Another interesting week so far for Magnum Hunter Resources (MHR) as the stock had moved from $2.60 last week to $3.48 intra-day Wednesday, before backing off the highs and closing at $3.15 Wednesday on heavy volume. The intraday ramp appears to have to do with comments CEO Gary Evans made to the Robert W. Baird & Co. Growth Stock Conference. His comments can be heard at the site here.
There were a few standout comments for me during the presentation. First of all, Mr. Evans said that they have hired bankers to explore a sale of the Eureka Hunter Midstream assets, and hope to have an announcement on that front in 90 -120 days. The company anticipates its retained equity in Eureka Hunter is $400 million to $500 million. His reasoning for moving away from the previously announced plans of rolling the midstream assets out in an MLP is that, due to the high volume growth of the Marcellus and Utica Shales, midstream companies are looking to buy into the area to gain exposure to that growth. They are also willing to pay up for the growth, because the midstream companies that had been focused on dry gas areas like Haynesville or Barnett are seeing less drilling in those regions, and therefore lower volumes. Lower volumes are not conducive to higher distributions, so these MLPs are actively looking to buy into new areas, and MHR has a solid first mover advantage in the Marcellus/Utica serving the West Virginia/Ohio sections. The main player in the midstream arena in the region is MarkWest Energy (MWE) serving not only MHR, but also Gulfport (GPOR), PDC Energy (PDCE), Antero, EQT Corp (EQT) and Rexx Energy (REXX), to name a few. To me, it is the most logical buyer of the Eureka Hunter assets, since Eureka Hunter is already tied into the Mobley Plant in West Virginia.
Mr. Evans believes that Eureka Hunter has run enough pipeline close enough to where MHR plans to drill that there is little risk a new owner of the midstream assets would act differently than the current management team would. Since running this pipe has already de-risked Magnum Hunter's access to infrastructure, they feel comfortable selling the assets, and using the cash to pay down debt. While I was originally leery about an outright sale of the midstream assets, since infrastructure constraints are mentioned on nearly every quarterly report from the larger players in the Utica (namely Gulfport and PDC Energy), the fact that the pipeline has already been run to the sections MHR wished to drill takes some of that concern off the table. However, I would still prefer them to hold on to the assets until the Utica has been a bit more developed, but if the demand for the assets is as high as Magnum Hunter claims, I guess everything has a price.
The second takeaway was that Mr. Evans updated the progress on the delayed 10-K filing, and showed a more aggressive stance on the recent change in auditors, making it clear that PricewaterhouseCoopers was fired for not performing their duties up to Magnum Hunter's expectations, and that BDO is doing a remarkable job. Mr. Evans anticipates having the 10-K wrapped up by mid-June, and that the first quarter numbers will be reported in the next week or two, and that the production numbers for the quarter should be released over the next week. The reserves report is also due around mid-year as well, which will show reserves added for the gas now being flared in the Williston Basin, and for the Middle Bakken, which had not been previously booked.
There was also a bit more detail on the potential of Magnum Hunter's Utica acreage. Mr. Evans said that Antero, which is not publicly traded, and other information from the field has been showing potential production numbers in the 6,000 to 8,000 barrel a day range per well close to the Farley pad MHR has begun drilling, which is in northern Washington County, Ohio. EURs are roughly 2.5 to 3 million barrels per well. Needless to say the results from this initial well could be a huge catalyst for the company, given that current production is around 20,000 boepd. Results from the first well are due out sometime over the summer, and the Farley pad is a four well pad.
Based on the new values given for the Eureka Hunter assets, and the sale of the Eagle Ford acreage to Penn Virginia (PVA), I have updated my projections for the value of Magnum Hunter Resources. The figures assume first and foremost that the numbers that have been publicly stated by MHR are correct, and secondly that the Appalachian acreage and the South Texas acreage are the "non-core" assets Mr. Evans said the company is planning to sell off. The low case assumes values of $2,000/acre for the Williston Basin land, and $3,000/acre for the Marcellus and Utica. The high case assumes values of $4,000 an acre for Williston, $10,000/acre for the Utica, and $7,000/acre for the Marcellus. These numbers are based on transactions that have been seen over in the market over the last several quarters, as well as comments from management about what they are seeing in the Utica. However, the per acre numbers can be misleading, since they often ignore important details like how long is remaining on the lease, if its held by production, accessibility, and other factors. Since the vast majority of the acreage in all three plays is held by production, and served well by infrastructure, I believe the true value of Magnum Hunter's acreage is closer to the high case, should the company decide to hang a "For Sale" sign out front for any of the acreage positions.
|Low Case||High Case|
|Asset||Price Per Acre||Value||Per Share||Asset||Price Per Acre||Value||Per Share|
|Eureka Hunter Midstream||$ 450,000,000||2.67||Eureka Hunter Midstream||$ 450,000,000||2.67|
|Williston Basin (180,000 acres )||$ 2,000||$ 360,000,000||2.13||Williston Basin (180,000 acres )||$ 4,000||$ 720,000,000||4.27|
|Utica (81,800 acres)||$ 3,000||$ 245,400,000||1.46||Utica (81,800 acres)||$ 10,000||$ 818,000,000||4.85|
|Marcellus (85,500 acres)||$ 3,000||$ 256,500,000||1.52||Marcellus (85,500 acres)||$ 7,000||$ 598,500,000||3.55|
|Stake in PVA||$ 41,500,000||0.25||Stake in PVA||$ 41,500,000||0.25|
|Non-core assets||$ 125,000,000||0.74||Non-core assets||$ 125,000,000||0.74|
|Cash||$ 110,000,000||0.65||Cash||$ 110,000,000||0.65|
|Revolver||$ -||-||Revolver||$ -||-|
|Preferred C||$ 100,000,000||(0.59)||0.59||Preferred C||$ 100,000,000||(0.59)|
|Preferred D||$ 206,900,000||(1.23)||Preferred D||$ 206,900,000||(1.23)|
|Preferred E||$ 68,500,000||(0.41)||Preferred E||$ 68,500,000||(0.41)|
|Senior Notes||$ 444,100,000||(2.63)||Senior Notes||$ 444,100,000||(2.63)|
|Total Equity Value||$ 768,900,000||$ 4.56||Total Equity Value||$ 2,043,500,000||$ 12.12|
A clean bill of health from BDO will remove a huge overhang for the stock. The company still plans to redeem the Series C Preferred shares, but cannot do so until the 10-K is filed. It is also prohibited from paying dividends on the preferred shares until the 10-K is filed, although those dividends will be made current as soon as the filing is completed. The Series D Preferred are eligible to be redeemed early next year, after which the balance sheet will be much cleaner than its current state. It's been a wild, nerve-racking ride for shareholders in MHR for the last several weeks, and while the ride isn't over, there should be an answer to the 10-K question in the next five weeks. Once that is cleared up, the shares should begin to trade on the value of Magnum Hunter's assets, which I believe is much, much higher than $3.15 per share.
Additional disclosure: Also long MHR Jan 15 Calls