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Rex Energy (NASDAQ:REXX)

Q2 2011 Earnings Call

August 03, 2011 10:30 am ET

Executives

David Pratt - Vice President and Exploration Manager

Patrick McKinney - Chief Operating Officer and Executive Vice President

Thomas Stabley - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Leo Mariani - RBC Capital Markets, LLC

Ronald Mills - Johnson Rice & Company, L.L.C.

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Operator

Good morning, ladies and gentlemen, welcome to the Rex Energy Corporation's conference call to discuss the second quarter 2011 financial results. [Operator Instructions] I would now like to introduce your host for today, Tom Stabley, Executive Vice President and Chief Financial Officer of Rex Energy.

Thomas Stabley

Good morning, and thank you for joining us for the Rex Energy Second Quarter 2011 Financial and Operational Update Call. With me on the call today is our Chief Operating Officer, Patrick McKinney; and Senior Vice President of Exploration, David Pratt. We hope you've had time to review yesterday's 2011 second quarter operational and financial release.

Today's discussion will include forward-looking information and reference to non-GAAP financial measures. You should refer to the disclosures in our 2010 10-K and other SEC filings regarding factors that could cause our future results to differ from this forward-looking information.

A reconciliation of non-GAAP financial measures can be found on our website and our 8-K filed yesterday with the SEC. We've also included additional information in the presentation materials posted to our website to help you analyze the company's performance.

Now moving to Slide 4 of our presentation. The second quarter was very productive for Rex Energy. First, we are very excited to announce our Warrior Prospect in Carroll County, Ohio, where we are in the process of closing approximately 11,000 net acres, subject to title, prospective for the Utica Shale. We believe that this position lies within the wet gas window of the play and should provide Rex a good entry point into this portion of the Utica Shale play. This acreage acquisition, along with our Butler County operated acreage and a small position we hold in Mercer County, PA, would bring our total potential Utica Shale lease holds to approximately 83,000 gross acres and 58,000 net acres. We are currently drilling our first Utica Shale well in Butler County and hope to fracture stimulate it in the third quarter.

In addition to our Carroll County acreage acquisition, we have also, during the quarter, leased an additional 3,700 net acres in our Butler operating area. This brings our total Marcellus Shale potential acreage to approximately 63,000 net acres with approximately 43,000 of this net acreage in our Butler operating area.

Lastly, we have completed the drilling of our first Upper Devonian test well and have plans to fracture stimulate this well during the third quarter.

We are also very pleased to announce that Rex Energy's bank group voted unanimously to increase our borrowing base from $160 million to $240 million, a 50% increase. This significant increase was the result of the company's continued development of additional proved undeveloped locations, improved well performance and increasing EURs. The bank group also agreed to extend the term of the credit facility for an additional 2 years through September 2015. And lastly, reducing the low end of our interest rate grid by 25 basis points. I would like to say thank you to all those banks of the syndicate group for their continued support of Rex Energy.

Moving to Slide 5. As evidenced by the increased borrowing base, the company continued its production growth in the second quarter, with our average daily production increasing by 27% over the first quarter and 87% over the same period in 2010. Our average daily production was approximately 35.2 million cubic feet equivalent per day, which was 9% above our previous issued second quarter guidance. The increase is attributed to our accelerated drilling schedule, increased levels of production on our new wells, and the Sarsen cryogenic plant running efficiently in our Butler operated areas.

In addition, I would also like to thank our partners at the Williams companies in our JV area, where they have had the same types of success growing production.

Daily natural gas production increased 46% over the first quarter and daily production from natural gas liquids increased 80% over the first quarter. As discussed earlier, our accelerated drilling program and improving well results have boosted both our natural gas and NGL production.

Taking a look at our production mix, oil and natural gas liquids accounted for 41% of our production during the quarter. Average daily oil production was down a bit [ph] in the second quarter when compared to the first quarter of 2011. This was caused by weather-related issues in our large field in Illinois, where flooding and other issues caused wells to be shut in during the quarter. Since then, all wells are now back online and producing, and we expect oil production to increase to normal preflood levels.

