Will Magnum Hunter Resources Prove Chesapeake Energy Right?

Magnum Hunter Resources (NYSE: MHR  ) will release its quarterly report on Friday, and investors have seen their shares soar in recent months as the tiny oil and gas production company has made some bold strategic moves to take advantage of opportunities in the domestic energy industry. One of the biggest bets Magnum Hunter is making is in the Utica shale play, which Chesapeake Energy (NYSE: CHK  ) identified early on as being a potential treasure trove that could match, or even exceed, existing hotbeds of activity like the Eagle Ford. But with Magnum Hunter putting its money where its mouth is, will investors reap the rewards?

Magnum Hunter is far from a household name even among energy investors. But having held stakes in areas like the Bakken, Eagle Ford, and Marcellus shale plays, Magnum Hunter has built a reputation as a player in the key high-growth opportunities in U.S. oil and gas production. Yet, with recent asset sales, Magnum Hunter has greatly increased its focus on the Utica shale, hoping to match encouraging initial results from Chesapeake and other exploration companies there. Let's take an early look at what's been happening with Magnum Hunter Resources over the past quarter, and what we're likely to see in its report.

Stats on Magnum Hunter Resources

Analyst EPS Estimate

($0.17)

Year-Ago EPS

($0.08)

Revenue Estimate

$82.93 million

Change From Year-Ago Revenue

18.9%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

How long will Magnum Hunter earnings stay in the red?
Analysts have marked down their views on Magnum Hunter earnings in recent months, widening loss estimates by a nickel per share for the third quarter and by roughly a third for the full 2013 and 2014 years. The stock, though, has soared, climbing 67% since early August.

Magnum Hunter saw huge growth coming into the quarter, with its second-quarter report in August finally getting the company's investors up to speed. The company almost doubled its revenue during the quarter as it increased production by 23%, and it highlighted its efforts to grow production by as much as 40% throughout the rest of 2013. Solutions to recent problems in getting products moved out to market should help Magnum Hunter raise output further.

But Magnum Hunter's most unusual aspect is that it has chosen to sell promising assets at premium prices. The company sold off key assets in the Eagle Ford to Penn Virginia during the second quarter, booking a profit of more than $150 million on the $400 million deal as Magnum Hunter identified the true value of the assets to Penn Virginia's operations. In September, the company followed up with sales of non-core Bakken assets to Oasis Petroleum (NYSE: OAS  ) , generating another $32.5 million to reinvest in other plays, and Magnum Hunter expects further sales to raise cash from lower-priority assets.

With the proceeds, Magnum Hunter is following up on Chesapeake's early call and putting money into the Utica shale and other top-priority plays. Gulfport Energy and Rex Energy have been equally aggressive in investing in the Utica shale, and early results have not only produced good production rates, but, also, a favorable mix of oil and liquids to dry-gas. For its part, Magnum recently referred to the Utica as the "potentially best shale play in U.S.," pointing to favorable prospects for estimated ultimate recovery of oil and gas.

In the Magnum Hunter earnings report, look closely to see if the company provides more insight into the results from its exploration efforts in the Utica. With so much at stake, Magnum Hunter needs to prove Chesapeake right and get big payoffs from the area if it wants to become profitable in the long run.

Should you look beyond Magnum Hunter?
Magnum Hunter's Utica bet is just one way in which record oil and natural gas production has changed the face of the entire domestic energy industry. But finding the absolute best plays to take advantage of the boom times will reap the greatest returns. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Click here to add Magnum Hunter Resources to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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