Rex Energy Downgraded by RBC to Sector Perform Speculative Risk

October 4, 2017

Rex Energy (REXX) received an investment-rating downgrade Tuesday to sector perform with a speculative-risk qualifier from outperform from RBC Capital Markets, which cited concerns about the oil-and-gas company’s leverage and what is needed to get the company out of its elevated leverage position.

The firm also trimmed its price target on the stock to $3 per share from $4. The reduced target is still above the stock’s Monday closing price of $2.62. RBC previously didn’t have a qualifier on its investment rating for Rex Energy, but said the speculative-risk qualifier was added to reflect high leverage.

In a note to clients, RBC said “while we expect strong production growth in 2018, and spending should increasingly become more aligned with cash flow, we think a significant increase in commodity prices is needed to get REXX out of its elevated leverage position.”

The firm described Rex’s leverage as showing signs of improvement but remaining at elevated levels. “REXX has made commendable progress on improving its liquidity over the last few years through a combination of non-core asset sales, [joint ventures] and equitization of debt, but a large leverage overhang remains,” the firm said, noting it anticipates leverage will remain highly elevated in 2018 and 2019.

“The company has laid out future milestones that should improve its liquidity and help reduce leverage, including additional non-core asset sales (Western Lawrence, Westmoreland/Clearfield) and additional [joint ventures],” RBC said. However, the firm added, “we think the leverage problem can only be solved by higher commodity prices.”

RBC also said free-cash-flow generation “looks weak over the next few years,” noting a projected outspend of $22 million in 2018 and $4 million in 2019. “REXX needs to generate free cash flow in order to work down its leverage burden,” the firm said.

The firm also said it sees Rex as an unlikely takeout candidate. “One exit strategy for management would seem to be as a takeout candidate, but we don’t not see that as likely in the near term,” the firm said, adding “well results and cost control have been consistently solid, but we don’t see many logical Appalachian buyers in the current market.” The firm said it believes Rex “would have more success focusing on its non-core asset sales and finding [joint-venture] partners.”

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By Bryan Smith

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