This article has been updated from its original post on June 14, 2016 (4:46 PM CST)
Rex Energy Corp.’s (NASDAQ: REXX) departure from the oily Illinois Basin will put the company on track to become a pure play Appalachia producer, though some analysts say it sold out on the cheap.
Rex has struggled to keep the Illinois Basin economic, with oil revenues falling by 41% year-over-year in the first quarter of 2016. Along with its need to pay debt, that may have been a factor in its sale of the 76,000 net acres in Illinois, Indiana and Kentucky.
Rex said June 14 it has an agreement to sell its acreage for $40 million with up to $10 million more in proceeds depending on the value of commodity prices. Buyer Campbell Development Group LLC could not be reached for comment.
So far in 2016, Rex’s drilling has been focused in the Appalachia, where it put eight net wells into service in first-quarter 2016. In the Illinois Basin, Rex did not drill or complete any wells.
Rex said the Illinois assets produce about 1,700 net barrels of oil per day (bbl/d). In the first quarter, Illinois Basin production was 158.3 Mbbl compared to 179.8 Mbbl/d for the same period in 2015.
“The decrease in production in Illinois is primarily related to the natural decline of our conventional oil producing properties in conjunction with shutting in certain wells that are marginally economic,” the company said in securities filings. “We are currently evaluating strategies to reduce the production declines in the Illinois Basin and will continue to be opportunistic with new well development.”
Brian Velie, senior analyst at Capital One Securities, said the assets’ modeled value was $100 million, including an estimated $20 million of annual EBITDA.
“On a more positive note, REX's share price did not previously reflect much value for the Illinois assets and shedding the only piece of the portfolio outside of the Appalachian Basin focuses the company's efforts on its core,” he said.
Most of Rex’s revenue comes from its core Appalachia holdings.
Other analysts said the sale price was in line with expectations of about $46 million in net asset value.
Cash from the sale also improves the company’s liquidity and, after closing the deal, the company expects to maintain a $190 million borrowing base.
“The deal provides much needed liquidity over the near term,” said Gordon Douthat, senior analyst, Wells Fargo. The sale “should alleviate some of the burden of high production costs out of the Illinois Basin.”
Rex said it received an average $30.45/bbl in the first quarter for oil that cost nearly $36/bbl, compared to $45.53/bbl in first-quarter 2015 and costs of $33/bbl.
Based on the purchase price, Rex received $23,500 per flowing bbl/d for the basin with no credit for the acreage, Douthat said.
To further reduce debt, the company has also exchanged senior notes for senior secure second lien notes due in 2020. It has also renegotiated debt and exchanged stock for notes.
The company has struggled with overspending and debt. The company’s capex was $167 million last year. In 2016, the company has lowered its capex to $15 million to $40 million with the assumption that it will employ one rig.
Douthat said subtracting the burden of high production costs out from the Illinois Basin should shave about 31 cents/Mcfe from production costs.
The company has also seen a steady decline in well costs, with Marcellus well costs down roughly 16% to $4.8 million at the end of 2015 compared to 2014.
In the Appalachian Basin, the company has 109,100 net acres and 1,110 net liquids-rich drilling locations. After first quarter production of 200 million cubic feet equivalent per day (MMcfe/d), the company is estimated an increase to about 205 MMcfe/d at the midpoint.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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