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
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.
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 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.
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.