Our per unit lease operating expenses were 12% lower compared to the first quarter of the year. The lower per-unit costs are a result of growing our production from the lower cost Marcellus Shale operations and becoming more efficient in the operations of these wells.

Lastly, but most important, our EBITDAX has increased 19% over the first quarter of the year and by 130% over the second quarter of 2010. This demonstrates the company's strong growth in operating cash flow through better well results and lower operating costs.

Moving to Slide 6. We outline our current commodity hedge position. We currently have approximately 69% of our midpoint guidance as gas production for the third quarter, hedged with a floor of approximately $5.23 for the remainder of 2011 and over 60% of our current production for 2012 and 2013 at floors of approximately $5. The company has approximately 80% of its current oil production hedged for the remainder of 2011 and '12 and approximately 37% for 2013.

The company does utilize put spread protection on a portion of these hedges with short puts below the applicable floors. Although these can cause the floors to move based on ultimate settlement of the contract, the existing spread protection gives the company full protection based on the current forward price expectations.

For more detailed information on our hedging position, see the current hedge summary on last night's release or the appendix at the back of our slide presentation.

On Slide 7, we have released our increased capital budget. The increase includes the amount needed to fund the acreage acquisition in Ohio Utica and the increased drilling and infrastructure for Westmoreland and Clearfield County. The new capital expenditure budget for 2011 is $235.6 million, which is $60.2 million increased from the previous announced CapEx budget of $175.4 million, with 78% of the accelerated budget allocated to oil and liquids rich operational areas.

$41 million of the increase will be used to acquire prospective acreage in our Warrior Prospect located in Carroll County, Ohio, and $19.2 million of the increase is allocated to our joint venture activities with Williams to drill an additional 4 wells, accelerate our midstream operations in Westmoreland and Clearfield, and increase the number of wells completed in placed into service during 2011. Also, a portion of the $19.2 million has been used in testing of more intense fracture stimulations for our Butler County wells, and this increased investment is translating into higher IPs and higher EURs.

We expect to fund these additional capital requirements through our increased borrowing base, our midstream partners in Butler obtaining a line of credit to assist with future mid-stream cost in that area, a possible joint venture and asset divestiture. The company expects to be able to discuss its future plans in more detail during the third quarter.

On Slide 8, we have our guidance for the third quarter and our revised full year guidance. For the third quarter, we're expecting our average daily production to be between 40.5 million and 42 million cubic feet equivalent per day. At the midpoint of this guidance, the company would have its fourth sequential quarter of double-digit growth at approximately 17%. In addition, we are increasing our full year and exit rate production guidance. We are lifting our full year daily production guidance to 37 million to 40.4 million cubic feet equivalent per day and from a previous range of 34.7 million to 39.4 million cubic feet equivalent per day. This would be an increase of approximately 5% at the midpoint for the full year.

We are also increasing our December 2011 exit rate to a range of 47 million to 53.5 million cubic feet equivalent per day from the previous guidance of 40.7 million to 48.5 million cubic feet equivalent per day. This is an increase of approximately 13% at the midpoint of the range.

As previously released in an earlier announcement, we have lowered our full year lease operating expense guidance from $32 million to $37 million to $31 million to $34 million. This decrease in guidance is due to lower overall levels of operating expenses across the company. Third quarter lease operating expenses are expected to be between $8 million and $9 million.

Also, as previously released, we have increased our cash G&A guidance for the full year from a range of $20 million to $21 million to $24 million to $25 million. This increase is attributable to the cost associated with the settlement of the litigation in Westmoreland County, as well as employee severance costs and other expenses related to the departure of our previous CEO. We expect third quarter G&A to return to a more normalized range of $5.3 million to $6 million.

I will now turn the call over to Patrick McKinney to discuss our operations.

Patrick McKinney

Thanks, Tom. Looking at Slide 9, we have a summary of progress on our operated area of the Marcellus Shale in Butler County. So far this year, we have drilled 22 gross, 15.4 (sic) [13.5] net wells, fracture stimulated 11 gross, 7.7 net wells, and placed 13 gross and 9.1 net wells in service. We've also increased our acreage position by 8,600 gross acres to approximately 63,200 gross acres through land swaps with our JV partners and other acreage acquisitions. We're continuing to lease acreage in areas that will contribute to our contiguous acreage position and help us fill in future units.

I'd like to point out the table at the bottom of the page, showing our pad completion history. We are seeing improved well results as we continue to develop our completion designs which are leading to improved IP rates and higher EURs for each new well that we drill. As you can see from the table, we have seen a 14% increase in our 30-day production rates from our -- as compared to our first -- to our Double well pad, which was put into service in February and our 3-well Talarico pad, which was put into service at the end of May. We are pleased with our progress thus far and are constantly working with our engineers in the field to improve our completion results.

On Slide 10, we have our Butler County drilling completion schedule for the remainder of the year. Our first rig, UDI 54, has completed drilling the 7-well Grosick pad and is now on the 3-well Carson pad, where it's drilling the second of 3 wells. We are planning to fracture stimulate 3 to 7 Grosick wells in October of this year, with the remaining wells to be fracture stimulated in 2012.

Our second rig, UDI 52, reached total depth on the 3-well Behm pad and has since moved on to the 3-well Graham pad, where it's drilling the second of 3 wells. Once it has reached total depth on the Graham pad, it'll move to Bricker pad. We're currently fracture stimulating the Behm wells and expect them to be in service in the beginning of September. The 2-well McElhinney pad is currently shut in, awaiting pipeline construction. We expect this well to be put into sales by November.

The third rig, Bronco #10 or really Nomac [ph] 312 -- 310, has completed drilling operations on the sixth well Gilliland pad, which included 5 Marcellus Shale wells and one Burkett test. The rig is now moving to drill the horizontal portion of our Butler County Utica Shale test at the Cheeseman well. After this rig has reached total depth on the Cheeseman, the rig will be released.

For full year 2011, Rex will drill 30 gross wells in Butler County and build an inventory of 17 wells to be frac-ed by the end of the year in anticipation of our Bluestone cryogenic gas plant coming online in the first quarter of '12.

Moving to Slide 11. I'd like to discuss updated economics on our Butler County operations. As our IP rates have been improving and we're now have production trends for over 100 days, we can revise the type curves on our Butler County Marcellus wells upward. We have increased our IP rate assumption from 3 million cubic feet a day equivalent to a range of between 3.2 and 3.4 million cubic feet equivalent per day, which is an increase of between 7% to 14%. As a result of the high IP rates, we also have increased our EUR for the wells from 4.4 Bcfe to a range of 4.4 to 5 Bcfe at top end of the range, 14% above of what we had assumed in the past. You can see the impact on the well economics in the graph to the right of the page. Even at current natural gas prices, these wells can yield internal rate of returns approaching 40%.

Looking at Slide 12. You can see why our wet gas areas in Butler County have better yields than the dry gas areas. For each Mcf of gas coming out of the wellhead, we're getting about a 28% advantage in commodity revenue when you take into account the natural gas liquids value. This yields a net $4.88 per Mcf equivalent cash margin at the wellhead.

Moving to Slide 13. There are some updates I'd like to give you on our non-operated joint venture projects with Williams. Year-to-date, Williams has drilled 19 gross, 7.6 net wells and has placed 8 gross, 3.2 net wells into service prior to the end of the second quarter. In order to market the incremental gas production from the new wells, our joint venture partner is working to secure an additional 35 million cubic feet per day of takeaway capacity in the Peoples Natural Gas line. We expect the additional pipeline capacity to be ready sometime in November. In the third quarter, Williams will transition to a one-rig program as it slows its development in our joint venture area and moves to fracture stimulating complete their wells in inventory.

On Slide 14. We have our drilling schedule for our non-operated area. Our first rig completed drilling operations in the 2-well Frye pad and is now drilling the second of 3 wells on the McBroom pad. Upon completion of the McBroom pad, the rig will move to the 2-well Skacel pad, where it'll begin drilling operations there. Our second rig in our JV area, Patterson 480, reached total depth from the 5-well Marco pad and after completing drilling operations has been released. The third rig on our JV area, the Patterson 332 rig, is drilling the last of 4 wells on the Resource Recovery #1 pad in Clearfield County. Upon reaching total depth there, it will also be released.

