but you are just building for the very first time infrastructure that you are going to need for the next 20 years.

That's really the unique story of the Marcellus is that you have a very small company with a very talented staff, who could see the attributes of what the play looked like. And you are able to accumulate these really key areas, especially in the wet-gas area, the liquid-rich area in the Southwest.

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