The Magnum Hunter (NYSE:MHR) Story: An experienced management team swaps shares for acreage and current production to create a U.S. onshore E&P shale player with a liquids rich bent and lots of running room. Looking at historical results is essentially a waste of time due to recent acquisitions that have reshaped the play list (now featuring the Eagle Ford, Appalachia, Marcellus and more), and the Williston Basin. The focus of the firm is now shifted from big acquisitions to exploitation of the current asset base, increasing production while decreasing costs and augmented by the occasional bolt on acquisition. Its Valuation is not excessive. See the summary table at the bottom of the post for more details on the numbers.
Production Set to Leap Beyond Acquired Volumes
- 1Q volumes were 2,629 BOEpd (50% liquids). These do not include the recent acquisitions.
- Current production is "over 6,000 BOEpd" with the inclusion of two recent acquisitions (one in Appalachia and one in the Williston Basin).
- Year end exit seems conservative. Management has espoused a year end exit rate of 10,000 BOEpd, with oil volumes accounting for roughly 60% of total volumes. This rate could, with a little operational luck (good weather really as opposed to what we saw in the Williston in the first quarter and continued timely well completions in the Eagle Ford), prove conservative given the drilling schedule for the remainder of 2011, which includes a large number of potential high rate, high working interest, oilier-than-not wells planned through the year end in 2 of 3 operating areas.
Back of the Envelope Model. Using highly depressed acreage valuations and conservative multiples of current production (let alone production levels that should be reached in just six month), it's easy to get to a number more than twice the company's current stock price.
A Quick Play Summary:
Eagle Ford Shale
- Acreage: 25,074 net acres providing for at least 100 drilling locations.
- Majority of the acreage is in the oil window in Gonzales County, with smaller positions in Atascosa, Fayette and Lee counties in Texas. Gonzales county has been home to some rather large IP's, with rates of between 1,500 and 1,800 BOEpd scored by EOG.
- Current Production ~ 1,000 BOEpd from 5 net wells drilled since the beginning of the program in mid 2010.
- 9 gross wells completed so far in the program, operated 6 of them and initial rates have been creeping higher,
- Most recent well was the Furrh-#1, IP of 982 BOEpd (88% liquids), high pressure well, minimal decline in pressure seen early,
- Next well will be the operated GeoHunter, could get news there in June,
- Company thinking on EURs is a wide range of 200 to 500 MBOE with the lower reserve recovery end of the range stemming from some more mixed results out of their non-operated program.
- 2011 Budget: $65 mm (26%)
- For that they get 7.5 net wells in 2011 (well costs of late coming in in the low $7 mm range)
- Completions done by HAL and relationship working great (timely manner).
Eagle Ford Nutshell - Look for rapid growth in the play as they add production from the 2011 plan and as they extend lateral lengths over the course of the year. Costs are expected to fall as they reduce drilling times despite the longer laterals. Lots of running room here and very oily for the play.
Appalachia – Marcellus but also Huron, Weir (oil), and deeper Utica potential.
- Currently producing 3,100 BOEpd net (~ 50% liquids) .
- EUR's in the 4 + Bcfe range for $5 mm.
- Initial Marcellus IPs in the 5 to 7 MMcfepd range are encouraging, again with 50% liquids
- Acreage 396,990 net acres including 58,820 net Marcellus acres. Trying to add acreage that has both Marcellus and Utica potential, actively high grading acreage.
- 2011 Budget: $60 mm (24%).
- For that they get 34 gross (22 net) wells in 2011 (@ $5 mm per well).
- Working to reduce costs as current production comes from > 3,000 wells, planning to sell
- They have their own rigs, saltwater disposal system, gathering system, and pipeline takeaway capacity.
- Potential Catalyst Watch: Weir oil wells in Kentucky – two horizontals drilled and flowing back now with another 2.3 net wells drilling. Will be doing more homework here in the near term.
- Currently producing 1,500 bopd net.
- 18 new gross wells (4 net wells) that are cased but waiting on frac, thinking this adds an additional 825 BOEpd late in 2Q and early in 3Q11.
- 81,350 net acres split between Divide and Burke County, ND and south Saskatchewan.
- Look for more bolt on small acreage positions in the future, in North Dakota and Saskatchewan, not in Alberta and not in Montana in the near term.
- 2011 Budget: $80 mm (31%).
- 5 rigs running, 6th rig arrives soon.
- Seeing more activity and better IP's (expecting to see them in the 1,000 to 1,300 BOEpd range) in Burke and Divide Counties now,
- Divide County completions improving – all wells with Samson as the operator (not SSN another private operator of the same name) are long laterals (10,000+ foot lateral) and the number of stages varies from well to well.
- Budget – they have included 20% inflation padding into the budget, $80 mm budget for all of the Williston (equally divided between the States and Canada).
- Saskatchewan acreage – recent bids adjacent to their position went for over $3,500 / acre.
- Debt to cap is 12% proforma recent acquisitions.
- Liquidity -
- expanded revolver to $145 mm, expecting this to go up at the mid year review.
- Series D preferred continues to raise money on a rolling basis.
- Looking at project financing for their Eureka Hunter Pipeline (non – recourse).
- The 4 net Bakken well completions growing the Williston segment production.
- The Weir oil wells, which have been commented on as "successful" but no rates have been given yet and more importantly, we have not been given a good idea of how much of their acreage could be prospective for the play.
- June 30 reserve report will show the recent acquisitions and 1H11 drilling adds.
Nutshell: Management has assembled the pieces of the next mid cap E&P company and will spend the next 18 months growing it. They've done this before and with a relatively un-levered balance sheet and strong asset mix, I think they are likely to be successful in doing so again. Valuation on a cash flow basis is middle of the road to somewhat cheapish given their higher liquids production and organic growth potential (next year). I like the name because the game plan is now growth via the drill bit (mostly) and I can easily get to a higher NAV (more than double without pushing any of the metrics). I don't own it but now find the story to be superior to at least one direct comparison if not two.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MHR over the next 72 hours.