Transitioning to a one-rig program will allow us the opportunity to fracture stimulate wells, create inventory, while leaving around 2 wells ready to complete and put into service for 2012. For the full year '11, Williams will drill a total of 24 gross wells. We are pleased with the drilling progress in our JV areas this year with operations well ahead of schedule. We're expecting to drill 4 more wells in our JV operating area, 4 more wells in addition than were previously planned. And we are also increasing our investment in midstream operations there to help support the increased production.

Moving to Slide 15. We're also updating our economic assumptions for our non-operated wells in Westmoreland County. We are increasing our IP rates from 3 million cubic feet a day to 4 million cubic feet per day. We are also increasing our EUR assumptions for Westmoreland wells from 3 Bcf per well to a range of 4 to 5 Bcf per well. We feel the results we are seeing with Williams' drilling and completions efforts supports this increase in our assumptions.

Looking at Slide 16. I'd like to talk about our expansion into the Utica Shale. Right now, we have approximately 83,500 gross and roughly 58,000 net acres that we feel are prospective in the Utica Shale. Much of this acreage is in Butler County, where we have our Marcellus Shale operations. We also have about 3,400 net acres in Mercer County that is prospective for Utica development. We have recently made an arrangement -- recent agreement for 11,000 net acres, pending title approval, in Carroll County, Ohio. You can note that we are essentially at ground zero in relationship to the Chesapeake activities in Carroll County. We are currently drilling our Utica Shale test, the Cheeseman well in Butler County, and should have results sometime in the fourth quarter. We are very excited about the potential of the Utica Shale and feel this could add considerable value to our portfolio of oil and gas properties.

At this point, I'd like to introduce Dave Pratt, our Senior Vice President of Exploration. Dave has over 25 years of experience in the Appalachian Basin, including significant experience in Ohio, and we'd like him to discuss our thoughts on geology of the Utica Shale play.

David Pratt

Thanks, Pat. The Ordovician age Utica Shale at Point Pleasant Formation is believed to be the source rock for over 300 million barrels of oil and 3 trillion cubic feet of gas reserves from overlying Silurian age Clinton sandstones and deeper Cambrian-Ordovician age Knox carbonates and sandstones in Eastern Ohio. In Western Pennsylvania and Eastern Ohio, the Utica Shale is over 150 feet thick and the underlying Point Pleasant Formation is 140 feet thick. These formations are a mixed carbonate/shale sequence, containing total organic carbon content ranging from 2.4% to 3.7%. These numbers, while not particularly rich compared to source rocks such as the Marcellus Shale, are very effective numbers due to the very thick section of potential source rock. The Point Pleasant has very high resistivities on geophysical logs, indicating the section is hydrocarbon bearing. Log analysis indicates that porosities in the Point Pleasant Formation range from 8% to 12%, comparable to the highest porosities Rex has seen in its Marcellus wells in Butler County.

The Utica Point Pleasant Formations in Eastern Ohio are sufficiently mature to be in the wet gas space. The Range Resources' Zion [ph] well drilled approximately 11 miles to the south of the Rex Cheeseman well tested 4.4 million cubic feet a day of dry gas according to data released by Range. While the Range Resources Zion [ph] well represents the highest known dry gas and the Chesapeake wells in Eastern Ohio are apparently in the wet gas phase, the location of the transition from dry gas to wet gas has yet to be determined.

Structural dip in Eastern Ohio is very gently dipping to the southeast but rapidly steepens in Western Pennsylvania. The Rex Cheeseman well is projected to be about 650 feet, structurally high, to the Range's Zion [ph] well at about 150 feet low to several Chesapeake locations in Western Beaver County, Pennsylvania. Rex anticipates penetrating the Point Pleasant Formation at a TVD of approximately 9,150 feet in the Cheeseman well. Rex intends to vertically drill the Cheeseman well through the Point Pleasant Formation and run geophysical logs in sidewall cores before plugging back and drilling the horizontal section of the well. The well is planned to have a 3,600-foot lateral.

