Small cap Magnum Hunter Resources has catalysts on the near horizon. The oil & gas producer operates in the Eagle Ford, Bakken and Marcellus. In the heart of a growth phase with an attractive valuation, MHR looks to have positive operational and financial announcements in the near future.
Chairman and CEO Gary Evans took over MHR in May of 2009 when the company was on life support. Mr. Evans built an E&P once prior, selling it in 2005 to Cimarex Energy (NYSE:XEC) for almost $2.2 billion after 20 years at the helm. Though most of Mr. Evans' career has been spent running US domestic producers, he is an investment banker by trade and has spent the last two and a half years high grading and bolting on to MHR's portfolio of properties.
MHR's leases in the Eagle Ford of 24,369 acres is prime high-return oil-producing real estate and operations are humming. Currently MHR receives a quality premium of $10 to WTI which has returns approaching 150% on drilling. The company has budgeted $50 million in capex for 2012 in the Eagle Ford. Expect this capex number to be revised higher with the funds being redirected from natural gas drilling and a pipeline monetization. MHR really seems to have cracked the code in the Eagle Ford sweet spot with well IPs now regularly in the 2000-3000 range. The Eagle Ford is MHR's smallest division by acreage yet is going to be the large driver of cash flow and growth for years to come.
In the Williston basin MHR has 81,740 acres, much of which is Bakken oil land. Last year's flooding significantly hurt the company's operations with this year's mild winter boding well for results. While Bakken production cannot compete with the returns of the Eagle Ford, crude oil production over natural gas is still a great place for investment dollars. MHR has $50 million budgeted here in capex for 2012.
The largest division is Appalachia with most of this activity occurring in the Marcellus. MHR's 58,048 Marcellus acres are wet producing 25% liquids. If a producer is going to produce natural gas, this is the place to operate. MHR has recently entered the Utica with 16,000 acres and expects to announce closing on more acreage by the end of January. The Utica land is in the liquids and oil areas and MHR plans to drill two Utica wells in 2012. MHR also has 273,000 of natural gas land in Southern Appalachia which will see nil activity anytime soon. The budget calls for $50 million to be invested here in 2012. I speculate either this capex number will be lower in 2012 or the production helps support the results of Eureka Hunter Pipeline.
The fourth division is the Eureka Hunter pipeline which is a standalone wholly owned division also budgeted for $50 million in capex this year. The pipeline's economic returns are buoyed with first mover advantages and support MHR's Marcellus drilling as well has other Marcellus players. MHR plans to MLP Eureka Hunter in the second half of 2012 and the pipeline's total value has been said could approach $1 billion after a couple more years of build out. E&Ps have been finding the income arbitrage between the high prices financial income investors will pay against the public market values given to producer's production very tempting.
On January 4 CEO Gary Evans said: "Through the holidays I worked hard on a transaction that we papered and will hopefully be announcing where private equity investors (will be) coming in for a substantial value to own a small piece of Eureka Hunter." Monetizing a small portion of this asset at a high price and redeploying the capital into the high return projects such as Eagle Ford oil drilling would create much value. This looks to be a large catalyst for MHR in the very near future.
MHR at Friday's close of 5.61 has a market cap of $723 million. MHR had 37 mmboe of proved reserves at September 30 and is adding about 1mmboe a month through the drill bit. The 2011 exit rate of production at 12,500 BOE gives a flowing BOE of $57,840, almost half of which is oil and liquids with most capex in the oil direction. The production exit rate expectation for 2012 of 14,500 is expected to be bumped higher as the year progresses.
Bears point to a funding gap which is not there, nor can they harp on debt with the low debt to capitalization of 20.5% to end the third quarter. Short interest is 30.8 million shares of the 128.8 million outstanding at over a 10 days to cover ratio. This could be rocket fuel to the operational and financial catalysts expected for this growth and value play.
Disclosure: I am long MHR.