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Earnings, Production, Propane: It's All Good News for Rex Energy

Rex Energy Corp. reported an 11% increase in production in 1Q2014 compared with 1Q2013, a 15% increase in propane price realizations, and earnings per share well above consensus estimates during a conference call with analysts Wednesday that was overflowing with good news.

"We continue to drive capital costs down, building upon the cost reductions we saw last year, and we believe there is further room for improvements," CEO Tom Stabley said.

The State College, PA-based exploration and production company reported 1Q2014 production of 122.2 MMcfe/d, 4% above the high end of its 115-118 MMcfe/d production guidance and a whopping 62% increase compared with 1Q2013. Total production included oil and natural gas liquids (NGL) production of 6,200 boe/d.

Before the effects of hedging, realized prices in 1Q2014 were $93.07/bbl for oil and condensate, $5.23/Mcf for natural gas and $58.64/bbl for NGLs. Contributing to the strong NGL price realizations was the effect of strong propane prices; propane price realizations, before the effects of hedging, were $1.37/gallon, an increase of 15% compared to 4Q2013.

Rex had hinted in March that the momentum gained during the first quarter would land it at the high end of its 115-118 MMcfe/d production guidance for the first three months of this year (see Shale DailyMarch 28).

Rex officials highlighted increased lateral length in the Marcellus Shale. "Operationally, we have increased our lateral length this year, with the majority of our wells being drilled with an average lateral length of above 5,000 feet," Stabley said. "Last year, the majority of our wells were drilled with lateral lengths below 5,000 feet." The company also plans to increase the number of wells per pad to 3.9, compared with 2.5 wells per pad in 2013.

"In addition to testing stack and offset multizone development, we're also focused on increasing EURs [estimated ultimate recovery] and lowering per-well unit costs," said COO Patrick McKinney. "The first step is to increase lateral lengths of the wells...we feel we have turned the corner on lengthening our laterals as a majority of our wells in 2014 will be drilled to an average lateral length of 5,000 feet or greater...moreover, we'll have 10 wells drilled with lateral lengths of over 6,000 feet in 2014."

Rex reported 1Q2014 net income of $10.4 million (17cents/share), up from a 1Q2013 loss of $2.4 million (minus 5 cents). Operating revenues from continuing operations were $96.6 million, an increase of 104% over 1Q2013.

On Tuesday, Rex also announced the execution of two separate binding precedent agreements with Dominion Transmission Inc. and Texas Gas Transmission LLC to transport natural gas volumes from Rex's Butler operated area in Butler County, PA to the Midwest and Gulf Coast.

"With these new agreements in place, we have established takeaway capacity for all of our expected production from the upcoming Bluestone II processing facility and a portion of the production expected from the future Bluestone III and Bluestone IV processing facilities in our Butler operated area," Stabley said. MarkWest Energy Partners LP's Bluestone II facility in Evans City, PA, near the Butler operated area (see Shale DailyMay 9, 2012) is on track to be commissioned by mid-May, giving Rex an additional 100 MMcf/d of processing capacity. The transportation agreements "represent a significant milestone for Rex Energy," allowing the company "to capitalize on strong price realizations for natural gas at the Gulf Coast for years to come."

The transportation agreement executed with Dominion would allow for expanded capacity on about 235 miles of existing Lebanon West II Project pipeline from from Butler to the Lebanon interconnect in Warren County, OH. Under the agreement, Rex secured firm transportation for 130,000 MMBtu/d for a period of 20 years beginning in late 2016. The project woulf allow Rex to move residue gas west from the Butler area to access premium markets in the Midwest and Gulf Coast.

The agreement with Texas Gas would allow for expanded capacity on about 690 miles of existing Ohio-Louisiana Access Project pipeline from the Lebanon nterconnect in Warren County to the Gulf South Bosco Meter, which would access the Perryville Exchange, in Perryville, LA. The agreement secures for Rex firm transportation for 100,000 MMBtu/d, again for a period of 20 years beginning in 2016. "Once this expansion is complete, Rex will be able to transport its residue gas south from the Lebanon Interconnect to access premium Gulf Coast markets, including future LNG [liquefied natural gas] export facilities constructed in the Gulf of Mexico," the company said.

Rex's production guidance for 2Q2014 is 125-135 MMcfe/d, and for full-year 2014 is 143-149 MMcfe/d. The second quarter production results "will be largely contingent upon the timing of the startup of the Bluestone II facility," the company said. The midpoint of the production guidance assumes the plant would be operational in May, as scheduled.

Rex made operational capital investments of close to $93.3 million in 1Q2014, with $82.1 million funding Marcellus and Ohio Utica operations and $11.2 million to fund conventional drilling, water flood enhancement and facility upgrades in the Illinois Basin. The Marcellus and Utica investment funded the drilling of 10 gross (7.9 net) wells, fracture stimulation of 22.0 gross (15.3 net) wells, placing nine gross (6.5 net) wells into sales and other projects related to drilling and completing wells in the Appalachian Basin. Of the 22.0 gross wells that were completed in 1Q2014, Rex had 11.0 resting at the end of the quarter in the Butler operated area awaiting commissioning of the Bluestone II facility. The Illinois Basin capital investment funded the drilling of one gross (1.0 net) well, fracture stimulation of 13 gross (13.0 net) wells and placing 13 gross (13.0 net) wells into sales and other projects related to drilling and completing wells.

Rex has said it expects full-year 2014 capital expenditures to be $350-365 million.

Analysts and investors seemed impressed by the news. The opening of Bluestone II in May sets the company up "for large ramp starting in 2Q2014," according to Wells Fargo, and BMO Capital Markets analysts said they viewed the company's share as inexpensive. "We expect longer laterals to drive improved results and see upside to production guidance for the year," BMO said. Rex shares, which ended the trading day Tuesday at $20.74/share, opened Wednesday at $22.00.

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