Should This Energy Underdog Take These Threats Seriously?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
(This article is part 5 in a series drilling down into Rex Energy through a SWOT analyis)
Rex Energy
Threats
Commodity prices
While Rex is well hedged for next year, a plummet in commodity prices could really affect the company. Right now liquids are the hot commodity and their growing opportunity here is threatened by price. They?ve only hedged 27% of their total liquids production though 2013, with most of that being propane.
Just one quarter ago, several companies experienced significantly lower NGL prices. In one example, Linn Energy
Access
As a small company Rex will always struggle with access. On their last 10-Q they list ?availability of gathering and transportation pipelines and processing and other midstream services? and ?availability of equipment, such as drilling rigs and related equipment and tools? as two of their risk factors. Access to adequate midstream services is important, and that?s why their deal with Markwest
Environmental and Legal Risks
Again from the 10-Q, they list ?effects of government regulation, permitting, and other legal requirements,? ?environmental risks,? and ?uncertainties associated with our legal proceedings and their outcome.? In Pennsylvania, for example, the state instituted an impact fee that adds a cost to each well drilled. Additional regulatory burdens could be added. In Ohio they have old laws that are sure to be supplemented, much as they have been in the keystone state. The list goes on of what could be, and while none are specific to Rex, the potential is for a greater impact due to their small size.
Economic Recovery
On March 6, 2009, in the depths of the credit crisis, Rex?s stock price hit a dollar twelve a share. That?s after hitting a high of $28.78 on June 18 of the previous year. To say Rex?s stock is driving by the winds of the economy and the market is an understatement. Again going to the 10-Q, they list the usual suspects, such as ?uncertainties regarding economic conditions? and ?difficult conditions and uncertainties in the capital and credit markets.? From their history those risks are real, and another recession at the wrong time could really affect the stock price and the operations. The company is well funded for the next year or so, but a prolonged economic slowdown would hurt.
Utica Unknowns
Chesapeake (NYSE: CHK)
A lot is riding on the Utica, and Rex has received several analyst upgrades, in part due to the resource potential of this play. If the Utica fails to deliver on all the hype it could put a damper on Rex?s liquids growth plans. Not only that, but it could severely impact their ability to grow as the assets are written down and sunk costs are lost. It would be a severe blow to the company.
Bottom Line
The good news is that the early indications are that the Utica Shale is for real. Rex should release additional production results in their third quarter report and we should soon know their 2013 capital plants for the play.
Investors still should take this threat seriously as exploration and production is fraught with risk. Companies drill dry holes and once promising plays turn out to be economically unviable. The rewards, however, are great if a company finds itself in a great position and we?ll know very soon if that?s Rex.
Source: http://feeds.fool.com/~r/usmf/foolwatch/~3/w8LNNX6Aj8s/story01.htm
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