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Rex Energy (REXX) Upgraded To 'Buy' By Brean Murray On Asset Sales, Hedges And Drilling Catalysts

 April 20, 2012 12:48 PM

Brean Murray, Carret & Co. analyst Raymond Deacon upgraded his rating on shares of Rex Energy Corp. (NASDAQ:REXX) to "Buy" from "Hold" based on asset sales, hedges and drilling catalysts.

The brokerage, while maintained its $14 price target, raised its Q1-2012 EPS estimate for Rex Energy to $0.12 from $0.09 and its 2012 estimate to $0.52 from $0.49, while maintaining its 2013 forecast of $0.45.

Deacon said the $14 price target equals to 85% of his risked NAV, which assumes mid-cycle NYMEX benchmark prices of $90/Bbl oil and $4.25/Mcf.

Rex should announce a sale of both its midstream and upstream (Niobrara) packages within the next six to eight weeks. Assuming a $100 million sale price for the midstream assets and a $25 million sale price for its Wyoming Niobrara acreage, Deacon estimates that Rex's liquidity will increase to $275 million.

[Related -Natural Gas Outlook Ahead of Q3 Earnings]

The company has price protection on roughly 75% of its 2012 gas volumes (floors at 4.75/Mcf) and 89% of its 2013 volumes (floors at $4.44/Mcf). Rex's first horizontal Utica shale test well has spud in Carroll County, OH, with results expected during the second quarter call in August.

In the Marcellus, drilling by peers could de-risk some super-liquids-rich areas in Mercer County, where Rex holds 6,000 acres, potentially opening up an area with higher liquids content and more robust economics than Rex's holdings in Butler County.

The shares have declined 38% year-to-date versus the EPX index's 4% decline and the Marcellus peer group's 14% decline. Low gas prices, a mismatch between 2012 capex of $155 MM and expected cash flow of $99 million and the sale of equity as gas fundamentals were deteriorating each contributed to the underperformance. At the moment, the company has the second largest short position in the E&P space.
The analyst said fears over valuation of midstream seem misplaced given the embedded growth in this business and future demand growth for its products. There will be no increase in marketing or transportation costs post sale since those are already taken into account in the minority interest expense on Rex's income statement.
Deacon thinks gas prices will trough over the next two months, and in that environment REXX has the ability to outperform due to planned asset sales, exploration in the Utica shale, third-party results from the super rich portion of the Marcellus in Mercer County and further results from the Upper Devonian/Burkett shale, which appears to have a higher liquids content than the Marcellus.

[Related -How The E&P Sentiment Is Faring?]

One of the key investing themes the analyst sees is increased demand for natural gas liquids from the Marcellus for export. Ethane and propane, chiefly, seem to be most likely beneficiaries and over half of the liquids stream in the Marcellus is ethane.

REXX is trading up 0.77% at $9.15 on Friday.



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