This Energy Underdog Keeps Growing
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Energy prices are volatile enough without adding the words small cap to the mix, but that’s exactly what we have with Rex Energy (NASDAQ: REXX). That volatility can go both ways of course and lately it has been in favor of long term investors. Shares of the tiny oil and gas exploration company are up nearly 30% since the beginning of May, nearly a third of that gain coming thanks to their second quarter earnings report.
It was a solid report with production increasing 78% year-over-year and average daily production from oil and NGLs reaching a record level of 2.7 MBoe/d. They’ve really grown their NGL production level increasing it by 20% bringing it up to 8% of their overall production. Natural gas is still 74% of their overall production but less than half of their overall revenue, even less if you factor out their hedging program which boosted natural gas revenue by a third in the quarter.
Rex is planning to have liquids production to be in excess of 30% by the end of 2012 and they have several projects under development to get them there. They are planning on spending a total of $180 million in capital expenses. They have a strong liquidity position and are well hedged to continue funding their growing production.
One of the highlights of the quarter was the sale of their share in Keystone Midstream Services to MarkWest Energy Partners (NYSE: MWE). As a 28% owner in the asset their interest netted the company $121 million of cash which resulted in a gain of $92.7 million recorded in the quarter. The deal which included two cryogenic gas gathering plants and a gas gathering system with associated field compression freed up some much needed capital for the company to reinvest into their drilling program.
One very interesting part of their drilling program is the Warrior North prospect in Ohio’s Utica Shale where they hold 15,000 acres. Their Brace #1H well has been drilled and completed and it’s just a mile from two Chesapeake (NYSE: CHK) discoveries in the oil/condensate/liquids rich zone. This particular well is scheduled to be connected to the Dominion (NYSE: D) east Ohio pipeline for sales starting in September. They have over 100 net drilling locations in this area. Chesapeake’s success in the area and their close proximity to the Dominion assets bode well for Rex’s future potential in the play.
In the Warrior South Prospect their acreage is also located in the liquids rich window of the Utica Shale. They have 21 potential net drilling locations on their 3,100 net acres. Here they are located close to Gulfport Energy (NASDAQ: GPOR) which recently brought its first well online. This prospect runs right along a proposed MarkWest liquids line making them perfectly positioned in the play. Rex is currently drilling one well and will be drilling an additional well in the third and fourth quarters.
Rex is well positioned to succeed in both the Utica and Marcellus. They are very well hedged, have a solid liquidity position and a very nice liquids rich production portfolio. There is a lot to like with this energy underdog and if their recent share price movement is any indication it appears investors are starting to take notice.
Now What?
I’ve recommended followers of my virtual “No Drip, No Mess” Portfolio write September $10 puts on Rex Energy. Those puts look to expire worthless as shares are now 35% higher. While I’d love to own the shares for the long term, I don’t want to chase them either. If volatility were to do a 180 on the shares sending them closer to my desired $10 buy price I’d recommend another round of writing puts. In the mean time I’ll just send this stock back to my energy watch list, unless the market changes its mind over the next six weeks.
latimerburned has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Dominion Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
