Magnum Hunter Resources Corporation (MHR) and Carrizo Oil & Gas, Inc. (CRZO) are Houston-based small-cap energy companies principally engaged in domestic shale plays. Both companies have impressive records of recent production growth. Magnum Hunter reported a 192% increase in oil production and 137% increase in total production (BOE) for the 3rd quarter of 2012 over the prior year's quarter. Carrizo reported a 257% increase in oil production and 26% increase in total production for the same period.
The following chart indicates the formations where MHR and CRZO are producing oil and gas.
A selection of key valuation metrics for each company are listed immediately below.
|Market Cap||647.3 M||831.4 M|
|Consensus 2013 P/E||-||10.22|
|Consensus 2014 P/E||384||7.01|
|Operating Profit Margin||-26.47%||20.94%|
Carrizo Oil & Gas
Carrizo's capital expenditures in the first three quarters of 2012 were heavily focused on drilling in the liquid-rich Eagle Ford. Carrizo's Eagle Ford drilling spend ($296.6m) accounted for 63.9% of its total drilling expenditures ($464.3m) for the nine-month period.
A production query on the Texas Railroad Commission's website for Carrizo (Eagle Ford) LLC, Carrizo Oil & Gas, Inc.'s subsidiary that operates in the Eagle Ford, produces the results in the following table. The company's significant Eagle Ford drilling activity has resulted in meaningful production gains. The drop in November and December is notable, however. (The company's 4th-quarter financial report will be released on February 26.)
|Date||Oil (BBL)||Casinghead (MCF)||GW Gas||Condensate|
Carrizo recently announced its 2013 capital spending plan. The company is plowing an even greater portion of its capex budget into the Eagle Ford. The company says that it will spend $385 million there, which is 77% of its $500 million budget. The remaining funds have been allocated primarily to Marcellus ($70m) and Niobrara ($35m).
Magnum Hunter's capital expenditures for the first three quarters of 2012 totaled $793.7 million. Capital expenditures were split between acquisitions and drilling activities. MHR spent $362.9 million to purchase Bakken and other Williston Basin properties and $24.8 million to increase its Utica acreage. Jefferies recently downgraded the stock on the basis that MHR overpaid for the properties.
In August 2012, Gary Evans, the Chairman and CEO of MHR, told The American Oil and Gas Reporter that "Magnum Hunter has an opportunity to grow its position within the Eagle Ford and use its successful operating processes for new acreage within this play. However, finding quality land for the right price is difficult."
Later, in October 2012, the company hired an investment bank and explored offers to sell its Eagle Ford properties. Gary Evans told The Oil and Gas Financial Journal that MHR has "done about as well as [it] can do in [the Eagle Ford] play with some of the highest producing wells throughout the Eagle Ford Shell."
While considering divestiture of its Eagle Ford assets, MHR continued its drilling program there. The company had previously allocated $130 million (40% of planned drilling expenditures) to the Eagle Ford for 2012. On December 28, 2012 the company announced the successful completion of two prolific wells in that shale. Each well came online with production of roughly 2,000 barrels of oil per day and 1,000 mcf of natural gas per day. Gary Evans stated that the "management and Board may very well have second thoughts about [their] decision to possibly completely divest these properties at this time."
The largest share of MHR's 2012 drilling budget went to its Williston Basin/Bakken properties. The company allocated $170 million (52.3% of planned drilling expenditures) to that play and $25 million (7.7%) to Appalachian Basin (Marcellus/Utica) development.
Last week MHR annouced a $300 million capital expenditure program for upstream assets in 2013. The budget will be split evenly between Williston (Bakken), Appalachian (Marcellus/Utica), and Eagle Ford.
The production mix for each company during 2012 Q3 was as follows:
|Production Mix (Q3 2012)||MHR||CRZO|
Compared to the prior year quarter:
|Production Mix (Q3 2011)||MHR||CRZO|
Both companies have been successful in their efforts to significantly increase the liquid component of their production.
The PV-10 value of Carrizo's estimated proved reserves was $1.31 billion (29% oil) on 9/30/12 compared to $1.45 billion on 12/31/11 and Magnum Hunter's PV-10 proved reserves value was $981.2 million (62.9% oil and natural gas liquids) on 12/31/12 compared to $616.9 million on 12/31/11.
Carrizo Oil & Gas
Carrizo has an approximately $3 million interest in Oxane Materials, Inc. but no other material non-upstream assets. In its most recent report on Carrizo, Credit Suisse valued this asset at .10/share.
Magnum Hunter is the majority owner of Eureka Hunter Holdings, which operates a gas gathering system in West Virginia, and Ohio. In March 2012, Magnum Hunter announced that Eureka Hunter Holdings had acquired TransTex Gas Services, LP for $58.5 million. TransTex treats natural gas and leases equipment to third parties to treat natural gas.
MHR stated in November 2012, that it intends to spin off Eureka Hunter Holdings to the public in 2013. Credit Suisse valued MHR's interest in Eureka Hunter at $1.80/share in September 2012.
Both of these stocks are highly-leveraged domestic shale players. MHR's debt to equity ratio was .956 and Carrizo's was 1.805 at the time of their most recently reported quarter. (Carrizo's debt to equity ratio should improve after it sold a UK field for $184 million in the 4th quarter.) Both stocks are volatile as indicated by their beta below and both have a significant portion of their shares shorted.
|Short Interest (1/31/13)||18.95%||14.83%|
Over the past 12 months, MHR's stock is down 47% and CRZO's shares are down 24%. The S&P 500 has produced a positive 15.04% total return over the period.
Carrizo is an excellent proxy for Eagle Ford development exposure; however, the company's transition from legacy gas production (Barnett) to oil has proved costly. The company still relies on predominantly-gas assets to raise capital through sales and generate cash flow from production. As shown on the cart below, despite the recent stabilization it remains a challenging environment for natural gas prices.
I favor Magnum Hunter based on its greater potential production growth, more favorable liquid production profile, and the potential value that will be unlocked for shareholders when the midstream business is spun-off. Also, as indicated above, Magnum Hunter has expressed a willingness to sell properties to improve its balance sheet.
Lastly, many commentators have noted that Magnum Hunter is "built to sell." Chairman and CEO Gary Evans sold the prior iteration of Magnum Hunter to Cimarex for $2.1 billion in 2005. The graph below from Deloitte's mergers and acquisition report for the oil and gas industry shows a recent uptick in activity in the oil patch. Magnum Hunter's current weakness may present an excellent buying opportunity before the company spins off its midstream business and/or gets purchased.
Additional disclosure: I may add to my position in MHR over the next 72 hours.