Whenever a company gets labeled as one thing, it takes a long time to distance itself from that label. Magnum Hunter Resources (NYSE:MHR) is a perfect example. The company has gone through a pretty big turnaround, but can't quite shake its reputation as a doom-and-gloom natural gas stock. Let's take a look at what Magnum Hunter is up to and see if its most recent moves will bring this fast-growing energy company into profitability.
Digging out of a hole
Before Magnum Hunter's turnaround to a predominately liquids producer, it was labeled as a natural gas company that was getting crushed by low natural gas prices. It appears, though, that the label has stuck despite the change in production. Not only has its share price dropped almost 40% this year, but more than 20% of its shares are sold short right now. Another fear is that its balance sheet is a little out of whack, with a pretty high debt load. While certainly it is a concern, it may not be as bad as many expect. Of Magnum Hunter's $1.1 billion in contractual obligations (debt, lease payments, etc.), more than 60% is not due until after 2016.
With three years of wiggle room to get its financial house in order before the big bills come due, the company has a decent amount of time to increase revenue. Between 2012 and 2011, it increased revenue by 141% and boosted production by 128% over the same period. At the end of the fiscal year 2012, it was producing at a rate of 18,200 barrels of oil equivalent per day from all of its sources, and plans to spend another $300 million in capital expenditures to increase production capacity. Much of that will be spent in the Utica shale, where it hopes to spud its first wells in 2013.
In terms of production efficiency, the company has done a commendable job of keeping pace with competitors. in the Bakken shale, Magnum Hunter has reduced its spud to first production time to 38 days, almost half that of major Bakken player Whiting Petroleum. If it can carry efficient operations like that into its other assets, it could be poised to do well in the near future. The one holdup for the company right now is some midstream bottlenecks in its particular locations in these basins. Thanks to some shutdowns at refining facilities and some problems with its own pipelines, Magnum Hunter has had to hold back some production. Once these issues are cleared up, it should be able to continue with operations as normal.
Much of Magnum Hunter's sucess in 2013 will revolve around two things: increasing production and trimming the fat off its asset portfolio. It bought two smaller exploration and production (E&P) companies, NuLoch Resources and and NGAS Resources, within the past couple of years as well as acreage in Williston from Samson Oil & Gas. These acquisitions have been the keystone in Magnum Hunter's sharp pivot from a predominately natural gas company to one that is producing 65% to 70% liquids. The one issue with these acquisitions, though, is that they have left the company with several non-core assets.
In order to relieve itself from financial obligations on these assets and clean up the balance sheet, the company intends to sell off these non-core assets. Right now, these sales involve portions of its Marcellus assets in Kentucky and some of its Williston assets in the eastern part of the Basin. It also intends to sell -- and has multiple offers for -- its Eagle Ford assets. While it may be questionable for a small, growth-oriented E&P company to sell some of its assets, it will still have strong positions in some of the better-performing shale plays in the U.S. It will also be able to focus its capital expenditures and hopefully gain better operational efficiency through concentrated drilling strategies.
Like other smaller E&P companies, Magnum Hunter is hoping for great things from the Williston Basin. On its most recent conference call, CEO Gary Evans said that the company is looking for wells in the Bakken and Three Forks formations to generate and estimated ultimate recovery (EUR) in the range of 500,000 to 750,000 barrels per well. This is a pretty reasonable estimate considering that its peers Triangle Pertoleum and Kodiak Oil &Gas, which have holdings in similar parts of the basin, expect EUR in the range of 500,000 to 950,000.
What a Fool believes
Overall, Magnum Hunter looks like it has positioned itself well for 2013: Production numbers are expected to grow at a healthy pace and increased infrastructure in the Utica, Marcellus, and Bakken will allow the company to command a higher price point. If it can also find a buyer for its ancillary assets and clear some debt off its books, it should be poised to bounce back from this big decline in 2012.
While Magnum Hunter's growth may be impressive, Kodiak Oil & Gas had very similar daily production numbers at the end of 2012 and expects to grow production even faster. Also, unlike Magnum Hunter, Kodiak is an almost pure-oil, one-basin play. To learn more about Kodiak's potential in the U.S.' premiere oil play, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of updates and analysis as key news breaks. To get started, simply click here now.
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