Significant growth in the Appalachian Basin, combined with higher finding and development costs in Kentucky’s Illinois Basin, dragged down profits at Rex Energy last year, but with production climbing and a backlog of wells set to come online soon, the company expects drastic improvements this year.

Regional pricing pressures didn’t discourage the Pennsylvania-based company from increasing 4Q2013 production by 12% to 110.4 MMcfe/d from the previous quarter, while full year production was up 38% over 2012 to reach 92.7 MMcfe/d. Oil and natural gas liquids (NGL) production increased last year by 59% over 2012 as well.

Company officials offered no new well results when they joined analysts for a fourth quarter conference call Thursday, but they noted that additional processing capacity in Pennsylvania and a series of wells they have planned for sales in the months ahead will significantly improve operating results this year.

“We have a substantial inventory of wells that will impact second and third quarter production,” CFO Michael Hodges said. “We expect quarter-over-quarter growth to be well into the double digits for both the second and third quarter.”

Rex has filled its existing 90 MMcf/d of processing capacity at MarkWest Energy Partners LP’s Sarsen and Bluestone facilities in Western Pennsylvania. The Bluestone II facility is expected to be commissioned in 2Q2014, and with the addition of another 48 MMcf/d of residue gas transportation secured in the Marcellus Shale, Rex plans to bring 10-12 new wells into sales by the end of the second quarter in its Butler operated area there.

“The exact timing of the Bluestone II plant will certainly affect our expected second quarter results, but with nine wells expected to come online in the Ohio Utica and 10-12 wells expected to come online in the Butler operated area in the second quarter, the second and third quarter of 2014 will be periods of accelerated growth for Rex Energy,” Hodges said. “We expect capital spending for 2014 to be slightly weighted to the front half of the year as we complete a large number of wells in the Ohio Utica and Butler operated areas.”

The company is currently drilling the third of three wells on its Schilling pad in Western Pennsylvania, with each being drilled at an average lateral length of 5,800 feet — the longest horizontal runs the company has yet executed in the area.

Rex also will begin completions and put wells into sales in its Warrior North prospect in Carroll County, OH. In its Warrior South prospect, in Guernsey, Noble and Belmont counties, Rex said it expects to start drilling operations on the six-well J. Hall pad next quarter, with plans to complete it in 3Q2014 and put it into sales late this year.

“[Rex’s] Appalachian Basin execution continues to be strong, but the stock continues to underperform Marcellus peers,” said Phillip Jungwirth, a financial analyst at BMO Capital Markets. “We attribute this to its lower relative returns and basis concerns. These issues will likely remain a headwind, but Marcellus returns could see improvement with longer laterals, and Utica well costs have the potential to be reduced.”

Rex reported a 4Q2013 loss of $13.9 million (26-cents/share), up from a 4Q2012 loss of $1.3 million (3-cents/share). In 2012, the company reported a full-year $56.4 million ($1.09/share) profit, but said significant production growth in Appalachia and higher development costs in the Illinois basin meant an overall loss of $1.9 million (4-cents/share) last year.

Specifically, the company incurred a non-cash impairment of $30 million in 4Q2013 as a result of its Illinois basin program. Costs there stemmed from a decline in the expected future prices of crude oil and a planned bump to its capital spending for the program. The impairment raised depreciation, depletion and amortization (DDA) costs to $2.32/Mcfe at the wellhead in 4Q2013. For the full year, DDA costs went from $18.5 million in 2012 to $63.9 million in 2013.

“We expect per-unit DDA expense will normalize at approximately $2/Mcfe in the first quarter of 2014,” Hodges said.

Production at some of the company’s bread-winning wells, such as the five-well J. Anderson pad in its Warrior South prospect in Ohio — brought online in 4Q2013 — impressed analysts. The J. Anderson has gone on to produce at an average per-well 30-day sales rate of 1,721 boe/d. At its six-well Baille Trust pad in Western Pennsylvania, which the company brought online last year, the average 30-day sales rate per well is 5,192 Mcfe/d.

Company officials said they expect to realize better gains from existing production in 1Q2014.

“Our realized gas price, before hedging was less than 25-cents off the average price of Henry Hub natural gas,” Hodges said. “This is despite regional pricing pressure that producers experienced during the fourth quarter. We expect in the first quarter of 2014 that realized price differentials will be very strong as winter weather has neutralized some of the short-term basis differential issues.”