Can this Energy Underdog Grow into a Top Dog?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Don't talk to me about aesthetics or tradition. Talk to me about what sells and what's good right now. And what the American people like is to think the underdog still has a chance.” - George Steinbrenner

Much like sports fans, investors want to win.  Those wins are not seen in a column or in championship rings, but by consistently and handily beating the market. However, just like championships are few and far between for most sports teams, most investors fail to beat the market.  The reasons are the same and range from poor management to lack of funds to an asset that turned out to be a liability. 

That’s certainly not to say that we can’t win, we’re on the journey to invest better so that we can live the life of our dreams.  We take great joy in finding winners that have been overlooked by others.  These underdogs have the potential to turn into top dogs if everything can come together. 

One company I have my eye on is a tiny underdog in the energy industry, Rex Energy (NASDAQ: REXX). Can a small natural gas driller Rex like become a winner and grow into a top dog?   Before we can even begin to answer that question, there are many others that must be answered.  Where are they strong and are those strengths enough to overcome any visible weaknesses?  What’s the opportunity for growth and do those potential rewards outpace the risks that threaten them? 

To answer these and more I’ll take you through a detailed SWOT analysis of Rex over the next few articles.  Below you’ll find a quick overview of what you’ll find:

 Strengths

  1. Focused Operation – Focused positions in both the Appalachian and Illinois Basins.
  2. Growing Liquids Production – Will end the year with liquids at 30% of total production.
  3. Increasing Access to Markets – Both end markets and capital markets.
  4. Strong Hedge Book – They have hedged ~76% of oil, ~74% of natural gas and ~27% of liquids production this year and next.
  5. Current Balance Sheet Strength – Sale of their stake in Keystone Midstream Services to MarkWest (NYSE: MWE) helped to fortify their balance sheet.

Weakness

  1. Volatile Small Cap – It's been a bumpy ride for investors.
  2. Future Liquidity – Liquidity is questionable after 2013 given current pace of development.
  3. Concentration of Assets – Focused operations are also very concentrated.
  4. Inability to Sell DJ Basin Acreage – Assets has been held for sale for almost a year.
  5. CEO Turnover – Now on their third CEO in the past two years.

Opportunities

  1. The Utica Shale – Both Chesapeake (NYSE: CHK) and Gulfport Energy (NASDAQ: GPOR) have reported enticing results from this emerging play. 
  2. Future of Natural Gas – Increase power generation, CNG vehicles and exports could drive demand higher for natural gas.
  3. Full Ethane Recovery – This stranded commodity could yield big profits for Rex. 
  4. Cracker Plant and Access to Liquids Transportation – Access to new customers at reduced transportation costs is good for their bottom line.
  5. Water Treatment and Gathering – Opportunities abound to grow these partially owned subsidiaries in both the Marcellus and Utica.

Threats

  1. Commodity Prices – While Rex is hedged they still face commodity pricing pressure.
  2. Access – Rex’s access to market is limited by both their small size and concentration.
  3. Environmental and Legal Risks – Not unique to Rex but smaller drillers don’t have the same balance sheet flexibility as their larger peers when it comes to these risks.
  4. Economic Recovery – A look at the boom and bust of their stock price shows just how dependent the company is on economic growth.
  5. Utica Unknowns – What if the Utica isn’t the next big thing?  While Chesapeake and Gulfport are bullish on their prospects others like Anadarko (NYSE: APC) don’t seem to be as enthused. 

Bottom Line

Rex has tremendous potential both in the Marcellus and the Utica let's make no bones about it; they are a very small company.  Top dogs like Chesapeake and Anadarko are more diversified across several basins while others like Gulfport have benefited from their past investments in oil focused projects.  Rex has been shedding non-core assets by strategically partnering with companies like MarkWest to ensure they have the access they need in an effort to join the big dogs as they run to win the race to supply our country with the energy we so desperately need. 

To drill down even deeper into Rex's you can read the detailed reports on their Strengths, Weaknesses, Opportunities and Threats


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, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. 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.

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