Does This Energy Underdog Have the Strength to Deliver Market Smashing Returns?
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 2 in a series drilling down into Rex Energy through a SWOT analyis)
Let’s face it, if you’re reading this article you’re here to make money in the stock market. You want to buy a winner before it makes everyone else rich beyond their wildest dreams. Odds are you think our domestic energy industry is where those dreams can come true and you’re even hoping I might just have some insight.
That insight is coming through digging deeply into Rex Energy (NASDAQ: REXX) by way of a SWOT analysis. In this article I’ll look at five strengths the company has developed which have the potential to deliver market smashing returns.
Rex has very focused operations within just two production basins: the Appalachia Basin and the Illinois Basin. Appalachia consists of a core Marcellus Shale and Upper Devonian position and an emerging Utica Shale position. Within the Marcellus and Devonian they have a core operated area of 46,000 net acres in Western Pennsylvania and a non-operated position of 18,500 net acres as part of a joint venture with Williams (NYSE: WMB) in the central part of the state. The operated acres hold an estimated 3.6 Tcfe of resource potential with full ethane recoveries. Finally, their Utica position consists of 17,800 net acres and 133.6 Mmboe of resource potential.
Their well-developed Illinois Basin position consists of 23,495 net acres and an additional 31,500 MBbls of resource potential. This basin has been producing since 1906 and over the years it has delivered 4 billion barrels of oil. The company has been using both conventional drilling and a tertiary recovery project called Alkali-Surfactant-Polymer (ASP) flooding in an effort to increase production.
These operations have enabled the company to grow production by 56% annually since 2009. Meanwhile they’ve grown proved reserves from 65.9 million Bcfe in 2008 to 366.2 Bcfe at the end of 2011 which is a 77% compound annual growth rate. They continue to grow their average daily which they expect to clock in at a range of 66.0 to 69.0 MMcfe/d for 2012.
The crown jewel for Rex is the Marcellus and it will remain so until we know more about the Utica. Rex is still very small and they do lag behind top dog Range Resources (NYSE: RRC) and their 750,000 acres which hold an estimated 34 to 46 Tcfe of resource potential. However, the play is one of the top natural gas plays in the entire world and Rex has a great core position in the play.
Growing Liquids Production
When you combine the Illinois Basin with their Utica position they have more than 1,000 liquids rich drilling locations and expect to end the year with liquids totaling about 30% of their production. With full ethane recoveries they have 4.6 Tcfe or 765 Mmboe of total liquids rich resource potential. Rex like most of their peers these days is becoming a liquids story. Those economics are compelling as you can see from this chart for a recent corporate presentation:
The industry is focusing on liquids in a big way. Talisman Energy (NYSE: TLM) for example basically closed up shop in terms of drilling in the Marcellus in order to focus on their liquids rich Eagle Ford Shale acres. The company went from 11 rigs all the way down to one and have slashed cap ex from more than a billion dollars down to less than $400 million. Meanwhile they’re building momentum in the Eagle Ford and had 12 rigs operating this year. Rex has seized this opportunity by being one of the first movers in the liquids rich potential of the Utica.
Increased Access to Markets
When Rex and their partners signed a deal to sell Keystone Midstream to MarkWest (NYSE: MWE) it represented a lot more than just the monetization of a non-core asset. More importantly it solidified their relationship with this exceptional midstream operator. They are building upon this relationship both in the Marcellus and Utica which will enable Rex to access more customers and get better value for their products.
Not only have they increased their access to markets for their products but they’ve also increased their access to the capital markets. Rex’s borrowing base has increased three times over the past year and now stands at $290 million. As CEO Tom Stabley put it, "The increased borrowing base further enhances our liquidity position and positions us to execute on our business plan at very attractive rates." Access to capital at favorable rates will continue to be important for Rex ans they seek to grow.
Strong Hedge Book
The company is conservatively managed and they’ve put together a strong hedge book to ensure their liquidity. You can see their current hedging summary in the chart below:
As you can see they have solid downside protection with a decent upside potential.
Current Balance Sheet Strength
The sale of their stake in Keystone Midstream Services to MarkWest netted Rex about $120 million and it really fortified their balance sheet with ample cash and credit flexibility. They have more than $220 million dollars of excess liquidity heading into 2013. Their debt to equity is just 23% though that’ll rise as they finish out the balance of their 2012 capital projects. Unless they acquire additional properties they shouldn’t have any need to raise equity capital until at least 2014.
Rex’s greatest strength is their ability to grow their liquids production. They have several avenues for growth including their Utica position, full ethane recoveries and their ASP floods. With liquids being the hot commodity today and an eventual uptick in natural gas prices Rex’s strengths could lead to real market beating returns as they build wealth for their shareholders. However, will their Weaknesses Prevent This Energy Underdog from Running Higher?
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