Rex Energy Investors: You're Getting Killed By This Downgrade, Risk Outlook

• Stifel has downgraded Rex Energy Corporation REX, sending shares plummeting 10 percent.
• Stifel sees “financial risk” and ballooning debt ahead for Rex in 2016.
• The downgrade comes on the heels of Stifel’s latest bleak natural gas price outlook.

Shares of Rex Energy are getting hammered by more than 10 percent on Tuesday following a downgrade coupled with a bleak outlook from Stifel analyst Michael Scialla. Despite an already battered share price, Scialla sees plenty of downside remaining for Rex and major financial risks ahead for the company in 2016.

The Downgrade

Stifel has downgraded Rex from Hold to Sell in the wake of the firm’s latest natural gas price forecasts. Stifel believes that gas prices will remain depressed in the near future, a development that will have a devastating impact on Rex.

Interest Coverage Critical

According to Scialla, Rex is currently facing 2016 interest coverage of about 1.2x. Rex has been doing everything it can to boost liquidity, including a $71.1 million sale of Keystone Clearwater Solutions in Q3. Liquidity now stands at $284 million, with only $3 million currently in cash.

“While this should fund a projected $74mn 2016 outspend, the company will have very little cushion to cover interest expenses next year, by our estimates,” Scialla explained.

Outlook

Stifel is now projecting debt/TTM EBITDA of 8.5x by the end of 2015, a number that the firm believes will balloon to 12.4x by the end of 2016. That debt level is nearly double the 6.5x ratio the company had as recently as September of 2015.

Rex’s stock has already nosedived 76.1 percent so far in 2015, but Scialla’s use of the phrase “financial risk,” as well as Stifel’s new $0.75 price target, sent the stock plummeting to new lows on Tuesday following the downgrade.

Disclosure: the author holds no position in the stocks mentioned.