Rex Energy Off to a Fast and Furious Start

| About: Rex Energy (REXX)

Rex Energy Corporation (Nasdaq: REXX) is a small-cap lion on the prowl to find those elusive oil and gas pockets in some of the oldest regions left untouched and abandoned by many of the biggest companies.

Riding a wave of improved drilling techniques, better exploration technologies and soaring demand, Rex Energy is off to a fast and furious start as a public company. With oil and natural gas prices shooting to stratospheric heights, smaller companies with a track record and decent potential have enticed investors to take notice.

Since emerging through an initial public offering last summer from a melange of partnerships and tiny entities, Rex Energy has roared to life with a steady stream of announcements of added drilling acreage and project successes.

Industry analysts have issued favorable reports on Rex Energy, with Thomson Financial finding that the five firms following the company have given the stock either a “buy” or “strong buy” rating.

The trading range for Rex Energy shares since the late-July IPO at $11 has been fairly wide, with the low of $7.55 coming last Sept. 14 and the $17.95 high seen on Feb. 26, following the release of impressive fourth-quarter results, discounting one-time charges. Shares have declined since then (closing at $16.25 on Wednesday), mostly on the overall market’s sour mood and a speedup in the announced departure of company president Thomas Shields. The stock offering did allow Rex Energy to pay off three-quarters of its outstanding debt and set up a new credit line.

Unlike many of the oil giants that are based in Texas, Rex Energy’s offices are in State College, Pa., best known as home to Joe Paterno and Penn State University. Rex Energy is scoring some touchdowns with key explorations taking place in its back yard, the Appalachian region of western Pennsylvania and West Virginia.

In addition, Rex Energy operates in the Illinois Basin region of Illinois and Indiana, the New Albany shale deposit throughout southern Indiana, and in the Permian region found in Texas and New Mexico.

Technology is driving Rex Energy’s growth. For instance, in the Illinois Basin from the 1960s through the 1980s, Marathon Oil Corporation (NYSE: MRO), the former Texaco, Exxon Mobil Corporation (NYSE: XOM) and Shell developed surfactant-polymer projects that became cost-prohibitive when oil was trading far below $50 a barrel. At double that price, there’s money to be made from some of these difficult-to-deliver deposits. Rex is testing a process known as alkali-surfactant-polymer flooding that reduces production costs.

The oil and gas business has been abuzz over the potential of the Marcellus black shale formation that stretches from New York State into West Virginia. A Jan. 17 Penn State press release outlined research of geosciences professor Terry Engelder, performed in conjunction with his counterpart, Gary Lash, at SUNY Fredonia. They have “conservatively” estimated the Marcellus formation to contain 168 trillion cubic feet of natural gas, which could potentially amount to a staggering 516 trillion cubic feet.

Rex Energy holds lease rights to 46,000 net acres in western Pennsylvania, and president and CEO Benjamin Hulburt told analysts on a Feb. 25 conference call that “our goal in 2008 is to acquire an additional 20,000 to 30,000 net acres.”

In addition, Hulburt said, “I am pleased to report that we have begun testing our acreage in the first quarter of 2008 as planned for the Marcellus Shale. However, we are not yet in a position to discuss results as these wells are still being completed.”

Analyst Leo Mariani of RBC Capital Markets said in a Feb. 26 update to clients that he’s expecting the company to report on Marcellus “by April.” Mariani, who rates Rex at “outperform,” boosted his price target by 35% to $19 despite what he called a “slight miss” in the fourth quarter of 2007.

At year-end, Rex Energy reported that proved reserves in 2007 increased 10% to 15.9 million barrels oil equivalent. The company’s reserves totaled 18.5 billion cubic feet of natural gas and 12.8 million barrels of crude oil.

For the quarter ended Dec. 31, Rex Energy reported a loss of $10.6 million, or $0.34 per share, rising from a $1.5 million loss in the comparable 2006 period. However, excluding items, the company would have reported EPS of $0.06, beating the Thomson Financial consensus analysts’ estimate of $0.02 a share.

With average daily production of 2,831 barrels of oil equivalent, Rex Energy reported a 21% revenue increase to $16.1 million. Full-year revenue improved 46% to $57.8 million as production increased 31%.

Following release of the year-end results on Feb. 25, analyst Jack Aydin of KeyBanc Capital Markets upped his 12-month price target to $20 from $17, while reaffirming a “buy” rating. Aydin told clients that “we are getting more incrementally more comfortable with the resource upside this company holds and management’s execution in meeting/exceeding set targets.” He also said the fourth quarter was “better than we had anticipated.”

On March 6, Broadpoint Capital’s Tom Covington initiated coverage of Rex Energy with a “buy” rating, and a lofty $23 price target, citing the potential from the Appalachian region. The media price target of analysts surveyed by Thomson Financial is $19.50.

For investors wanting a small-cap oil-and-gas play, Rex Energy (REXX) might offer a chance to jump in. The lion might be a sleeping giant if it delivers a bigger product flow.

Disclosure: none