Magnum Hunter Resources Corp. Puts Its Foot on the Gas

Magnum Hunter Resources Corp. is selling stock to accelerate its drilling program.

May 28, 2014 at 1:07PM
 Natural Gas Rig Pa

Source: Flickr/Nicholas A Tonelli.

Magnum Hunter Resources Corp. (NYSE:MHR) announced today that it was selling $150 million in common stock in a private placement. The company is selling shares for $7.00 apiece to a private investment firm run by former oil and gas executives. The investment firm is also picking up warrants to buy another $18.2 million in stock at $8.50 per share. In total, Magnum Hunter Resources is selling about 15% of the company to what will now be its largest shareholder. The capital raise was done with one goal in mind: Magnum Hunter Resources plans to accelerate its natural gas drilling program in the Marcellus and Utica Shale plays.

Foot on the gas
Magnum Hunter Resources plans to use the $150 million capital injection to add another drilling rig to accelerate its drilling operations on its 200,000 net acres in the Marcellus and Utica Shale plays. In addition to that, it plans to use some of the funds to buy additional oil and gas leases in Ohio and West Virginia that are prospective for both shale plays. Finally, the company will use a portion of the proceeds to pay down its senior revolving credit facility.

After closing the deal, Magnum Hunter Resources will have about $208.5 million in total liquidity. That liquidity, when combined with its active non-core asset sale program, should provide the company with enough money to continue to execute on its strategic drilling program in these natural gas-rich shale plays.

Accelerating while others are braking
Magnum Hunter Resources' plan to accelerate its drilling in the Utica Shale is coming at a time when some of its peers, most notably Gulfport Energy (NASDAQ:GPOR), are actually putting the brakes on growth. Gulfport Energy's new CEO, Michael Moore, noted in the company's first-quarter press release that his priority was to take a more prudent approach that balances near-term growth with long-term value. Because of that new approach, the company decided to tap the brakes and take a more methodical approach to developing the Utica Shale.

However, there is one key difference between Gulfport Energy and Magnum Hunter Resources. That's access to midstream pipeline capacity, which has been an issue for Gulfport Energy. This is an issue that doesn't plague Magnum Hunter Resources to the same degree because it controls its midstream destiny thanks to its ownership in Eureka Hunter Midstream, which operates in the heart of its Utica Shale acreage, as the following slide shows.

Eureka Hunter Utica Exposure

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

This is proving to be a real competitive advantage as Magnum Hunter Resources can easily ramp up its drilling program as it can plan for Eureka Hunter to build pipelines around its new wells. Meanwhile, competitors like Gulfport Energy need to wait for pipeline companies to come to its new wells, which is slowing it down.

Investor takeaway
This advantage is one reason why Magnum Hunter Resources can really putting its foot on the gas. The company has been selling off oil assets in order to focus nearly all of its attention on growing in the Marcellus and Utica Shale plays. It's a pretty bold move for the company that should pay off as long as natural gas prices stay reasonable.

1 easy way to profit from the energy boom
While Magnum Hunter Resources has its own midstream company, most of its peers pay someone else for those services. These "middlemen" are a very profitable thanks to a small IRS "loophole" that helps these companies line their investors' pockets with cash. You can learn how to profit from these companies by checking out 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. 

 

Matt DiLallo 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.

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