And with that, I'd like to turn the call back over to Pat McKinney.

Patrick McKinney

Thanks, Dave. On Slide 18, I'd like to go on a little bit more detail about our Warrior Prospect acreage in Carroll County. We believe that this acreage lies in the liquids window of the Utica Shale and has the potential for both condensate and natural gas production. With its close proximity to major pipelines and infrastructure, we are looking forward to development in 2012. Based on our contiguous acreage position, we have identified approximately 80 net drilling locations in the Warrior Prospect to date based on 4,000-foot lateral links and 1,000-foot spacing between the laterals. In order to execute our drilling program in the Utica, we have contracted with our drilling partner, Union Drilling, to build Rex a state-of-the-art new drilling rig capable of drilling to these deeper depths in the play. The rig is scheduled to be delivered in the second quarter of 2012.

Moving on to Slide 19. I'd like to give an update on our ASP project in our Lawrence Field in Illinois. We're continuing to see a positive response in our ASP Middagh pilot project. Oil cuts in the first responding producer have increased from 1.5% to 20% as the project matures and we continue to see the oil bank. We expect to see the increasing fluid production with the increasing oil cuts over time. Oil response in the 6-well producing pattern has shown an increase in oil cut from 1% to 10% and consistently averaged between 70 to 78 gross barrels of oil per day, with 3 of our producing wells still awaiting more significant response as a poor volume of the ASP solution injected catches up to the initial responding wells. So far, we have yet to see a breakthrough of ASP chemicals, which indicates that the project continued to show excellent response characteristics.

We have also continued expansion into our next ASP project area, the Perkins-Smith Unit. We have drilled all the pattern wells, completed injection line facility work and have begun brine injection into this project area. We expect to commence ASP injection sometime late in the fourth quarter.

As we have mentioned in our release, we should be in a position to talk more definitively about crude reserves impacts of this pilot in our third quarter call in November. While we continue to be increasingly encouraged by the response of this pilot, it's difficult to estimate the eventual poor-volume oil recovery this early in the response phase of the project.

In our Niobrara area of operations on Slide 20, here's a quick update I'd like to make. We are currently fracture stimulating completing the Steege 11-33H well and completed drilling operations on the Shapley 14-25H. Based on extensive review of 3-D seismic in collaboration with service companies and other operators in the play, we changed the orientation of the lateral on the Steege well, changed the liner to plug and perf, and utilized a low pH fluid system for the frac. As we have previously mentioned, we want to have a 60-day-plus production history on these wells before we release results so we can have a higher degree of confidence on the decline curves and EURs. We expect the Shapley well to be fracture stimulated sometime at the end of the third quarter.

With that, I'd like to open up the line for question and answer.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Leo Mariani of RBC.

Leo Mariani - RBC Capital Markets, LLC

Wanted to get an update on your second cryogenic plant in terms of when you guys expect that to be on location and starting to function there.

Patrick McKinney

This is Pat. I think as we talked previously, we filed that application with the Pennsylvania DEP last December, and we expected a 6- to 9-month timeline as far as the permitting of it. As we sit here today, we still don't have a read of when that permit is going to be going out to public comment. So there's really no new information to report on that.

Leo Mariani - RBC Capital Markets, LLC

Okay. Jumping over to what you guys are saying on the EURs in the Marcellus, I guess you're slightly bumping up your type curve here in Butler and bumping it up a fair bit in Westmoreland. In Butler, I mean, do you guys have enough wells that are unconstrained at this point? Are you able to sort of look at production data over time that's not getting impacted by facility issues, to really get a hard look at how that -- how those wells are performing?

Patrick McKinney

Yes, we think we're in that position now, Leo. I mean, as we mentioned, we've seen for the number of the wells, production trends now for anywhere from 200 to -- 100 to 200 days and we feel that's given us a pretty good indication of what the type curve is looking like.

Leo Mariani - RBC Capital Markets, LLC

And that's unconstrained production on individual wells for 100, 200 days.

