What caused the increase? A combination of organic drilling extensions, as well as acquisitions (Magnum Hunter's Chief Executive Officer Gary Evans' effective and proven strategy to build, develop and sell oil and natural gas companies). In the 1980's, Mr. Evans built an oil and natural gas company named Magnum Hunter. He grew the assets, developed the company, and then, in 2005, sold Magnum Hunter to Cimarex (XEC) for $2.2 billion.
He retained the name rights and Magnum Hunter Resources (II) is his current project.
Organic drilling accounted for the largest proved reserves growth adding approximately 14.7 MMBOE of reserves growth over the first half of 2012. OAG360 notes that MHR's three-year (2009 - 2011) production replacement rate is 1,655%, well above the 89 E&P company average of 484% in EnerCom's database.
As a recap, during 2011, the company reported reserves and production increases of 235% and 237% year-over-year, respectively. Magnum Hunter's full year 2011 organic extensions and discoveries and other additions from drilling activities replaced the company's full year 2011 estimated production by a factor of 6.7 times.
MHR is growth focused on a per-share basis. For the period of 2009 through 2011, Magnum Hunter grew reserves 313% on a debt-adjusted per share basis. The average growth rate in EnerCom's database for this metric is 52%, including MHR's percentage. The debt-adjusted per share ratio converts all new outside capital raised (debt, preferred shares, common equity) by a company into common shares. Debt adjusted per-share production growth by MHR for the same period was 126%, 25 times superior to the group average of 5% (including MHR's percentage).
MHR highlighted two acquisitions having the biggest influence to its reserve additions this year.
In April 2012, MHR purchased $311 million worth of properties in the Williston Basin from Baytex Energy (BTE). The acquisition, which added nearly 8.7 MMBOE of proved reserves, had a significant impact to the company's oil and liquids growth. From December 2011 to June 2012, MHR has increased its oil weighting from 48% crude oil to 64% crude oil. Current production from the acquisition is 934 BOEPD, increasing to 1,295 BOEPD with near-term completions. Based on the purchase price, Magnum Hunter paid $332,976 per flowing BOEPD. To fund the acquisition, the company sold 35MMshares of common stock at a price of $4.50 per share for net proceeds of approximately $148.7 million, and offered $450 million in aggregate principal amount of senior unsecured notes due 2020 which provided $432.2 million in net proceeds. Proceeds raised from both offerings were used to finance the acquisition, pay off all amounts outstanding under the company's existing term loan, repay outstanding debt under the company's revolving credit facility, and increased the company's 2012 upstream capital budget from $150 million to $325 million (92% of capital budget focused on Williston Basin and Eagle Ford).
On March 30, 2012, MHR closed its acquisition of oil and gas properties owned by Eagle Operating Inc. in the Williston Basin adding 2.2 MMBOE of proved reserves for $50.5 million. Current net production from the acquisition is 350 BOEPD. Based on the purchase price, Magnum Hunter paid $144,286 per flowing BOEPD. The company funded the $48.5 million cash portion with existing liquidity and its credit facility, and the remaining $2.0 million with restricted common stock at $6.74 per share. Eagle retained a small overriding royalty interest in certain properties on a sliding scale basis not to exceed 2%.
MHR has ample running room to begin development of the Middle Bakken and Three Forks Sanish formations across its approximately 125,000 net acre land position in 2012. MHR has six to seven gross (three to four net) drilling rigs currently running in the Williston Basin and the company has allocated $170 million of its $325 million 2012 CAPEX budget to the play.
PV-10 is the present value of estimated future cash flows, before income taxes, of a Company's estimated total proved reserves. As of June 30, 2012, MHR's PV-10 increased 55% to $957.9 million from $616.9 million, as compared to six months ago at year-end 2011. Used in the calculation, crude oil / liquids pricing was $95.67 per barrel and $3.13 per MMBtu for natural gas.
Final Thoughts on Magnum Hunter
With a near-term goal of achieving 100 MMBOE in proved reserves, it is an exciting time at Magnum Hunter Resources. The company operates in the three largest shale plays: Bakken, Eagle Ford and Marcellus, while making its recent entrance into the emerging Utica shale play. MHR continues to add oil and liquids reserves and production through organic growth and acquisitions. Estimated capital expenditures for 2012 are $325 million. The company posted an increase of 137% in production over the last sequential quarters.
Disclosure: I am long MHR.
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