Rex Energy Asset Sale Reduces Liquidity Concerns

| About: Rex Energy (REXX)

Summary

Illinois Basin asset sale fetched $40 million, with the potential for $50 million. This is slightly more than its estimated worth.

The Illinois Basin was a very high production cost asset, with a mid-$30s per barrel production cost. After adding in maintenance capital requirements, it was a play for $60+ oil.

Cash flow at $50 oil is expected to improve modestly. 2018 breakeven is estimated at $3.35 natural gas without preferred dividends and $3.50 with preferred dividends.

Liquidity seems okay after the sale, with projected credit facility usage (including letters of credit) at $115 million at the end of 2017 versus the current $190 million borrowing base.

Common equity value is still mainly an option on higher natural gas prices ($4+) as debt to EBITDA is still quite high if natural gas is below that price.

The Illinois Basin asset sale appears to be a positive one for Rex Energy (NASDAQ:REXX), mainly in terms of improving its liquidity. It is selling 76,000 net acres with oil production of 1,700 barrels per day for approximately $40 million (before closing and post-closing adjustments), with additional potential of up to $10 million during the next three years depending on commodity prices. This is a good price for the Illinois Basin asset as Wells Fargo estimated in June 2015 (when oil prices were around $60) that Rex may be able to fetch $35 million for that asset.

Effects On Rex

Rex is now a pure play Appalachian company after this asset sale. It only spent $15 million (7% of total) in capital expenditures on the Illinois Basin in 2015 and less than $1 million (3% of its total capital expenditures before reimbursements) there in Q1 2016.

The Illinois Basin assets were very high cost with an average production cost (excluding ad valorem and severance costs) of $33.63 per barrel in 2015 and $35.98 per barrel in Q1 2016. Due to the relative lack of investment, oil production also fell 12% in Q1 2016 versus Q1 2015.

Rex indicated that it expects its borrowing base to remain at $190 million after its current borrowing base redetermination and apparently including the Illinois Basin sale. This would be a pretty good achievement given that the Illinois Basin assets had a PV-10 of $38 million at the end of 2015. The ability to get more than PV-10 at $50 oil and also not have the borrowing base further reduced makes the Illinois Basin sale a positive for Rex.

2017 Outlook

The Illinois Basin sale has the effect of reducing Rex's projected 2017 revenue at $50 oil and $3 natural gas by around $31 million from my previous projections. In addition to the oil and condensate volumes going down significantly, the average price also goes down since the Appalachian Basin condensate fetches a lower price than the Illinois Basin oil.

Units

$ Per Unit

$ Million

Oil and Condensate

250,000

$41.00

$10

Natural Gas

46,116,600

$2.30

$106

NGLs (C3+)

2,177,700

$22.00

$48

Ethane

2,049,600

$9.00

$18

Hedge Value

$1

Total Revenue

$183

This is offset by various production and G&A costs going down by $25 million and maintenance capital expenditures declining by a bit as well. Rex is projected to have around $14 million in positive cash flow at $50 oil and $3 natural gas now, up from $10 million in my previous calculation, although part of that change is also due to the reduction in interest costs from its April 2016 note exchanges.

$ Million

Production and Lease Operating Expense

$98

Cash G&A

$19

Cash Interest Expense

$11

Capital Expenditures

$41

Total Expenses

$169

The modest improvement in positive cash flow at $50 oil makes sense since the Illinois Basin asset had quite high production costs. Without any capital expenditures, Illinois Basin production would be flirting with unprofitability at $40 oil. After adding in the capital expenditures required to maintain production level, it probably needs around $60 oil to breakeven.

After 2017

The sale of the Illinois Basin asset means that oil now has very limited influence on Rex's financials other than the potential correlation to the pricing of NGLs. A $10 change in the price of oil now has the same impact (excluding any change in NGL prices) on Rex's financials as a $0.05 change in the price of natural gas.

After 2017, Rex's cash interest expense increases to approximately $57 million again. This would put Rex's breakeven point before preferred dividends at roughly $3.35 Henry Hub natural gas along with a realized price of $26 for NGLs and $11 for Ethane.

The preferred dividends currently amount to $6.9 million per year. This adds approximately $0.15 to Rex's required natural gas breakeven point, so the breakeven point would be around $3.50 natural gas with the preferred dividends included and independent of any accumulated dividends that need to be paid.

Liquidity Calculations

Rex Energy expects its credit facility borrowing base to be maintained at $190 million after its borrowing base redetermination and including the effect of its Illinois Basin sale. It had $25 million in cash at the end of Q1 2016 and $199 million in outstanding borrowings and letters of credit under its credit facility. Between the Illinois Basin proceeds and positive cash flow, Rex may be able to reduce its outstanding borrowings and letters of credit to around $115 million or less by the end of 2017, assuming a minimal amount of cash on hand. This should give it a bit of room with its credit facility to handle the potential modest cash burn in 2018 if natural gas isn't quite at $3.35 yet.

Conclusion

The Illinois Basin sale gives Rex some breathing room with its credit facility and should put it in decent condition to avoid liquidity problems (assuming that its borrowing base isn't significantly reduced in the future) once its interest expense goes up in 2018 again. The Illinois Basin asset wasn't much of a benefit financially at current oil prices, although it could have contributed well if oil went back up to $70.

Rex's debt to EBITDA levels remains high though despite the debt reduction, so the common equity probably still needs around $4 natural gas before it has intrinsic value. The benefit of the Illinois Basin sale is that it does give Rex some more time to potentially get to a period where natural gas is $4+.

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