Rex Energy Corp. will cut 2015 spending by 44% from this year's level, zero-in on its best assets in the Appalachian Basin and rely on efficiencies in its drilling program to grow year-over-year production by 33%.
The company had already tempered its outlook for 2015 on declining commodity prices, first announcing in November a preliminary plan would have reduced next year’s budget only slightly. (see Shale Daily, Nov. 5). It went further when it released formal guidance on Monday, saying 2015 capital expenditures (capex) would now be $180-220 million, down from this year’s budget of $350-365 million.
"Given the current commodity price environment, we feel that Rex Energy's 2015 capital budget allows the company to significantly grow production while also maintaining financial flexibility," CEO Tom Stabley said. "Our 2015 capital budget is designed to target our highest quality assets and we believe the continued production growth we anticipate in 2015, even at a reduced capital budget, continues to illustrate the quality of our asset portfolio and operational efficiency."
Other Appalachian operators have towed the same line thus far in announcing guidance for next year, with Range Resources Corp., Gastar Exploration Inc. and PDC Energy Inc. all electing to significantly cut 2015 spending and maintain production growth (see Shale Daily, Nov. 11; Dec. 10; Dec. 15). Rex has been drilling longer laterals across much of its acreage, drilling more wells at each pad and tightening downspacing in its key Butler Operated area in western Pennsylvania, all of which has helped grow its production this year. The company is aiming to exit 2015 with 196-205 MMcfe/d, which would come up slightly from this years goal of 143-149 MMcfe/d.
"The significant reduction in capex with minimal change to 2015 production should be viewed positively, although some may question what the slowdown means for 2016 volumes," said BMO Capital Markets analyst Phillip Jungwirth.
Rex will continue operating three rigs, with most of its spending -- up to $140 million -- going to its core Butler Operated area. Up to another $80 million will be dedicated to the Utica Shale in Ohio and the rest will be spent in the Illinois Basin. The company plans to drill 27-35 wells and complete 23-35. Rex also indicated that most of its production growth would come in the first half of 2015, when it expects to fill up available capacity at MarkWest Energy Partners LP's Bluestone and Sarsen processing facilities in Evans City, PA (see Shale Daily, June 2).
That left analysts wondering when production would flatten out next year.
"Rex noted it expects to fully utilize dedicated processing capacity at the Bluestone and Sarsen facilities near the end of 1Q2015 and guidance appears to indicate flattish production thereafter throughout 2015," Jungwirth added. "That said, Rex noted that the Bluestone III processing facility is expected to be in service in early 4Q2015, although it's unclear to us if capacity will be fully utilized with the slowdown in drilling activity, unless commodity prices rebound later this year."
Analysts at Wells Fargo Securities agreed and said they were modeling "slight declines" in Rex production after its processing capacity is filled early next year.
The company's bank group also amended its lending contract by limiting senior secured borrowings to 1.75 times the company's earnings before interest, taxes, depreciation, depletion, amortization and expenses. Rex said, however, that it does not plan to have any outstanding borrowings under its credit facility at the end of this year, which would give it flexibility under the new lending agreement.
In another effort to offset an increase in leverage next year, Rex also said it was pursuing the monetization of its 60% ownership interest in Keystone Clearwater Solutions, its water service subsidiary. It's also searching for a joint venture partner to help it develop the new Moraine East area in Butler County, PA, which it acquired in a deal earlier this year from Royal Dutch Shell plc (see Shale Daily, Aug. 13).