Shale Play Showdown: Magnum Hunter Vs. Carrizo Oil & Gas

| About: Carrizo Oil (CRZO)
This article is now exclusive for PRO subscribers.

Magnum Hunter Resources Corporation (MHR) and Carrizo Oil & Gas, Inc. (NASDAQ: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 (NYSE: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.

Formation MHR CRZO
Eagle Ford x x
Marcellus x x
Utica x


Barnett x
Niobrara x
Bakken x


A selection of key valuation metrics for each company are listed immediately below.

Valuation MHR CRZO
Price 3.84 20.74
Market Cap 647.3 M 831.4 M
P/E - 19.86
Consensus 2013 P/E - 10.22
Consensus 2014 P/E 384 7.01
Price/Sales (TTM) 2.56 2.74
Price/Book (MRQ) 1.33 1.54
Operating Profit Margin -26.47% 20.94%

Capital Expenditures

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
Oct 2011 54,209 38,700 37,563 6,848
Nov 2011 73,467 50,313 31,221 6,196
Dec 2011 86,107 45,376 30,874 6,133
Jan 2012 114,775 61,826 31,562 5,692
Feb 2012 145,618 97,874 58,770 10,086
Mar 2012 186,596 127,368 27,619 5,915
Apr 2012 270,705 287,135 24,530 5,001
May 2012 345,776 359,692 93,806 14,985
Jun 2012 366,476 388,922 71,402 9,777
Jul 2012 343,432 375,147 55,626 7,923
Aug 2012 362,929 464,837 57,940 7,925
Sep 2012 388,958 491,828 59,844 6,941
Oct 2012 379,914 485,904 56,039 6,587
Nov 2012 343,859 485,214 144,565 29,120
Dec 2012 290,698 399,152 152,441 28,991

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


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.

Production Mix

The production mix for each company during 2012 Q3 was as follows:

Production Mix (Q3 2012) MHR CRZO
Oil 50.3% 40.8%
Natural Gas 45.0% 52.8%
NGLs 4.7% 6.4%

Compared to the prior year quarter:

Production Mix (Q3 2011) MHR CRZO
Oil 33.8% 11.9%
Natural Gas 62.9% 86.2%
NGLs 3.3%


Both companies have been successful in their efforts to significantly increase the liquid component of their production.

Proved Reserves

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.

Other Assets

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

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%
Beta 1.8 2.0

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.

(Source: Deloitte)

Disclosure: I am long MHR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may add to my position in MHR over the next 72 hours.