Back on July 2nd, Stocks on Wall Street released an article on Rex Energy (NASDAQ: REXX) recommending the stock as a ‘BUY’ and signaling to investors to purchase shares at the price of $11.62. Due to overall strong performance and increased optimism around both Rex Energy and the growing region they drill in we decided to upgrade our position and offer some new changes and updated guidance on Rex.
How Has Rex Energy Actually Performed?
Since our recommendation REXX has performed exceptionally well soaring over 39% in a 9-month period all the way to $16.11. At its peak, shares hit $17.33 a total yield of well over 50%. After further examining REXX’s financial statements we are still optimistic especially since overall numbers have improved, better positioning the company for the long-run. Below are some five reasons to continue to be bullish on Rex.
Five Reasons to Continue to Be Bullish on Rex Energy
- REXX’s PEG Ratio improved substantially rising from 0.96 back in July 2012 to currently 0.51. This is direct proof that management’s overall strategy and efficiency have been very effective positioning the company for a strong year going forward.
- The company has beat earnings estimates the last two quarters and as a result consensus earnings estimates for 2013 and 2014 have increased.
- Three initial test results from the Utica prove to be hugely successful and big wins for Rex indicating the liquid-rich area is even more prosperous than they originally projected.
- As a result of all the positive feedback, strong numbers, & overall consistent performance analysts across the board have raised their price target for REXX from $16 to well over $19 a share while continuing to maintain an ‘Outperform” rating on the stock. Overall 82% of the analysts watching the stock have issued a ‘BUY’ rating or higher.
- Like we have mentioned before REXX continues to be a logical acquisition candidate for a bigger player. Why? It’s due to the fact that REXX is a small cap company worth a little over $1B however their robust production, growth and valuable set of assets make them a very desirable company in the eyes of the big players.
What Risk Factors to Account For
REXX is not immune to everything and if there is a weakness it’s the concern in their liquidity going forward especially if gas prices were to fall much lower. Investors shouldn’t be all to concerned however as we continue to see management effectively combatting this issue and in the past they have always found ways to keep production fully up and running so we have no reason to doubt that they would stop such efficient business practices now. In addition, Rex still has various assets for sale, which have helped provide a safety net if liquidity issues were to ever arises. After examining the books, it looks like REXX is in a much better financial situation now then it was just 9-months ago which is a good indicator going forward. When we first recommend Rex, the company had about three years of liquidity before they would have had to start cutting back on their drilling program or finding other sources of cash. Today’s current rate shows Rex has well over four years worth of liquidity, an optimistic sign for investors and further proof of management’s effectiveness.
Increased Spending Followed By Increased Expectations
Going forward expect Rex to continue to perform exceptionally well as they increase the amount of capital they’re spending on production, which in return should deliver much higher revenue numbers. When talking about the successful recent tests and the future potential in the region Rex’s CEO, Tom Stabley, said, “that the company believes the past results demonstrate the huge opportunity that exists for continued superior well performance in this region going forward.” Stabley used these tests as a key reasoning behind the company’s huge capital spending program. Rex isn’t the only one increasing their spending either as both Gulfport and Magnum Hunter Resources are following suit and spending a large portion of their 2013 capital budget on the play. With such a huge increase in capital spending, expectations are very high, as hopefully the move will prove it’s worth generating significant liquids-rich growth for all three companies.
Overall Long-Term Outlook
Overall, we continue to be very Bullish about Rex Energy anticipating huge liquids growth production coming from the Utica shale. As a result we expect REXX shares to continue to outperform their peers and as a result we are raising our original 12-month price target from $18.50 to $20 per share, a total net yield of 72% on the year and an additional 32% from the current stock price.
Rex Energy (NASDAQ: REXX) is an independent energy company engaged in the acquisition, production, exploration and development of oil and gas, with properties concentrated in the Appalachian and Illinois regions. REXX is one name in the oil and gas complex that could be setting up for a big breakout. REXX has become one of our favorite small natural gas producers and a company that is vastly undervalued given their resource potential. REXX is an underdog from top to bottom, but one with lots of potential to produce strong long-term gains for investors. Holding a market cap of just over half a billion dollars, $685M to be exact, REXX is tiny compared to others in its industry.