Patrick McKinney

Yes, into sales. You're obviously strained somewhat by going through your production facilities. But yes, we've been able to go and flow and produce the wells at their capabilities.

Leo Mariani - RBC Capital Markets, LLC

Got you. Okay. And I guess, in Westmoreland, obviously a much bigger bump in the EURs there. Can you give us a sense of how much production history you guys have on those wells also?

Patrick McKinney

On some of the pads, we've got the results approaching 100 days and the more recent fracs that they've done have been a little less than that. But on the dry gas side over there, we feel that the curves are going to be pretty consistent with some of the prior production. So we're not as much worried about the shape of the curve over there.

Leo Mariani - RBC Capital Markets, LLC

Okay. I guess in the Utica, can you guys just talk a little bit about whether or not you plan to lease [ph] acreage here, and how you sort of base your model in terms of the areas that you want to acquire new leases? Is there a sufficient well control there in Carroll County? Is that one of the reasons why you guys are targeting there?

Thomas Stabley

Well, Leo, it's Tom. I'll talk a little bit about the leasing efforts there. I mean, obviously, we're very pleased to get the entry point into the Carroll County area that we've got. We continue to, as we lay out and design the units, add incremental acreage to that contiguous block that we have. Obviously, as Patrick said, it is -- we do feel it's ground zero for where Chesapeake is currently drilling. And so it's very competitive in that area right now. So we do have landmen there. We're continuing to add some acreage but it remains a very competitive place to lease.

Leo Mariani - RBC Capital Markets, LLC

I guess, if you guys could just kind of talk about well control in the area, well that you guys are aware of, and how you sort of map this out in a little bit more detail.

David Pratt

Leo, this is Dave. We focused in on this area. I think one of the things that we looked at is the distribution of overlying reservoirs. We're just down dip from the oiliest part of the Clinton sandstone reservoirs, which we thought this helped draw a bull's eye on the area. One thing that we like about the Point Pleasant is that across several counties, it looks broadly similar in terms of porosity, thickness and resistivities. So we feel pretty confident that this is a resource-type play. There's plenty of well control. A lot of wells were drilled deeper through the Utica on the way down to the Knox carbonate as part of the drilling boom in the 1990s that took place for that. So there's literally hundreds of logs to choose from to look at and they all look pretty much similar in the areas. So those are the things that we were looking at when we focused in on this area.

Operator

Our next question is from Neal Dingmann of SunTrust.

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Maybe first question for Pat. Just wondering, Pat, did you say, over in Butler County you are now testing one Utica well? And then, just wondering what the additional plans, I guess, through the remainder of the year for Utica tests. And would you commingle some things there? Or how do you plan on completing or producing that?

Patrick McKinney

Well, we've got one Utica test planned now on our Cheeseman well. And we're going to obviously look at the results on that. As we sit here today, we don't have any other plans right now for another Utica test in Butler County this year. As we mentioned, we're going to release the Nomac [ph] 310 rig, which is the bigger rig that we got to drill this Utica test. And Chesapeake's taken that back to move it to Eastern Ohio, but we're going to get our Union Drilling rig in, in the second quarter. So that will probably be the next opportunity to drill some deeper wells.

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Okay. And then just lastly, just on capacity. First over in Westmoreland, with the 35 additional takeaway that you have coming in there, do you figure you'll have enough capacity, not just through this year but well into next year, on the non-op? And then over in Butler, I know you've obviously added a clear amount of capacity with the cryogen and different facilities there. Maybe just an update on sort of the capacity, where you sit, I guess, through the end of the year.

Thomas Stabley

Well, in Westmoreland County, I mean it's going to depend of the size of the wells and what they -- and how they continue to produce on the one that they have. But clearly, based on the rates that we're seeing, I mean, that's probably going to come up a little bit short of what we need for the remaining 12 wells that they're going to frac this year. So I think they're also looking at some additional capacity on Equitrans to pick up some of that slack, but they're still early in those negotiations.

Patrick McKinney

Well, Neal, I was just going to add -- this is Pat -- on the Cheeseman well. Depending on its hydrocarbon makeup, we have a different outlet potential for that in the NFG line, which is located up there near the lease. So we should have ample takeaway for development up in that area.

