Natural Gas

Photo credit: Flickr/Nicholas A. Tonelli 

Last week, Magnum Hunter Resources (NYSE:MHR) posted decent first-quarter results. The shale-focused oil and gas company reported a 59% surge in adjusted production, which fueled an 89% jump in the company's EBITDAX. Let's take a closer look at the quarter, as well as what investors should expect going forward.

Drilling down into the results
Magnum Hunter Resources has worked hard lately to sell off noncore assets so that it can focus on its three core plays and its midstream business. The center of its core business are operations in the Marcellus and Utica shale plays. Last quarter, the company completed six net wells in those two plays, including its first dry gas Utica shale well. That was one of the best gas wells in the Utica shale so far, which bodes well for the company's future potential in the play.

Magnum Hunter Resources' other core play is the Bakken shale. Here the company is slowly selling off noncore acreage in order to focus on its best acreage in that key oil play. Magnum Hunter last quarter announced that it expects to close the sale of its Tableland assets in Canada soon, while it is close to securing a deal to sell some of its noncore acres in North Dakota. Both of these deals would improve the company's liquidity and enable it to continue drilling high rate of return wells elsewhere in its portfolio.

Magnum Hunter is also making significant progress tying in its Bakken wells to ONEOK Partners' (NYSE:OKS) natural-gas gathering system. The company plans to have 95% of its wells tied into the ONEOK Partners system by the end of the year, which will have a big impact on reducing the amount of natural gas flared. Magnum Hunter Resources sees these connections to the ONEOK Partners system as a real milestone.

Pipeline Construction

Photo credit: Flickr/Vicki Watkins.

The final highlight worth noting on the quarter was Magnum Hunter Resources' own midstream segment. The Eureka Hunter system's throughput volume reached a record high in the quarter, which fueled a 99% increase in that segment's revenue. The company sees this segment being key to its ability to meet its full-year production guidance, and to avoid the fate of peers such as Gulfport Energy (NASDAQ:GPOR), which recently scaled back its growth plans due to midstream issues.

The game plan
Looking ahead, Magnum Hunter Resources' plan is to continue selling off noncore assets in order to focus on the best acres within its three core plays. This plan is critical to the company's ability to fund its 2014 capital plan of $400 million, which Magnum Hunter believes should more than double production from last year's rate.

Magnum Hunter Resources Growth Rate

Source Magnum Hunter Investor Presentation (Link opens a PDF).

While the company's production guidance rate for 2014 has been lowered to 32,500 BOE/d to reflect recent asset sales, that's still a very compelling growth rate. It's a rate that the company doesn't expect to slow anytime soon and could actually accelerate in the future, as Magnum Hunter is contemplating the addition of another drilling rig next year.

That's in stark contrast to Gulfport Energy, which recently noted that taking a "more measured, methodical approach to the development program in the Utica was needed." That statement, made by new CEO Michael Moore in the company's earnings release, caught Gulfport Energy investors off-guard. One of the main drivers of the decision to slow its pace of growth was issues Gulfport Energy was having with its midstream partners, which is beyond the company's control.

Midstream issues are not a problem that Magnum Hunter Resources expects to have because it controls the midstream partner in its core Utica and Marcellus shale plays. While its gas production in the Bakken is tied into its relationship with ONEOK Partners, that's a much smaller portion of its production. 

Investor takeaway
Magnum Hunter Resources is on pace to have a pretty good year. The company is just getting started in the Utica shale, with the early results very promising. If those results hold as it drills more wells, Magnum Hunter Resources could really deliver outstanding value creation in the years ahead.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends ONEOK Partners, L.P.. 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.