We are an independent oil and gas company operating in the Appalachian Basin and the Illinois Basin. In the Appalachian Basin, we are focused on our Marcellus Shale drilling projects. In the Illinois Basin, in addition to our developmental conventional oil drilling, we are focused on the implementation of enhanced oil recovery on our properties. We pursue a balanced growth strategy of exploiting our sizable inventory of lower-risk developmental drilling locations, pursuing our higher potential exploration drilling prospects, and actively seeking to acquire complementary oil and natural gas properties.
We were incorporated in the state of Delaware on March 8, 2007. We completed our initial public offering and the Reorganization Transactions in July 2007. Our common stock currently trades on the NASDAQ Global Market under the symbol “REXX”. The information set forth in this report is exclusive of our discontinued operations related to the Southwest Region properties, unless otherwise noted, which are classified as Discontinued Operations on our Consolidated and Combined Statements of Operations and Assets Held for Sale on our Consolidated Balance Sheets.
Our strategy is to increase stockholder value by profitably increasing our reserves, production, cash flow and earnings. The following are key elements of our strategy:
Employ Technological Expertise: Our strategy is to utilize and expand the technological expertise that has enabled us to achieve a drilling completion rate of approximately 99% over the last three years and has helped us improve operations and enhance field recoveries. We intend to apply this expertise to our proved reserve base and our development projects.
Develop Our Existing Properties: Our focus is to develop our asset base in both of our operating basins, including:
our Marcellus Shale natural gas play with approximately 90,000 gross (58,000 net) acres;
our Lawrence Field ASP Flood Project in Illinois; and
our inventory of approximately 348 proved undeveloped locations and proved developed non-producing wells.
Pursue Strategic Acquisitions and Joint Ventures: We plan to continue to acquire and lease additional oil and natural gas properties in our core areas of operation. We believe that our strong history of acquisitions, leading position in the Illinois Basin and technical expertise situate us well to attract joint venture partners and pursue strategic acquisitions.
Focus on Operations: We intend to focus our future acquisition and leasing activities on properties where we have a significant working interest and can operate the property to control and implement the planned exploration and development activity.
Reduce Per Unit Operating Costs Through Economies of Scale and Efficient Operations: As we continue to increase our oil and natural gas production and develop our existing properties, we believe that our per unit production costs will benefit from increased production in lower cost operations and through better use of our existing infrastructure over a larger number of wells.
Because of the volatility of commodity prices and the risks involved in our industry, we believe in remaining flexible in our capital budgeting process. When appropriate, we may defer capital projects to seize an attractive acquisition opportunity or reallocate capital towards projects where we believe we can generate higher than anticipated returns. We also believe in maintaining a strong balance sheet and using commodity hedging. This allows us to be more opportunistic in lower price environments as well as providing more consistent financial results.
Marketing and Customers
We market nearly all of our oil and gas production from the properties we operate for both our interest and that of the other working interest owners and royalty owners.
In the Illinois Basin, the majority of our oil is stored at well site tanks and sold to CountryMark Cooperative, LLP (“CountryMark”), a local refinery, currently at a premium to the basin-posted prices. This premium is provided to us due to our significant size in the basin relative to other local producers. The oil is purchased at our tank facilities from the refiner and trucked to refinery facilities. The revenue we derived from our sales to CountryMark for the year ended December 31, 2009 constituted approximately 77% of our oil and natural gas sales revenue from continuing operations for such period. As such, we are currently significantly dependent on the creditworthiness of CountryMark. We have taken steps to monitor the creditworthiness of CountryMark, including obtaining a letter of credit corresponding to a significant projected monthly revenue.
On December 30, 2009, we entered into a Master Crude Purchase Agreement (the “Master Crude Purchase Agreement”) with CountryMark. The agreement was effective as of January 1, 2010 and replaced in its entirety a letter agreement in place between us and CountryMark regarding crude oil purchases. Under the terms of the agreement, we agreed to sell, supply and deliver to CountryMark, and CountryMark agreed to receive and purchase from us, crude oil pursuant to purchase and sale order confirmations that we and CountryMark may enter into from time to time. Under the agreement, until we enter into a confirmation with CountryMark, neither party is under an obligation to purchase or sell any crude oil. Under the terms of the Master Crude Purchase Agreement, at least 120 days prior to the beginning of each calendar year, CountryMark is required to provide written notice to us stating the quantity, specifications and crude price for the crude oil that CountryMark wishes to purchase from us for the upcoming term commencing on January 1 of such year. If these terms and conditions are acceptable to us, we may enter into a written confirmation with CountryMark setting forth this agreement. Each confirmation will also set forth the price to be paid by CountryMark to us for each barrel of oil sold to CountryMark during the term of such confirmation and the oil and gas leases from which we will sell to CountryMark all crude oil produced and trucked during the term of the confirmation. The term of the Master Crude Purchase Agreement commences on January 1, 2010 and will terminate on January 1, 2011, provided that the term will automatically be extended for additional one-year terms unless, prior to October 1 of each year, either party gives written notice to the other. In connection with the execution of the Master Crude Purchase Agreement, we entered into Confirmation Number 1 with CountryMark for the period commencing on January 1, 2010 and ending on December 31, 2010. Pursuant to the Confirmation Number 1, CountryMark agreed to purchase all crude oil produced by us from a substantial majority of our oil and gas leases covering lands in the Illinois Basin.
During 2008, we constructed our own offload facility at a nearby crude oil pipeline operated by Marathon Oil Corp. that has enabled us to slightly diversify our purchasers. In the Appalachian Basin, our natural gas producing properties are located near existing pipeline systems and processing infrastructure. The majority of our production is transported over our own gathering lines to local distribution companies.
In the Appalachian Basin, due to its proximity to large east coast cities, we have generally received a premium over market prices for our gas production of approximately $0.25-$0.50 per Mcf.
We are in the process, in conjunction with a third-party partner, of constructing a high pressure gathering system and a cryogenic gas processing plant in Butler County, Pennsylvania. We expect that the cryogenic gas processing plant will service our wells and third-party wells in the area that produce natural gas with a high BTU content. The cryogenic gas processing plant is expected to decrease the BTU level of the gas to appropriate levels for distribution through a standard sales line. The by-products of the cryogenic gas processing plant are natural gas liquids which will be marketed separately.
Prices for oil and natural gas fluctuate widely based on, among other things, supply and demand. Supply and demand are influenced by a number of factors, including weather, foreign policy, industry practices and the U.S. and worldwide economic climate. Oil and natural gas markets have historically been cyclical and volatile in nature as a result of many factors that are beyond our control. There can be no assurance of what price we will be able to sell our oil and natural gas. Prices may be low when our wells are most productive, thereby reducing overall returns.
We enter into derivative transactions with unaffiliated third parties to achieve more predictable cash flows and to reduce our exposure to short-term fluctuations in oil and gas prices.