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What Magnum Hunter Resources Transition Means to Investors

By Matthew DiLallo - Apr 18, 2013 at 2:00PM

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Magnum Hunter provides investors with an update on its plans now that its exiting the Eagle Ford.

Unconventional exploration and production company Magnum Hunter Resources (NYSE: MHR) recently provided the market with an update on its operations. Included in the update are its plans for the future now that it has announced the sale of its Eagle Ford acreage to Penn Virginia (NYSE: PVA). Let's drill down into this announcement to see what it means for investors.

Eagle Ford
One of the draws of Magnum Hunter is that the company had operations in three of the best emerging resource plays in the country. Now that it's dropping its Eagle Ford operations, the outlook and makeup of the company has changed. The company will be going from a production mix of 60% oil and liquids and 40% natural gas to one that will be 60% gas and 40% oil and liquids. With natural gas prices heading higher that might not be a bad thing, but it is something to watch.

The story here had been of a company transitioning from gas to liquids. While that's still the case, the sale of the Eagle Ford acreage is a step backward, at least temporarily. To start the year the company was planning on spending a third of its $300 million drilling budget in each basin, two of which are very liquids-rich. However, it's now going to split the funds evenly between the Williston Basin and the gassier Appalachian Basin.

Finally, the company isn't completely out of the Eagle Ford just yet. It is currently participating with Marathon Oil (MRO 0.41%) on a well targeting the Pearsall Shale. It's hoping to prove up some of this acreage and eventually package it for sale. Overall, the company sees about $150 million in non-core assets that it can sell. Because of its tight financial situation, these asset sales are necessary to pay down debt and fund its growth. The bottom line is that Magnum Hunter is turning into a gassier company in the near term, but also one with a bit more financial breathing room.

I mentioned that Magnum Hunter's Appalachian operations will be getting a big dose of capital this year. While a portion of that capital will be spent on high-returning Marcellus natural gas wells, part of the plan includes drilling in the Utica Shale. Magnum Hunter believes that its acreage is in the sweet spot of the liquids-rich area of the Utica which should yield exceptional value for the company.

The Utica is an area that investors will need to watch closely. Some operators like Gulfport Energy (GPOR) see the Utica as being one of the best plays in North America. It certainly helps that the company has seen some of the best producing wells in the play which is why its investing heavily to grow in the Utica.

Others, like Chesapeake (CHKA.Q), aren't as aggressive and instead are looking to lighten up on the play. The company is planning to unload some acreage and its spending a greater portion of its capital budget on the Eagle Ford. With Magnum Hunter exiting the Eagle Ford, it certainly bears watching how its Utica wells turn out.

The bottom line
Even after selling its Eagle Ford acreage Magnum Hunter expects to hit its production guidance for the year. It believes that the $300 million in planned capital spending will easily offset the 3,200 barrels of oil equivalent per day of production that it's losing. As long as natural gas prices stay elevated, this move should pay off; however, if we see another sustained drop in gas prices, the sale of the Eagle Ford could end up backfiring on the company. 

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