Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



An Energy Marriage Proposal That Looks Like a Match Made in Heaven


Source: Flickr/Shelley Panzarella.

I'm pretty bullish on the energy sector. While my portfolio is loaded with energy stocks, I'm always on the lookout for new names to add. There are two energy stocks in particular that I really like, but I'm hesitant to add either because I see both as being a little too risky for my tastes. Not only that but as separate entities, neither offers the complete exposure to America's energy boom that I'm seeking. This got me thinking that if these two young stars merged, the combination would make a great energy growth stock.

That's why I'm proposing a marriage of sorts between Magnum Hunter Resources (NYSE: MHR  ) and Halcon Resources (NYSE: HK  ) . While both have a dynamic future by going it alone, I think the sky is the limit for the combined entity. Here's why.

Singular focus is good but not great
Magnum Hunter Resources looks like it has a bright future. The company is growing fast, has a solid management team, and is just loaded with energy potential. I really like its strong oil-rich position in the Williston Basin, which when combined with is liquids-rich position in the Appalachian Basin gives the company a promising one-two punch. As the following slide shows, Magnum Hunter Resources has amassed solid positions in both key plays.

Source: Magnum Hunter Resources investor presentation (link opens a PDF).

The company will use those two basins to achieve daily production of about 35,000 barrels of oil equivalent by the end of this year. That strong growth is more than double the production rate of last year.

That said, it is beginning to produce more natural gas, which is still out of favor. That's because its current focus is on drilling in the gassy Marcellus and Utica Shale plays after it sold its oil-rich Eagle Ford assets last year. The lack of oil fueled growth is one reason why I've shied away from the company. On top of that, it has a fairly complex balance sheet that's weighed down by debt due to its aggressive approach.

Halcon Resources, on the other hand, is an oil-rich company as 84% of its reserves are oil. Further, as the following slide shows it has assets in the Bakken/Williston Basin, Texas, and the emerging Tuscaloosa Marine Shale.

Source: Halcon Resources investor presentation (link opens a PDF).

Halcon Resources sees its assets producing a 61% surge in production this year to an average of about 40,000 BOE per day. Most of that production will be high-value liquids as Halcon Resources is spending all of its capital this year to capture liquids-rich growth.

The problem I have with Halcon Resources is that its aggressive growth plans have led to a few stumbles along the way. For example, Halcon Resources recently gave up on the emerging Utica Shale after its first few wells didn't turn out as expected. Not only that, but its debt is a bit high as Halcon Resources, like Magnum Hunter Resources, has used debt to fund much of its growth.

Why two are better than one
I think that many of my concerns with both companies could be eliminated if these two would just join forces. A combined entity would have impressive positions in five of the top shale plays in North America. By combining the overlapping positions the company would hold a massive 294,000 net acre position in the oil-rich Bakken Shale as well as 241,000 net acres in the liquids-rich Utica Shale. On top of that, the combined entity would hold 79,000 net acres in the Marcellus, 100,000 in an extension of the Eagle Ford Shale, and more than 300,000 net acres in the emerging Tuscaloosa Marine Shale.

Those acres would hold proved reserves totaling more than 211 million BOE. In addition, the combined entity would have nearly 2.2 billion BOE of potential resources when adding in probable, possible, and continent resources. Further, the production of the combined entity would be much more balanced by commodity type.

Also, a move like this would allow the combined entity to achieve synergies in the areas of overlap and combine best practices to save money. Further, it would then have greater scale so that it could simplify and improve its balance sheet. Add it all up and there's a lot of upside potential. 

Daddy wants this bird out of the nest
While this particular merger idea is merely a figment of my imagination, it's not completely out of the realm of possibility. Halcon Resources CEO Floyd Wilson has gone on record in saying he's looking to sell his company as soon as possible. While a cash sale to a larger oil company is his ideal exit, that will take a while. On the other hand, a stock-for-stock merger with a company like Magnum Hunter Resources would provide him with a much more saleable asset once the merger synergies are achieved that could net everyone a very nice profit when a bigger oil company comes calling.

The IRS wants you to profit from the energy boom
Record oil and natural gas production is revolutionizing the United States' energy position. It can also revolutionize your portfolio thanks to a secret IRS loophole few investors know about. That's why The Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Read/Post Comments (1) | Recommend This Article (6)

Comments from our Foolish Readers

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 April 30, 2014, at 12:47 PM, Mega wrote:

    I don't think Halcon wants to tie this albatross around their neck. Despite exuberance in the stock price, MHR's financial position is increasingly tenuous.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2923801, ~/Articles/ArticleHandler.aspx, 8/29/2015 7:44:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated 22 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
HK $1.05 Down -0.01 -0.94%
Halcon Resources C… CAPS Rating: **
MHR $0.85 Down -0.06 -6.47%
Magnum Hunter Reso… CAPS Rating: **