3 Important Numbers From Magnum Hunter Resources' Annual Report

Earlier this month Magnum Hunter Resources (NYSE: MHR  ) finally filed its long-awaited annual report. The company's report was delayed after it fired its auditor. This document is a great tool for investors to get a really good picture of the company, which is exactly why investors should take the time to read it. To help investors know what to look for when reading the report (which you can assess here – link opens a PDF), I'm going to explain the three important numbers you'll find in that report.

Proved reserves
One of the most important numbers in an oil and gas company's annual report is its proved reserves. The proved reserves are the estimated economically producible oil and gas that the company possesses. These are the most important reserves because they are the reserves that the company and its engineers are most certain are actually there.

For Magnum Hunter that number is 61.7 million barrels of oil equivalent, or Boe, as of the end of last year. It's a number that excludes the 11.4 million Boe of reserves in the Eagle Ford that were sold to Penn Virginia (NYSE: PVA  ) earlier this year. Magnum's reserves are 57% oil and natural gas liquids, and more than half of those reserves are in the company's acreage in the Appalachian Basin. This number is important because it's where investors can build a base value for the company, which is where the next number comes into play.

PV-10
The next number to get to know is the PV-10, which is the present value of future net revenues as the reserves are produced. This gives investors a sort of baseline value for a company and in Magnum Hunter's case its PV-10 as of the end of last year was $753.4 million:

Source: Magnum Hunter Resources Annual Report

That figure excludes the Eagle Ford sale which had a PV-10 of $227.8 million. This is where it should be noted that Magnum Hunter sold those assets for just over $400 million. So, while the PV-10 is a good baseline for value, it doesn't account for everything, including potential upside from probable and possible reserves as well as other intangibles. That is one reason why Magnum Hunter's total enterprise value is more than double its PV-10.

Changes to the reserves
The final number to drill down into notes the changes in the reserves; the company includes its Eagle Ford acres in its annual report. This will give you an idea of how good the company is at organically replacing its reserves. Take a look at the following chart from its annual report:

Source: Magnum Hunter Resources

Note that the company began the year with 44.9 million Boe of proved reserves and ended the year with 73.1 million Boe. There were two major drivers of increases in reserves last year, purchase of reserves in place and revisions of previous estimates. The company added 16.8 million Boe to its reserves because it was able to revise its reserves upward. This could have been due to how wells were performing, new data, or changes in technology.

Unlike a lot of its peers, Magnum Hunter didn't take a very large impairment charge for its proved reserves last year; it only booked a $4.1 million dollar charge, though it did take a much larger charge of $70.6 million for unproved properties. Last year, low natural gas prices really hurt the 50 top oil and gas companies as the group took $26.4 billion in impairment charges. This took a bite out of the reported profits at a number of companies, including Southwest Energy (NYSE: SWN  ) , which got crushed last year as it was forced to take a $2.97 billion charge on its proved oil and gas properties. What this all boils down to is that Magnum Hunter could still economically produce virtually all of its proved reserves despite last year's low-price environment. The same can't be said for Southwest, which will have to wait for gas prices to pick up before it can put those reserves back on the books, let alone produce them.

The final important number worth pointing out is that while Magnum Hunter produced 4.8 million Boe last year, it only was able to add 3.5 million Boe through discoveries and extensions. It's better to see the company discover more oil each year than it produces, but overall its numbers are pretty solid. The other thing to keep in mind is that proved developed reserves went up substantially from 24.2 million Boe to 43.5 million Boe. These are reserves that can be expected to be produced but it will take the application of fluid injection or other improved recovery techniques to make it happen. Enhanced oil recovery methods, such as water flooding or carbon dioxide injection, are some of the most common techniques used to extract these kinds of reserves.

Final Foolish thoughts
Now that the numbers are finally out, Magnum Hunter investors have a much better understanding of how the company did last year. Overall, reserves are up, which is exactly what you'd expect after the company spent just over a billion dollars in acquisitions as well as exploration and development. In the year ahead, investors should expect the company to continue to grow both its reserves and value as its continues to invest to develop its asset base.

Magnum Hunter is a very interesting company, however, because of its size and balance sheet there is a lot of risk. If you are on the lookout to balance this risk with a top oil stock you might want to check the stock that The Motley Fool's chief investment officer has selected as his No. 1 stock for this year. To find out which stock it is simply access our special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2013, at 6:04 PM, brooks1988 wrote:

    Two quick notes you did not touch upon that greatly influence your remarks. As for reserves, it is true that EFS reserves are excluded, but no Utica reserves have been booked at all, so the reserve numbers are missing a giant piece. As for PV-10, the number is derived solely from reserves and does not account for the $400m value of MHRs pipeline system -- so again, your comments are missing a major piece of the puzzle.

  • Report this Comment On June 29, 2013, at 8:30 AM, TMFmd19 wrote:

    You are correct, which is why I mention these numbers as being good baseline numbers to look at, but not the only piece of the puzzle. There is a part II coming soon which will break apart the report a bit more.

    Matt

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