Although it was started as an Appalachian Basin-focused, penny-stock independent in the early 1970s, the current-day Range Resources Corp. (NYSE: RRC) was actually formed in the late 1990s when, amid flagging commodity prices, the competition for acquisitions became very intense. It was then that the Fort Worth, Texas-based operator adopted a three-phase transformation plan for long-term growth.

"The first thing we did was become much more technically capable, geologically and geophysically, so that we could generate more of our own prospects; to do that, we revamped our technical team," says John Pinkerton - , Range's president and chief executive officer. "Next, we began building a multi-year inventory of drilling projects, a move that required a commitment to spending more on seismic and expanding our acreage position. Lastly, we committed to delivering consistent baseline growth through the drillbit."

That transformation in strategic thinking has dramatically reshaped the scope and scale of Range's business operations and the running room it now has to achieve growth-for itself and its shareholders.

Since the late 1990s, the company's staff has grown 10-fold, from 65 employees to some 650-including more than 110 geologists, geophysicists, petroleum engineers and land personnel. Meanwhile, its acreage position in its expanded onshore core areas of operation-the Appalachian Basin, the Southwest (Texas, Oklahoma and New Mexico) and the Gulf Coast-has ballooned from a couple hundred thousand acres to 3.1 million gross acres (2.6 million net). Concurrently, its inventory of mainly natural gas drilling projects has soared from between 200 and 300 to more than 8,000.

That's not all. During 2003-05, Range grew its 82% gas-biased production from 154 million cubic feet equivalent per day to 257 million while managing an average annual reserve-replacement rate of 203%-just through the drillbit alone (a 497% annual average when one includes acquisitions).

"Before 2003, we had never replaced our reserves through the drillbit in any given year," says Pinkerton - .

Notably, the company, whose proved reserves now stand at 1.6 trillion cubic feet equivalent-up from some 685 billion equivalent in 2003-has achieved all this upstream growth at an average annual finding and development (F&D) cost of $1.27 per thousand equivalent.

Commensurate with this performance, Range's revenues during 2003-05 rose from just under $246 million to $536 million while earnings jumped from $35.4 million to $111 million. Its stock price since 2001 has risen more than seven-fold, from around $4 per share to approximately $29 at press time.

To find out more about Range's transformation and its plans for the future, Oil and Gas Investor - recently visited with Pinkerton - .

Investor - How would you describe Range today?

Pinkerton - We've gone from a neophyte operator with a limited ability to generate our own prospects and replace reserves to one that in recent years has been able to achieve 203% annual reserve-replacement levels through the drillbit at top-quartile F&D costs. So the drillbit is now our driver for consistent baseline growth, and any acquisitions-which at times you may or may not be able to make-is just icing on the cake.

In the current environment, growth through the drillbit generates higher returns than making acquisitions and is more accretive to shareholders. Right now, we've got 8,000-plus projects in inventory and we'll be drilling 1,050 wells this year, so we've got an eight-year project inventory at our current drilling pace against a 15-year reserve-life base.

Investor - Which of your core areas currently make the greatest contribution?

Pinkerton - During the past couple of years, our Appalachian coalbed methane (CBM) production has risen by about 170%, and in southeastern New Mexico we've grown output by around 200%.

In addition, we have an oil-redevelopment project in the West Fuhrman Mascho Unit in West Texas where daily production has jumped 900%, from 300 to 3,000 barrels. That was Oil and Gas Investor - 's 2006 Excellence Awards pick for Best Field Rejuvenation project.

Investor - Which areas will contribute most to your future production growth?

Pinkerton - Within two years, we expect to double our Appalachian CBM output from a current level of around 25 million cubic feet per day. Also, we expect substantial growth in the Barnett Shale in the Fort Worth Basin in East Texas where we just acquired Stroud Energy. That company is made up of former Mitchell Energy & Development employees-the team that really discovered the Barnett play.

Overall, we have about 50,000 net acres right in the heart of the play and while we're currently producing about 20 million cubic feet of gas per day in the Barnett, we're looking to take that output up to 100 million during the next 24 to 36 months.

In addition, we have an emerging Devonian shale play, mainly in the Pennsylvania area of Appalachia, where we've amassed 309,000 gross acres to date and are planning to increase that position to between 400,000 and 500,000 acres. With 3,500 potential well locations and an estimated 2.4 trillion cubic feet of reserve potential, this play could more than double the size of Range.

Investor - What's the most important acquisition or find the company has made to date?

Pinkerton - Just staying in the Appalachian Basin for the past 35 years-even during tough times-and building our position there to more than 2 million net acres with 4,000-plus miles of pipeline. As we see it, this basin is still largely unexplored and has huge upside from the CBM and shale plays as well as from deeper formations such as the Trenton-Black River.

Then there's the Stroud acquisition that I've already mentioned. Importantly, we expect to use the expertise of the former Mitchell Energy employees in that company not only in the Barnett but in similar plays like the Woodford Shale in Oklahoma and the Floyd Shale in Alabama's Black Warrior Basin.

If I add it all up, we've got about 395,000 net acres in our shale plays and about 400,000 net acres in our Appalachian CBM plays in Virginia, West Virginia and Pennsylvania. These resource plays are relatively low-risk and highly predictable.

Investor - What's your capex budget look like for 2006 versus 2005?

Pinkerton - For 2006, our capital budget for drilling, land and seismic is about $550 million. We really don't budget for acquisitions. This compares to a 2005 capex budget of about $325 million. Next year, we'll probably spend $650 million.

Investor - How do you plan to fund this spending increase?

Pinkerton - Through cash flow, which we've done successfully every year. I would point out that we have good hedges in place and get high prices for our gas production in Appalachia. Then on the acquisition side, if a good opportunity arises, we'll go to the capital markets.

Investor - What are your production-growth targets for this year and next?

Pinkerton - We originally had a 2006 production-growth target of 10%, but we've raised that to 15%-the same target we have for 2007.

Investor - Your outlook for natural gas prices?

Pinkerton - During the next two years, we think natural gas will trade somewhere between $6 and $10. Being pretty aggressive hedgers, we recently hedged one-third of our 2007 and 2008 production at an average of $9.50. However, we run all of our economics at much lower commodity prices-$40 oil and $5 gas-so, from our perspective, we're locking in cash flow, earnings and rates of return for ourselves and our shareholders without trying to speculate on gas prices.

Investor - If a good acquisition opportunity came up, what size could your balance sheet handle?

Pinkerton - We could double the size of our borrowing-base facility, currently $600 million, and probably do a $1-billion acquisition. But that's not really what Range is about-we're about baseline growth through the drillbit.

Investor - How are you dealing with rising oilfield-service costs?

Pinkerton - We've found that the best way to mitigate costs is to use technology. For example, at our West Fuhrman Mascho Unit, we've taken wells that used to take 12 days to drill and are now drilling them in six days. That's because we've teamed up with the drilling company and are using state-of-the-art drillbits and drilling equipment. Thus, even though dayrates and service costs might have gone up 100%, we've been able to cut our drilling time 50%.