The Future of the Utica is Coming into Focus

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

Tiny Appalachian and Illinois Basin focused E&P company Rex Energy (NASDAQ: REXX) reported third quarter results on Election Day.  Rex reported solid results as their drilling program continues to produce.  In a preview of what to expect in the report I had three questions I was hoping the company would provide some color on.  Specifically, I was looking to see if the earnings number would matter to the street, if they’d provide an update on their DJ Basin divestiture and how their Utica efforts were progressing.  Rex delivered on all three and gave investors another piece of good news to boot:     

Earnings and Production

In my preview I said that I didn’t think it would matter if Rex met the street’s five cent earnings estimate for the quarter.  I stated that Rex “isn’t an earnings story…instead, investors will be looking at their production growth, especially in liquids.”  So whether you look at Rex’s loss from continuing operations of four cents a share or their adjusted net income of eight cents a share it really doesn’t matter at this point.  What really matters at this stage in the company’s life cycle is the growth in their production volumes. 

This is where Rex really shined as they reported a 63% increase year-over-year and a 14% increase sequentially.  That worked out to 71.1 MMcfe/d of net production volumes which was higher than their initial 2012 production guidance of 63.7 to 64.3 MMcfe/d.  More importantly they achieved record average daily production for their oil and NGLs at 3.0 MBoe/d or 26% of total production.  This is just shy of their goal to end the year with 30% of their production from liquids. 

DJ Basin Update

In my earnings preview I stated that, “I'd like to get some color to see if they're any farther along in the sale process.”  Investors got a little more than just some color as the company announced that they closed on a portion of their land in the basin.  The sale brought in $3.5 million worth of cash back into the company’s coffers.  The acres sold represented all their holdings in Nebraska and Colorado and it had a carrying value of $1.3 million.  

They still have another 27,000 acres left in Wyoming to sell or partner.  That land has a carrying value of $9.1 million which for perspective would have funded the cost of their Brace well in the Utica.  Hopefully the company can finally get these assets off the books by the end of the next quarter.

Utica

Rex provided three important updates on their Utica position:

  1. Achieved their goal of securing 20,000 acres in their Warrior Prospect of the Utica. 
  2. Completed drilling three Warrior South Wells
  3. First Ohio Utica Well averaged a 30-day sales rate of 731 Boe/d

Of these three updates the one that interests me the most is the rates they saw from their first Utica well, the Brace #1H.  The results were well below the top performing wells of both Chesapeake (NYSE: CHK) and Gulfport Energy (NASDAQ: GPOR) who saw results as high as 1,735 boe/d and 2,914 boe/d respectively.  However, they are solid results that bode well for Rex’s future in the play. 

The Utica continues to be a hot play although there are some warning signs that might be signaling a top in the market.  For example, EV Energy Partners (NASDAQ: EVEP) is focusing on unloading their stake in the play.  In their last earnings report it was noted that CEP Mark Houser said that, “Our major focus this quarter however, has been and will continue to be on managing our Utica Shale acreage monetization process."  While their business model is different from most drillers as they are more akin to an income producing MLP it’s interesting to see that they see more value by selling their acres than by participating in the drilling. 

Rex however continues to go full bore into the Utica.  They seem to see a lot of upside in the play and plan to keep ramping up their production.  If they are correct it could yield fantastic future returns for their shareholders. 

Express Shipment

A nice little addition to the earnings release was the announcement that Rex has signed on to be an anchor shipper on the ATEX pipeline.  This is an important development as it increases Rex’s access to market for their ethane.  For more details on what this means to Rex Energy click here.

Bottom Line

This was a very solid quarter for Rex Energy.  They made a lot of progress as they increased production and brought a lot more clarity to their future with the Utica results and a partial sale of their DJ Basin acres.  Rex continues to be a story to watch for the coming year. 


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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