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Okay, and then lastly if I could, I'm sorry. Just on the 3 wells that were completed on the Niobrara, I'm just wondering now when you look at those, what's your thoughts as far as stages, completion kind of as you go forward versus what some earlier wells that you had.

Patrick McKinney

Well, obviously, as we mentioned on the call here, we changed some things up and really tried to work and collaborate with the service companies and the other operators out there to get a better feel for what was working. So I think as we start to see the results on the Steege well, I think we'll be in a better position to really talk about the benefits of our new completion methodology.

Operator

Our next question is from Ron Mills of Johnson Rice.

Ronald Mills - Johnson Rice & Company, L.L.C.

Just on the production guidance and the CapEx levels, particularly on the production guidance, it sounds like the -- Williams has tried to get that incremental 35 million a day in capacity by year end. And I'm assuming that's why the production guidance in particular is weighted to the fourth quarter, and particularly with the exit rate. Is that -- am I reading the right information into that?

Thomas Stabley

No, that's absolutely correct, Ron. I mean, obviously, if they're planning on getting that incremental capacity sometime in November. obviously, if it gets a little bit earlier, it's going to help the full fourth quarter a little bit more, but to the extent it comes on late in November, then it's keyed up just for the exit rate in December.

Ronald Mills - Johnson Rice & Company, L.L.C.

Okay. And did you just say that even with that incremental 35 million a day, you may be bumping up against the total capacity that Williams has in that area?

Thomas Stabley

Well, they have an additional 18 wells scheduled to frac in the end of this year and depending on the rate that those wells come on, there's a possibility that they won't have enough capacity.

Ronald Mills - Johnson Rice & Company, L.L.C.

Okay. And are you in all of those wells?

Thomas Stabley

We are.

Ronald Mills - Johnson Rice & Company, L.L.C.

Okay. And just to clarify, the incremental -- I think you said earlier, they're going to complete 12 more wells. Is that 12 incremental wells versus what you're originally planning? Or how many incremental wells versus your original plan are Williams -- is Williams going to complete?

Thomas Stabley

It's about 10 additional than our original plan.

Ronald Mills - Johnson Rice & Company, L.L.C.

Okay. And then in the Utica, obviously, a very hot play in terms of news flow lately. But what does the area look like in terms of infrastructure? I know there's been quite a bit of shallow development in that portion of the state. But in terms of infrastructure -- for guys, just industry as a whole and you once you start drilling next year, is -- does the area have the right kind of infrastructure in terms of high-pressure lines or processing in the event that you have quite a bit of wet gas? What's the infrastructural situation look like in the area?

Patrick McKinney

This is Pat. I'll take a stab at that. I think you're starting to get more color wrong now coming out. As Dave mentioned, the Clinton areas, there had been historic oil production in the area. We think in the areas that we're at, there's ample gas pipeline takeaway for what we're seeing. There's refinery down in Southern Ohio and there's a lot more existing infrastructure in there from prior development than I think a lot of people realize. So we don't see any issues, at least initially looking at it that, that's going to slow this play down.

Ronald Mills - Johnson Rice & Company, L.L.C.

Okay, and then Tom, as it relates to your funding options that you walked in -- I think you've mentioned most of those in the past, but in the sense the midstream LOC is pretty straightforward in terms of JVs and/or asset sales. I'm assuming on the JV side, you could do Niobrara and/or Utica, or maybe the Utica is too early at this point. And on asset sales, is it still -- given your past sales, are you still really almost limited to more your conventional Illinois production? I'm just trying to get a sense in terms of where those could be targeted.

Thomas Stabley

No, I think all those are correct. And I think in addition to that, we're going to take a look at the dry gas area that we have and possibly looking at selling down a portion or a small interest in that.

Operator

[Operator Instructions] There are no further questions at this time.

Thomas Stabley

Okay. Thank you, and on behalf of the Rex management team, I'd like to thank you all for participating in the Rex Energy Second Quarter 2011 Conference Call. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.

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Source: Rex Energy Management Discusses Q2 2011 Results - Earnings Call Transcript
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