Rex Energy's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Rex Energy (REXX)

Q1 2012 Earnings Call

May 02, 2012 10:00 am ET

Executives

Thomas C. Stabley - Co-Founder, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Director

Patrick M. McKinney - President and Chief Operating Officer

Analysts

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Jack N. Aydin - KeyBanc Capital Markets Inc., Research Division

Ronald E. Mills - Johnson Rice & Company, L.L.C., Research Division

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Michael Scialla - Stifel, Nicolaus & Co., Inc., Research Division

Unknown Analyst

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Rex Energy Corporation's conference call to discuss the company's first quarter 2012 financial results. [Operator Instructions] I would now like to introduce Tom Stabley, Chief Executive Officer of Rex Energy.

Thomas C. Stabley

Good morning, and thank you for joining us for the Rex Energy first quarter 2012 financial and operational update call. With me on the call today is our President and Chief Operating Officer, Patrick McKinney. We've hoped you had the time to review yesterday's 2012 first quarter operational and financial release. Today's discussion will include forward-looking information and reference to non-GAAP financial measures. Issued a further disclosure in 2011 Form 10-K and other SEC filings regarding factors that could cause our future results to differ from forward-looking information.

Moving to Slide 2. A reconciliation of non-GAAP financial measures can be found our website and our 8-K filed yesterday with the SEC. We've also included additional information in the presentation materials posted on our website to help you analyze the company's performance.

Moving onto Slide 4. Beginning on Slide 4, we have a summary of highlights for the first quarter. Production for the first quarter came in at 60.7 million cubic feet equivalent per day, which is 1% above the high end of our previously issued guidance of 60 million cubic feet equivalent per day. The beat was a combination of the strong performance from our non-operated Marcellus wells in Westmoreland County, Illinois production related to a mild winter and continued strong performance from our core assets in Butler Operated Area. We remain very encouraged with the performance of the most recent 7 wells in Westmoreland County after their first 120 days, which has exceeded our 4.2 BCF type-curve by over 50%. With our 23% production increase over the fourth quarter, Rex has now had 6 consecutive quarters of double-digit growth.

Also contributing to the strong production performance is the Drushel #3H well in Butler County. This well was completed over a year ago with the company's new "Super Frac" design and was tested along with 2 other wells during our 2011 program utilizing the same technique. The combination of higher sand concentration, reduced cluster spacing has resulted it in an EUR for the well of approximately 8.8 BCFE. We are continuing to test the "Super Frac" design and most recently fracked our 2 Carson wells with 4,000-foot laterals using this method. These 2 wells will be placed in the sales with the commissioning of our second jointly-owned cryogenic plant, which is scheduled for the start-up at the end of May.

I'm also pleased to announce that we have closed on our 15,000 acres in the Warrior Prospect in Carroll County Ohio, and have begun drilling operations on our first well in this area, the Brace #1. Completion operations for this well are currently scheduled for June of this year. In addition to our 15,000 acres in Carroll County, we have now completed acquirement agreement located in the tri-county area of Noble, Guernsey and Belmont Counties. The agreement includes 4,500 gross, 2,800 net acres and will be referred to as the Warrior South Prospect. This will bring our total Ohio Utica acreage up to approximately 17,800 net acres. Our initial commitment under this farm end is to drill and complete 1 horizontal well and commence the drilling of 2 others by November 15. We have adjusted our drilling plan accordingly to allow for 1 of 3 budgeted wells for the Warrior Prospects to be completed in the Warrior South area and the remaining 2 in the Carroll area. This will not change the full-year budget.

In addition to the acreage added in Ohio, we also added 3,300 net acres in Marcellus, including 1,200 in our Butler operated area with the remainder mostly in Westmoreland Counties. Including our farm end agreement in the Warrior South Prospect, we have added approximately 6,100 net acres in the Appalachian Basin during the quarter. Similar to last year's leasing plan, we will be very opportunistic at adding good quality acreage that is accretive to our existing positions and focus predominantly on liquids opportunities.

In regards to the company's current May borrowing base redetermination, we remain very encouraged with the process and we'll update the market in the next several weeks. Lastly, as previously announced, Rex is actively evaluating potential opportunities to invest its jointly-owned midstream assets in its Niobrara assets. The marketing process for each of these initiatives continue to progress and based on the current status and anticipated timing of the potential transaction, the company expects to provide an update to the market on these planned asset divestitures within the next 2 weeks.

Moving to Slide 5. Moving to Slide 5, there are some points I would like to highlight. As stated earlier, our average daily production increased 23% over the fourth quarter, with oil and NGL accounting for 26% of our production. Lease operating expenses for the quarter, excluding the onetime $2.8 million for the retroactive portion of the new Pennsylvania impact fee or $9.5 million or approximately $1.72 per Mcfe. $1.72 per Mcfe is a 40% reduction in LOE on a per unit basis over the first quarter of 2011. Included in $1.72, we did record approximately 600,000 to begin accruing for the 2012 impact fee, which will be recorded and spread throughout the year as each new well is spud for accounting purposes. We treat this as lease operating expenses.

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