Shale exploration: Magnum Hunter Resources – A refocus in US shale strategy for sustainable growth

Evaluate Energy

Magnum Hunter Resources (NYSE:MHR, “MHR”) is a US-shale focused oil and gas company based in Houston, Texas, and is a new addition to the Evaluate Energy company database. It is one of many US-shale companies that have been forced into a refocus of strategy as operating costs have remained high over the last few years in the major plays. However, MHR has come out of this restructuring looking much healthier, and is now set for a spectacular 2014 according to early guidance figures.

Market Cap Doubles in 6 Months
MHR’s 2013 annual results boasted a doubling in market cap since June. This leap followed a difficult period that began for many US shale-focused companies in the middle of 2012, where MHR’s share price fell from US$6.41 to US$4.18 in 3 months and moved further towards $3.50 until June 2013.

Source: Evaluate Energy

The MHR shareholders will be hoping this rise in market cap is sustainable, unlike a similar rise between Q3 2011 and Q1 2012 that eventually led to a fall. Whilst the share price continued to trend downwards in this year between June 2012 and June 2013, the company’s daily production actually went in the opposite direction, proving that a rise in production in isolation is not necessarily a good thing for an oil and gas company shareholder.

A Refocus in Strategy to Maintain Growth
The rise in share price and market cap in 2013 came after a big sale in the Eagle Ford shale in Texas; MHR sold its holdings in Gonzalo and Lavaca counties for $401 million in April to Penn Virginia (NYSE:PVA). MHR completed its exit from the play in early 2014 with the $24 million sale of its remaining Eagle Ford acreage to New Standard Energy (ASX:NSE). This was in some ways a surprising move as the Eagle Ford has been the most active shale play in terms of companies acquiring new or bolstering existing acreage positions over the last few years; MHR is almost unique (especially for a company of its size) in actually leaving the play to focus its efforts elsewhere, but the rise in share price is proof that the market welcomed the move.

The exit from the Eagle Ford, around $100 million of other sales in the year and further planned non-core divestitures of over $400 million have allowed Magnum Hunter to focus its investment plans on its core plays, the Bakken in North Dakota and the Marcellus and Utica plays in the Appalachian basin.

Source: Evaluate Energy, correct as of MHR 10-K Annual Report, 2013

The asset divestitures were very important moves for MHR, as drilling activity in US shale plays does not seem to be getting cheaper at all, as the years go by. Certain companies, such as Range Resources Corp. (NYSE:RRC) in the Marcellus and Continental Resources (NYSE:CLR) in the Bakken, are finding ways to drive their average well costs down following extensive work over a long period of time, but on the whole, average costs for the last three years in MHR’s remaining plays have been rising.

Source: Evaluate Energy – 2014 data not complete until April when all companies have reported 2014 budgets

Making any kind of growth had been difficult for MHR with these high costs to contend with across 4 plays (Eagle Ford average well cost in 2013 was $7.5 million) and non-core areas for a year following the fall in share price in 2012, which explains the market’s approval of a refocus in strategy as the company moves into 2014. Many companies have been undertaking a similar refocus in strategy due to high costs; the Bakken is one area in particular that saw many deals in 2013 with minor, non-core or non-operating acreage holders selling acreage positions to the more established companies in the play. Full analysis of the Bakken sales in 2013 can be found in the Evaluate Energy Global Oil & Gas Deals Report.

A Big Year Ahead
2014, if guidance figures eventually ring true, is set to be a spectacular year for MHR operationally. Its exit rate guidance for daily production is quite staggering at 35,000 boe/d considering production levels up to now.

Source: Evaluate Energy/MHR Guidance Press Release

The sale in Eagle Ford assets was the major contributing factor to a drop of around 5,000 barrels per day between Q2 and Q3 2013, but a robust capital expenditure plan for 2014 sees the exit rate shoot up to 35,000 boe/d. The company plans to spend $260 million in its Marcellus and Utica plays, and $50 million in the Bakken. The cautionary fact here is that this plan may increase the company’s gas weighting by the end of next year (already at 43% in Q4 2013) as the Marcellus and the Utica are both gas producing plays, but MHR is targeting liquids-rich areas in an attempt to avoid this.

Magnum Hunter is a new addition to the Evaluate Energy database, which holds 20+ years of historic financial and operating data for over 300 oil and gas companies worldwide, and an extensive database focused on the US and Canadian shale gas & liquids industry, with company by company acreage holdings, capital expenditure budgets and planned well activity, as well as play by play average well costs. Evaluate Energy also provides oil and gas deals information with its M&A database.

 

Notes:
Evaluate Energy’s Average Well Costs for US Shale plays are estimated by using company guidance figures for capital expenditures and planned drilling activity in each play. The figures are collected annually for the Bakken, Barnett, Eagle Ford, Fayetteville, Haynesville, Marcellus, Niobrara, Tuscaloosa Marine and Utica plays in the US, and for the Duvernay, Horn River and Montney plays in Canada, where figures are available. 2014 data will be complete by the end of April 2014.

About the author
Mark Young is a senior analyst at Evaluate Energy. Evaluate Energy provides data solutions for oil and gas company analysis.

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