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3 Things You Need to Know About Magnum Hunter Resources

The advent of the shale gas and oil boom is, in my opinion, one of the most exciting economic developments of my lifetime. Many will say that we're still in the early innings, and if that's the case, then Magnum Hunter Resources (NASDAQOTH: MHRCQ  ) just might still be getting warmed up. Let's take a quick look at three things you need to know about this shale-focused exploration and production company.

It's focused on the three best plays
It seems like we're finding new shale resources every year. So far, the best of the best plays have been the Eagle Ford in Texas, the Bakken in North Dakota, and the Marcellus/Utica in Ohio, West Virginia, and Pennsylvania. It just so happens that those are the very three plays that Magnum Hunter is pouring capital into. 

The company is spending $300 million this year to develop its acreage across these three great shale plays. That's a lot of money for a company with an enterprise value of $1.7 billion. It expects that this capital will enable it to grow production from its current range of 18,000-20,000 barrels of oil equivalent per day (boepd) to a range of 23,000-25,000 boepd by the end of this year. Increasingly, that production will be liquids-rich.

It's getting wet
Until this year, more than half of Magnum Hunter's production was natural gas. Going forward, the company will be much more focused on liquids. A big reason for that is because the company has been growing its liquids reserves, which now stand at 62.9% of its current proved reserves.

If you're paying attention to the oil and gas industry these days then you know that the focus has been shifting to liquids. A large swath of companies are devoting most, if not all of their capital, to liquids-rich acreage. As examples, former natural gas champions like Devon Energy (NYSE: DVN  ) and Chesapeake Energy (NYSE: CHK  ) are now both trumpeting liquids growth. 

Chesapeake, which is the No. 2 producer of natural gas in the U.S., is quick to point out that it's the 11th-largest liquids producer as well. It's aiming to grow its liquids production by 29% this year alone and end the year with at least 25% of its production being liquids. Devon, which is the fourth-largest natural gas producer isn't spending any money to grow natural gas production. Instead, it expects a decline in production, while its oil production is expected to grow nearly 20%, and its natural gas liquids production should grow around 10% this year. Needless to say, Magnum is in good company.

Eureka! It has midstream assets too!
One other interesting tidbit about Magnum is that it owns a stake in Eureka Hunter Midstream. The company's equity interest is valued at over $300 million and the asset is being structured for a possible MLP rollout. Among Eureka's assets are a pipeline that's strategically located in the heart of the "wet gas corridor" in the Marcellus. It also has a presence in the Eagle Ford and has expansion potential into the Utica. It's a nice, stable, add-on business that could be used at some point as another source of capital; much like Chesapeake did with Access Midstream.

My Foolish take
Magnum Hunter is an interesting company to watch. It has loads of potential with its fast growing liquids business focused on the three best plays in the U.S. However, its balance sheet adds an element of risk given the amount of debt the company has taken on. It will be interesting to watch how this company is able recover the cash it is spending on capital initiatives. If operating cash flow is able to fund these expansion projects rather than adding additional leverage to the balance sheet, then Magnum Hunter could join the ranks of the top independent exploration and production companies in the business.

Debt has been the enemy of many an investor. Need a prime example? Look no further than Chesapeake Energy. Widespread land grabs funded by debt during the peak of natural gas prices has left this company saddled with a lopsided balance sheet as of late. While these issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

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