Rice Energy: Likely Undervalued

Rice EnergyRice Energy (NYSE: RICE) is an independent natural gas and oil company. As of the July 3 market close, shares were trading at $29.09/share, giving the company a market capitalization of around $3.73 billion. Shares in the company have fallen over 12% in the past month, providing value investors with an opportunity to pay 73 to 97 cents on the dollar.

What the Analysts Are Saying

97 cents on the dollar might not sound too exciting, but it represents a nice margin of safety. According to the Financial Times, over 20 polled investment analysts, the consensus was that the company would outperform the market. Additionally, over 14 analysts offering 12-month price targets for the company, the median target stood at $35/share, equating to an increase of just over 20% from the last market close price of $29.09/share.[1] Buying the stock at around $29.09/share should give you minimal downside and an attractive upside with seemingly low risk.

Summary of Operations

As per the company’s website, Rice Energy is engaged in the acquisition, exploration and development of natural gas and oil properties in the Appalachian Basin. The company claims to be an early identifier of the core of both the Marcellus Shale in southwestern Pennsylvania and the Utica Shale in southeastern Ohio.[2]

Michael Fitzsimmons, a Seeking Alpha contributor, published a detailed article on the operations of Rice Energy.[3] Some of the main points were as follows:

  1. The company released test results of its first Utica well in early June, the Bigfoot 9H. The results of the well outperformed estimates significantly.
  2. The company is sitting on 46,000 net acres in the “sweet spot of Utica”, the “Point Pleasant Core”.
  3. The company could double production this year, and has “excellent access to interstate pipeline exit capacity and is realizing good prices”.
  4. The company has good drilling technology, access to capital and a strong joint venture partner (namely Alpha Natural Resources).
  5. The company’s management are well-aligned with the interests of other shareholders, with a management stake worth about a third of the company (including the Rice family’s interests).

Michael’s claim that the shares “could easily rise 50%” over the next 12 months might sound a little optimistic, but it is true that the company has strong upside potential; it has a great platform in place for future success. A useful overview of the company’s operations can be found in its RBC Global Energy & Power Conference presentation, published in early June.[4]

Closing Comments

Rice Energy certainly seems like a buy right now. Investors considering entering the stock now may gain some additional confidence in hearing that Citadel disclosed a 5.5% stake in Rice Energy in mid-June, when the stock was trading at $31.69/share, a level almost 9% higher than today’s price.[5]

Rice Energy cannot be described as a zero-risk investment of course, but the risk/reward profile is certainly sound. By buying the stock now at a price similar to the July 3 market close price, it is very unlikely that money will be lost; it is likely that at least a satisfactory return will be obtained within the next 12 months, with an outperformance of the overall market not unlikely. If there ever was a time to enter the stock, it would probably be now.

References

1. http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=RICE:NYQ
2. http://riceenergy.com/
3. http://seekingalpha.com/article/2256573-rice-energy-monster-bigfoot-well-is-the-uticas-biggest-yet-shares-have-50-percent-upside
4. http://riceenergy.com/media/RICE%20Energy%20RBC%20Investor%20Presentation%20-%20Final%20June%203%202014.pdf
5. http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&ref=9657797&type=HTML&symbol=RICE&companyName=Rice+Energy+Inc&formType=SC+13G&dateFiled=2014-06-17

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