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 its 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 with 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, it holds good economics on the wet gas portion of their portfolio, and has a solid hedging program, which will allow it to continue to profit throughout the year even if gas prices fall.
Management has done a successful job to ensure it has enough liquidity to continue the drilling program while shifting the program toward its liquids-rich acreage. The recent deal to sell its 28% stake in the Keystone Midstream to MarkWest Energy Partners (NYSE: MWE) netted it $120 million. Adding to that it has some assets in the Rockies up for sale, all which should bring in additional cash, which will be used in the drilling program.
If there is a weakness about REXX, it's the concern about liquidity going forward if gas prices fall much lower. Not to worry though as management has effectively combated this issue with recent deals along with the upsizing of the credit facility, giving it the fuel needed to keep on drilling. At the current rate it has about three years of liquidity before it'll need to either start to cut back on the drilling program or find other sources of cash if commodity prices don't increase. We however project gas prices to increase in the coming year especially in the liquids Rex is drilling.
Fundamentally REXX is a strong company and after examining the 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 a lot 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.
- Revenue looks 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:
The stock is down 13.92% year-to-date but don't let that be a reason to avoid investing in REXX. Looking at the charts for Rex Energy, you'll notice that this stock has been printing higher lows since the stock bottomed at around $9.70 a share back in June. 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 toward 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.
Currently trading at $12.99 we believe REXX has a lot of potential to vastly outperform the market as it focuses more on its liquids-rich portfolio going forward. While it does have liquidity issues, we wouldn't be surprised to see it seek out a joint-venture partner in the near future if not simply be acquired. Rex is not the top dog, but it has plenty of room to run. We plan on holding shares until the company is either acquired or it is valued too richly to justify. We are very excited about this investment opportunity and foresee strong gains over the course of the next year and expect shares to rise to $22 per share in the next 12 months, a total net yield of 70%. That is if REXX is not bought out before then.
Disclosure: I am long REXX. 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.