There’s a lot to like about REXX, all of which we will outline in the various sections below.
REXX has a great position in the Marcellus, a growing position in the liquids rich Utica Shale, they hold good economics on the wet gas portion of their portfolio, and have a solid hedging program which will allow them to continue to profit throughout the year even if gas prices fall.
Management has done a successful job to ensure they have enough liquidity to continue their drilling program while shifting the program toward their liquids rich acreage. Their recent deal to sell their 28% stake in the Keystone Midstream to MarkWest Energy Partners (NYSE: MWE) netted them $120 million dollars. Adding to that they have some assets in the Rockies up for sale, all which should bring in additional cash, which will be used in their drilling program.
If there is a weakness about REXX, it’s the concern in their liquidity going forward if gas prices fall much lower. Not to worry though as management has effectively combatted this issue with their recent deals along with the upsizing of their credit facility giving them the fuel needed to keep on drilling. At their current rate they have about three years of liquidity before they’ll need to either start to cut back on their drilling program or find other sources of cash if commodity prices don’t increase. We however project gas prices to increase in the next coming year especially in the liquids Rex is drilling.
Fundamentally REXX is a strong company and after examining their financial statements we have come across some strong bullish indicators investors will like to see.
- PEG Ratio 0.96; PEG Ratios below 1 shows that the stock and company is undervalued and holds lots of upside.
- P/S Ratio 5.69; Rexx’s current P/S ratio is below the historical average, which is a good indicator of value.
- Revenues look strong and management has been profitable with 31.6% Profit Margin, 26.13% Operating Margin, Trailing P/E of 15.56, Forward P/E of 22.02 all of which bode well for future earnings.
- REXX has seen a substantial increase in shares bought by insiders. Insiders now hold over 16% of REXX’s shares with many high-level executives recently purchasing back shares. It might be nothing but historically when insiders are purchasing up large amounts of shares it means good times are ahead.
- Analysts across the board believe REXX is a strong long-term investment. 12 of the 15 analysts covering the stock have issued a ‘BUY’ or ‘STRONG BUY’ rating. See the chart below for more info:
Year-to-date REXX is down but don’t let that be a reason to avoid investing as long-term the growth opportunities outweigh any potential short-term risks. Looking at the charts for Rex Energy, you’ll notice that this stock has been steadily rising since the stock bottomed at around $9.29 a share back on June 4th. Historically, whenever a stock consistently makes higher lows, it shows that large traders are eager to jump into the stock on any dip. This is a bullish signal for investors and it often means that the stock is setting up to trend much higher, which we have seen, in recent trading sessions.
This strong action in the stock has now pushed the 50-Day moving average above the 200-Day moving average which shows the stock is on an uptrend, another strong technical signal for investors. With REXX pushing past some big resistance levels the stock has showed even more strength going forward making analysts project that this stock could easily be setting up to trade back towards its 52-week high of $15.64 per share or even higher. Technical indicators look strong for REXX and if shares pass $15.64 with strong volume it will mean this stock will have zero resistance until it gets back to above $20 a share.
REXX is currently trading at $11.62. Going forward, we believe REXX has lots of potential to vastly outperform the market as they focus more on their liquids rich portfolio going forward. While they do have liquidity issues, we wouldn’t be surprised to see them seek out a joint venture partner in the near future if not simply be acquired. Rex is not the top dog, but they have plenty of room to run. We see REXX as a strong current buy opportunity and advise investors to purchase shares all the way up to $13. We plan on holding our shares until either the companies acquired or it is valued to richly to justify. Overall we are really excited about this investment opportunity and foresee strong gains over the course of the next year expecting shares to rise above $18.50 per share in the next 12-months, a total net yield of 59%.