Natural Gas Roars, See Rex Energy

| About: Rex Energy (REXX)


Fundamentals in nat gas delayed, but still in place.

Takeaway pipelines & contracts lead to improved and raised realized prices.

Improved balance sheet.

Enhanced liquidity for production growth at higher realized prices.

Rex Energy (NASDAQ:REXX) surges on natural gas (NYSEARCA:UNG),

In Q4 '16, I got long REXX (Rex Energy) and described why here. I also explained my long thesis for natural gas too. As we emerge from winter, many across North America haven't noticed we had one! We've just had the most mild weather on the continent in the last 80 years. Google is flush with headlines if you don't believe it. I live in Lake Tahoe, where record snow obscured these meteorological records.

I had argued that too many investors and prognosticators had been focused on local and/or domestic markets, and weather, most oblivious to the takeaway. I never argued the former wouldn't affect nat gas pricing, but I did argue the latter would prevail, eventually. Perhaps it should have been stated that "records" in either direction - production, weather, whatever - will exert directional pressure as the case may be. During this winter, weather records suppressed demand, obviously. Withdrawals from storage eased as a byproduct of below normal HDDs (what would have been normal heating days) and allowed prices to moderate.

In spite of the obvious, storage levels dropped back into their 5-year average. The EIA report chart below shows the 5- year average in storage inside of the 'grey band'. The dotted line shows rolling average over 5 years. Headlines mislead. And while misinformation may be no surprise, investor reaction is unwarranted. There exist mountains of data on the growing uses for nat gas; this link is just another example.

Under The Hood:

REXX was equally active on the equity roller coaster - and not only in terms of its price or the swings of Henry Hub. Its corporate actions have caught some investors by surprise. But fret not; REXX has remained in good shape by outperforming guidance, shoring up its balance sheet/controlling liabilities, and guiding to higher production and realized pricing.

By way of realized pricing, Elephant Analytics opined and reported in January on REXX. Then CEO Stabley was quoted, "Rex believes that its natural gas liquids (C3+) will fetch approximately 43% to 48% of WTI pricing in 2017 due to improvements in local differentials, compared to approximately 37% in Q3 2016." But as of its 8-K on April 24, 2017, Stabley refreshed his/our company's performance:

"Our first quarter 2017 results are the first step in achieving our two-year plan for 2017 and 2018. One of the most important highlights of the quarter was our price realizations, with the strong results underlining the importance of our marketing initiatives and current marketing portfolio. With a full year of Gulf Coast transport and improved differentials in the northeast markets, we expect to see improved realizations throughout the year and will continue to pursue further enhancements to our marketing portfolio to further improve our realizations... The company continues to expect full-year 2017 realized C3+NGL prices to average approximately 50% - 55% of WTI {emphasis added}." [Bold are author's annotations]

This represents ~16% improvement in price realization over forecast just 3 months earlier.

The proof is in the data. Below is the REXX 8-K report on price realizations. Bold highlights are author's annotations.

March 31,



Average price per unit:

Realized natural gas price per Mcf - as reported





Realized impact from cash settled derivatives per Mcf




Net realized price per Mcf





Price Improvement


Realized NGL (C3+) price per Bbl - as reported





Realized impact from cash settled derivatives per Bbl




Net realized price per Bbl





Price Improvement


Realized ethane price per Bbl - as reported





Realized impact from cash settled derivatives per Bbl



Net realized price per Bbl





Price Improvement


Realized condensate price per Bbl - as reported





Realized impact from cash settled derivatives per Bbl(3)



Net realized price per Bbl





Price Improvement (due to derivative in 2016)


Realized gas equivalent price (per Mcfe) - as reported




Price Improvement


Shoring up liabilities is paramount and in doing so there was much consternation over REXX's reinstatement of its preferred dividend. It is imperative for investors in common equity to appreciate the maneuvers, and, in this instance, appreciate the move which was a net positive for equity holders.

