Marcellus Companies Beating Projections, Stocks Up

 |  Includes: COG, EQT, GST, REXX, RRC
by: Josh Young

Gastar (NYSEMKT:GST) is the most recent Marcellus-focused company to announce a "beat" on production, revenue and cash flow. Gastar produced 57.6 mmcfe/d in Q2, versus guidance of 52-55 mmcfe/d. And cash flow per share grew to $0.19 from $0.06 in Q2 2012. Gastar has shown great progress in its Marcellus asset, and with upcoming results in the Hunton, it could continue to outperform.

This beat, plus other recent developments could drive analyst target prices beyond the recent targets of $4.50-$4.70 per share. These recent developments include the additional cash deposits from Cubic for the East Texas asset sale, the resale of part of the Chesapeake acquisition for the price of the entire acquisition, and the funding of Gastar's $200 million high yield deal.

EQT (NYSE:EQT) had a similar "beat", producing 8% more than expected from the Marcellus. Its stock is up more than 5% since this announcement a little over a week ago, despite it being one the highest performing stocks in the energy indexes (NYSEARCA:XOP). Incidentally, EQT is ramping up production in NW West Virginia, nearby Gastar's main Marcellus asset.

Range Resources (NYSE:RRC) also announced excellent results, with longer laterals driving up EURs and rates of return in its SW PA acreage, which is just across the state line from EQT and Gastar's recent excellent results. It appears a liquids rich Marcellus "core" is forming in the SW PA / NW WV area, with EQT, RRC Gastar and other companies leading the way.

Cabot (NYSE:COG) also announced excellent results, (sensing a trend here among Marcellus-focused companies?), growing production 52% year over year. Cabot is focused on the NE PA dry gas area. Despite recent lower natural gas prices, Cabot stock continues to rise unabated, up another ~10% since its report in late July.

And while Rex Energy (NASDAQ:REXX) has not yet released its Q2 results, it did provide an interim operational update recently, highlighting excellent recent Utica results. While Rex has some Utica acreage, the vast majority of its production, cash flow and reserves come from the Marcellus, and its stock has traded more or less in line with the other Marcellus focused companies in the past year.

From a results perspective, obviously Gastar, EQT, Range, Cabot and Rex are doing quite well, particularly in the Marcellus, which appears to be driving their stock prices and valuations. However, from a valuation perspective, there seems to be a standout in the group.

While the other stocks trade at 9-14x 2013 EBITDA, Gastar is only trading at ~5.5x EV/EBITDA (EV adjusted for the signed but not yet closed Chesapeake acreage sale). Gastar's analyst price targets have been rising recently, with a recent buy-side target of $4.70 per share. If Gastar were to simply rise to the valuation of its peers, the stock could triple from its recent ~$3.34 price.

It is rare for companies to trade at such a large discount to peers. Perhaps as Gastar closes some of its announced deals and continues its excellent operating results, that gap may close.

Disclosure: I am long GST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may buy or sell any security mentioned at any time with no further notice