3 Things Magnum Hunter Resources Must Do to Win Back Investors

It's been a tough year for investors of Magnum Hunter Resources (NYSE: MHR  ) . As I write this, shares are down about 18% on the year, though shares had been down by more than 37% after the company announced that it was ditching its auditor. While the stock has slowly recovered, the company has three major action items to accomplish if it wants to win back investors.

1. File an annual report
It's nearly June and the company has yet to file its annual report. Magnum Hunter has hired BDO as its new auditor and the new target is to have the report completed by the end of June. Once the report is out, investors will have a much better picture of the company.

In addition to the report, investors will want to see if there are any impairments to be made to the company's assets, as well as if there will be any issues with its debt covenants. Once these uncertainties are cleared up, investors can really focus on the business' performance and potential instead of these distractions.

2. Finish refocusing
Earlier this year Magnum Hunter closed the sale of the bulk of its Eagle Ford Shale assets. The deal brought in about $400 million; however, it marked a peculiar transition away from liquids and back toward natural gas. Not only did the company sell this oil-rich production but it is now earmarking half of its planned 2013 Eagle Ford capital budget to its gassy acreage in Appalachia.

Magnum Hunter isn't finished with its transition plan as it has about $100 million-$150 million of additional non-core asset sales to complete this year. On top of that, the company needs to make a decision as to whether it will monetize its midstream assets which could be worth more than $750 million. Once investors have clarity as to what direction the company will be going, it should be a big confidence booster. Investors hate uncertainty and right now there is just too much of it at Magnum Hunter.

3. Execute its plan
Once the company can get past all this uncertainty it needs to execute on its plan to grow production and eventually turn the company that can generate significant free cash flow. It has a long way to go, but clarity here could be coming soon. For example, the company just started drilling its first well into the Utica Shale. The play isn't turning out how some producers had hoped which is adding to the company's risk. Devon Energy (NYSE: DVN  ) , for example is bailing on the play after its first few wells didn't turn out that well. The risk for Magnum Hunter is that its wells turn out to be duds. It doesn't have Devon's balance sheet strength, nor vast portfolio of opportunities to be drilling dry holes.

The other important area to watch is the Bakken. Magnum Hunter expects participate in the drilling of 30 wells this year while seeing the potential to drill more than 500 future wells. The company will need to be mindful of well costs which can range substantially. Last year, top Bakken producer Continental Resources (NYSE: CLR  ) was able to drill operated wells for about $9.2 million each, however, non-operated wells that it participated in had a weighted average well cost of $11.3 million. This year the company has gotten well costs down to $8.3 million while hoping to shave another $100,000 off of its well costs before the end of the year.

On the other end of the spectrum, Kodiak Oil & Gas (NYSE: KOG  ) spends about $10 million to drill its Bakken wells. The math in getting well costs down is pretty compelling. At the current cost to drill a well, Kodiak will drill about 75 wells this year; however, if it was able to cut its costs closer to Continental's levels the company could drill more than a dozen additional wells. For Magnum Hunter this means it needs to keep its well costs under control so that it can stretch its limited capital resources as far as possible.

Final Foolish thoughts
Magnum Hunter has a lot on its plate this year. The company needs to ensure that it provides its investors with an annual report as soon as possible in order to remove that cloud of uncertainty. In addition to that, the company needs to complete its refocusing efforts and then execute to grow the company into one that generates sustainable cash flow. If it's able to do those three things then it should be able to win back the confidence of investors and prove the doubters to be wrong

With all the uncertainty surrounding the stock, investors might want to look elsewhere. Kodiak Oil & Gas, for example is a much more dynamic growth story at the moment. The company offers great opportunities, however, with those opportunities come great risks. To find out whether Kodiak is currently a buy or a sell, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of updates and analysis as key news breaks. To get started simply click here now.


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