A preferred is a hybrid debt and equity instrument and before the common could be free from its bludgeoned past; preferred holders' arrears need to be brought current. This is a positive move, however, as a current equity holder, I lamented the arrears were initially going to be paid in cash versus in equity (i.e. dilution). Yes, I was heard, and it is now to be paid in cash. REXX will roar!

More information can be read about the preferred when it was issued here. A few essentials to appreciate are that the preferred holders are massively underwater. Their conversion to common is at $18/share (not split adjusted which is important because after the recent reverse split, the conversion will be $180/share) - a massive distance from any threat of dilution. And if REXX hits my forecasted price point, a home run, I will be thankful. Batter up!

In any event during the fateful years, REXX announced its dividend suspension. The move preserved essential cash without default. The pain was borne by the preferred holders alone, but their arrears claims are just now coming back as REXX recovers. The point here… REXX recovers. The reinstatement of the preferred dividend is found here. REXX will roar and remember, it will be paid in cash not diluted equity. This speaks volumes on management's confidence.

The final consternation was the required reverse stock split. This is a non-issue - just housekeeping. I read in dismay comments blasting fellow shareholders' questions. Quite simply, REXX had to do this to meet listing requirements (and preserve our liquidity). Nasdaq requires companies' equity trade over Penny Stock Status. That means over $1/share. It means nothing in terms of overall value, but everything in terms of our liquidity and the company's access to capital. Thankfully, this measure passed in the recent shareholder meeting. Have no fear: on May 16, if you had 1000 shares, you will then have 100, but the value will be the same.

8-K May 5, 2017: Proposal Five - Amendment to the Company's Certificate of Incorporation to Implement a Reverse Stock Split of the Company's Common Stock, solely at the discretion of the Board

The Company's common stockholders approved a grant of discretionary authority to the Board to effect an amendment to the Company's Certificate of Incorporation to implement a reverse stock split of the outstanding shares of the Company's common stock at a reverse stock split ratio between 1-for-5 and 1-for-10, with such ratio determined by the Board in its sole discretion (the "Reverse Stock Split Proposal"), as described in the Company's definitive Proxy Statement filed with the Securities and Exchange Commission on April 4, 2017.







Much MORE Under the Hood:

Last week, with the price of everything and anything relating to energy getting beaten indiscriminately and discarded to the woodshed, REXX too capsized. The pain was nearly unbearable for the unwitting or unknowing. For investors who saved pennies for rainy days, long positions were aggressively added. More news broke! Liquidity concerns washed away! Capex is now planned to grow faster, forecast production is greater, and all delivered at even higher realized prices ahead.

On May 1st, REXX announced that it has closed an agreement with Angelo Gordon for a new $300 million first lien delayed draw term loan. It's not cheap $, but it's less than my credit cards charge me! Here are the main points:

  • Interest of LIBOR + 8.75% on drawn amounts and maturing in April 2021.
  • Initial borrowings of approximately $144.0 million under the term loan were used to repay all outstanding loans and obligations under the company's previous senior secured credit facility.
  • Place approximately $19.3 million of cash on the balance sheet.
  • Adds $46.5 million for outstanding undrawn letters of credit.
  • REXX will have approximately $110.0 million of additional capacity under the term loan, which will be available for the development of the company's core assets and general corporate purposes.
  • The term loan permits the issuance of up to an additional $100 million in secured first lien debt for purposes of additional reserve development and acquisitions, positioning Rex Energy well for years to come.

The Trade and How to Express your Opinion:

As explained in my first article on REXX, then and still for a brief time remaining a penny stock, REXX can be bought for under $.50 a share as of Friday's closing. Options sit this one out as the equity is the perpetual option. My truck is loaded now below $.40, but that matters not. With some cooperation from energy markets, uses and exports too, REXX will be much higher. If I were infallible, I would have sold all at $.90 on January 18th and reloaded all last week, but I gather such is for liars or fools. I am looking for much, much higher. That which makes legends of home runs.

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Disclosure: I am/we are 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.

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