The Game Changing Opportunities for this Energy Underdog
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
(This article is part 4 in a series drilling down into Rex Energy through a SWOT analyis)
Opportunity – a good position, chance or prospect, as for advancement or success.
When I think about Rex Energy (NASDAQ: REXX), the first word that comes to mind (after dog of course!) is opportunity. To have a good position, chance or prospect is exactly what we’ve got in Rex, and in this continuation of a SWOT analysis we’ll look at five such opportunities for this little energy underdog.
The Utica Shale –
By far their biggest opportunity is their growing Utica Shale position. The big question is whether or not that play is for real or just a lot of hot air. Rex’s first well in the play, Brace 1H had 1.1 million barrels of oil equivalent per day. This well was toward the lighter end of what top driller in the play, Chesapeake (NYSE: CHK) has been experiencing. In eight wells drilled around Rex’s Warrior North Prospect they saw rates between 1.1 Mboe/d and 3.0 Mboe/d, with five of them 1.4 Mboe/d or higher.
Meanwhile, in their Warrior South Prospect we’ve seen some exciting wells drilled by Gulf Port Energy (NASDAQ: GPOR), and they are calling the play “one of the most promising up-and-coming oil levered plays in North America.” Their recent Shugert well tested at a peak rate of 4,913 Boe/d while they Boy Scout tested at 3,456 Boe/d.
The play could possibly hold between 1.3 to 5.5 billion barrels of oil and 3.8 to 15.7 trillion cubic feet of natural gas if estimates by the Ohio Department of Natural Resources are correct. Rex is a first mover in the play and held 17,800 net acres at the end of the second quarter; while their position is dwarfed by the million acres that Chesapeake holds, it represents 11% of their net acres and 17% of their current resource potential.
Future of Natural Gas-
The reason the Utica is so important to Rex and others is that it appears to be liquids rich. However, a steady rise in natural gas prices represents another huge opportunity for Rex. With 70% of their production being dry gas (and of that about 70% is hedged next year), as prices rise more of that will fall to their bottom line.
As we look to new ways to use our abundant natural gas resources, the new demand created should boost prices. While the country still lacks a real energy plan, we are seeing the private sector move in several key demand areas: Power Generation, CNG Vehicles, Petrochemicals and export terminals. The opportunities are vast and Rex will benefit from any uplift in prices over the next few years.
Full Ethane Recovery-
Currently only 10% of their liquids sale is from ethane, however they are working to ensure full ethane sales, which will bump it to 67% of production. This takes the production from 1.64 gallons per wellhead Mcf to 4.5 gallons per wellhead Mcf. It also pushes their oil and NGL reserves from 25% to 37%. They estimate that they have total recoverable resource potential of 150.7 Mmboe or 904.0 Bcfe in the Butler Marcellus and Upper Devonian acreage.
Cracker Plant and Emerging Access to Liquids Transportation
Ethane could be an important commodity for the company. While the deal is not a certainty just yet, Shell’s (NYSE: RDS-A) (NYSE: RDS-B) proposed Ethane Cracker plant couldn’t have been placed better if you’re Rex Energy. It’s core Butler operated acres in the Marcellus are just off to the east of the plant’s proposed location while their Utica acres are to the west and to the south. Adding this potentially large future ethane customer is important because it cuts down on transportation costs.
One of the many benefits to the Keystone deal with MarkWest is their ability to transport liquids by pipe instead of truck and rail. Currently it costs the company $12.81/bbl to transport their NGL’s via trucks and rail but once they are hooked up into MarkWest’s system in 2014 that cost will drop to $2.52/bbls, which is a 25% increase in realized prices.
Finally, additional takeaway capacity is being built in the region, including Enterprise’s ATEX pipeline, which will take ethane to the Gulf Coast petrochemical markets as well as MarkWest’s own Mariner Project to the export markets along the east coast. As more of these projects come online, ethane’s current status as a stranded commodity will be reversed.
Water Treatment and Gathering-
A final, but at the moment very small, opportunity is found in water treatment. They currently own 80% of Water Solutions Holdings (NOTE: according to the 10-Q they own 80%, but on the conference call CEO Thomas Stabley said it was 60%) which was created with another partner to acquire, manage and operate water treatment, disposal and transportation facilities. They are designed to treat, dispose or transport brine and fresh waters that were either used or produced in oil and gas development.
This is an interesting asset for Rex. The subsidiary had about $3 million in capex allocated to it and they expect it to generate about $10 million in revenue against $6 million in expenses, giving it $4 million to $5 million in cash flow according to Stabley. They do plan to pare down their stake in the business from 80% to 20% and grow it in both Pennsylvania and eventually Ohio.
Additionally, they own a 51% interest in NorthStar#3, which was formed to construct, own and operate a water disposal well in Ohio. Rex put up a $4.8 million promissory note to supplement the operations of the entity. Because of this they have the right of first refusal on all the capacity if the disposal well is successful. If it’s not a success, they’ll have no recourse to recover their investment and will absorb a loss. Like Water Solutions, this is a very small business but because Rex is a small company every penny matters.
Finally, Rex owns a 40% non-operated interest in RW Gathering, which owns gathering assets to facilitate their development in the Appalachian Basin. The company was formed to “acquire, improve, manage, operate and dispose of gas gathering lines and associated facilities.” Their partner in the venture is Williams (NYSE: WMB), and at the time the deal was signed in 2009 it included 1,800 miles of gathering lines serving 6,900 wells. These assets were originally related to their 50/50 venture with Williams on 44,000 acres in central Pennsylvania. Again, this is a small asset but it is one that they can grow and potentially monetize.
Rex has been working to monetize non-core assets in order to fund their drilling program. Monetizing their 28% stake in Keystone Midstream Services in a sale to MarkWest was a key to padding their balance sheet to fund their drilling program. Not only that, but they secured a great transportation partner that goes a long way towards opening up this access to marketing. As it stands right now, their plan is to hold (if not grow) their two water related businesses and their gathering assets. They have good partners in place, which should provide opportunities for future success.
The biggest opportunity for Rex is represented by the potential for their Utica Shale position. If the resource basin ends up being as big as Gulfport and Chesapeake say it is then Rex will be sitting pretty. There is tremendous value upside to their Marcellus, Upper Devonian and Utica positions as demand for natural gas and liquids increases. The location of the potential Ethane Cracker as well as their access to MarkWest’s infrastructure will give Rex greater flexibility to supply this growing demand at better prices and deliver more value to their shareholders. However, threats do still remain.
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.