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Rice Energy, Inc. - Initiation Note

Rice Energy, Inc.

NEUTRAL (RICE, $10.66)

Marcellus Gas Producer Fairly Priced At Current Levels

March 11, 2016

Glenn Williams Jr.

212.417.3638

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We are initiating coverage on Rice Energy with a NEUTRAL rating and $11 price target. Despite substantial natural gas reserves in the Marcellus shale, we contend that Rice is fairly valued at current levels, given our 12 month outlook for the company’s share price. We value Rice’s equity on the basis of daily production, proved reserves, and projected EBITDAX. We contend that while Rice has strong figures on multiple fronts, the market and (thus current market price), already reflect this sentiment. As such, we currently rate Rice at NEUTRAL, but would view any significant pullback from current prices as a buying opportunity.

By most valuation metrics, Rice has traded fairly in line with Henry Hub gas prices. Where we look to find a divergence between daily gas prices and Rice’s daily EV/EBITDAX level, we actually note a fairly steady relationship (Exhibit 13). The same pattern holds as we look at Rice on the basis of EV/Flowing Million Cubic Foot Equivalent (i.e. daily production). Thus we acknowledge that markets could potentially be attaching Rice’s prospects solely to the price of natural gas itself, ignoring Rice’s extensive hedge book and firm transportation (FT) portfolio.

Still…we conclude that Rice’s shares already trade at a premium to its peer group. We note that on the basis of several metrics (notably EV/PV-10, EV/Flowing Barrel, and EV/Proved Reserves), Rice is already being attributed a premium to a selection of Marcellus based peers. Given that fact (along with the current environment for natural gas prices), we currently attribute 3% additional upside to Rice at this time.

We base our price target on a blended average of Rice’s daily production, proved reserves, and projected EBITDAX figures. In doing so, we arrive at a price target of $11 per share (Exhibit 9). Our model adds $1.46 for a working capital surplus, while deducting $9.57 per share for net debt. Given the 3% implied upside, we initiate coverage on Rice with a NEUTRAL rating.

RICESource: Capital IQ; National Securities Corporation


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