Is Magnum Hunter Resources' Acreage Worth Drilling?

While the company’s balance sheet is definitely a cause for concern, is its Utica acreage on the sweet spot?

Mar 31, 2014 at 10:13AM

Magnum Hunter Resources Corp.'s (NYSE:MHR) balance sheet may prove to be a hindrance to its ambitious growth plans despite natural gas prices moving north. But if state geological reports are to be believed, its core holdings may not be in the sweet spot of the Utica Shale play.

Marcellus

A natural gas rig in the Marcellus formation. Source: Wikipedia

Following the successful production exploits of Antero Resources Corp. (NYSE:AR), Magnum's decision to focus on developing its Utica and Marcellus acreage this year sounds like a solid strategy, at least on paper. But a glance through its balance sheet raises the question of whether the Houston-based Magnum Hunter has the resources to actually pull it off. At the moment, the company's balance sheet looks less than stellar.

How the company has been financing its operations
For 2014, Magnum Hunter Resources plans to spend $400 million as capital expenditure, of which 65% is allocated to developing the Utica and Marcellus shale plays. However, with only $41.7 million cash in hand and a revolving credit facility of $218 million due in 2016, meeting these expenses looks like a tall order.

Last year, cash proceeds from sale of assets came to $506 million, and to a large extent, this helped the company fund its capital expenditure of $631.5 million. This year shouldn't be much different. Management is looking forward to further divesting $400 million worth of non-core assets with sales of $69.5 million already executed in the first two months. This should definitely help. However, a delay in executing these divestitures could hurt the company's future drilling plans.

At the beginning of this year, Magnum had negative working capital with a net working capital ratio of 0.66. This is worse than the previous year's ratio of 0.84.

According to its annual report, among planned divestitures are properties in the southern Appalachian Basin in Kentucky and Tennessee, as well as the Canadian operations of Williston Hunter Canada, a wholly owned subsidiary of the company. But investors must keep in mind that not all these divestitures have been profitable. Last year, Magnum recognized a net loss of $44.6 million on sale of assets. This is over and above the $97 million expense in exploration and abandonment activities, thanks to expired leases on properties that the company did not choose to develop. Additionally, depreciation, depletion, and amortization costs increased almost 40% to $99 million. It seems that Magnum's acreage may not be that exciting.

A risky investment
Back in 2009, Magnum had acquired the privately held Triad Energy from going bankrupt for about $81 million. This included about 88,000 net mineral acres in Ohio, West Virginia, and Kentucky. Approximately, 47,000 net acres cover the Marcellus Shale play that is now a part of the company's core acreage holding.

However, compared to the likes of the Bakken and the Eagle Ford, the Utica is still far from being a prolific oil and gas play. While the latter has seemingly garnered a lot of attention as America's next hottest shale play, it is yet to witness high-volume producing wells on a consistent basis. According to various reports, the Utica shale's "sweet spot" is turning out to be smaller than initially thought, and the oil-rich window is concentrated in a narrow belt. The question is: Does Magnum's acreage fall in that sweet spot?

According to a former chief geologist from Ohio Department of Natural Resources, Larry Wickstrom, the real hot spot on the play could be more to the south than originally thought. According to him, the narrow belt runs from Carroll County in the north, moving down to Harrison County, followed by a little of Guernsey in the east, and down into Noble County. He additionally mentions that Monroe, Jefferson, and Belmont counties are potentially rich in dry gas. The following chart from the Ohio DNR gives a clear picture:

Thickness Map Of The Utica Shale Play

Source: Ohio Department of Natural Resources.

So where does Magnum Hunter stand? Most of the company's holdings are further south -- in the Noble and Washington counties. However, its Monroe county acreage has shown promise. In February, the Stalder wells (in Monroe County) have tested to a peak rate of 32.5 million cubic feet per day, or Mmcf/d, of natural gas. In the month of March, the company is anticipating a net incremental production of 6,000 to 8,000 barrels of oil equivalent per day, or Boe/d.

Of course, Utica's sweet spot could be extending further south than already anticipated. Until a consistent production pattern is established, the current inferences are still nothing more than "educated guesses." However, the next 12 months should most probably bring a confirmation.

A Foolish takeaway
While the latest update on production increment is a positive development, it's still a long way from Magnum's targeted exit production of 35,000 Boe/d for 2014. The targeted divestures must soon take place in order to meet working capital requirements. But most importantly, as production and sales volumes grow, management must address its balance sheet concerns.

Invest in America's growing energy renaissance by exploiting this "loophole"
You already know record oil and natural gas production is revolutionizing the United States' energy position. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance. For this reason, The Motley Fool is offering a look at three energy companies using this small IRS "loophole". Take advantage of this profitable opportunity by grabbing your brand-new special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on advice that could help you cut taxes for decades to come. Click here to access your report -- it's absolutely free. 

Isac Simon has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers