Magnum Hunter Resources Corp's (NYSE:MHR) investors have been on a wild ride in 2014. At times this year the stock has surged more than 20%, only to fall back and then surge again. Those surges seemed to stop this summer when the stock stalled out and took a dive that it had yet to recover from, as we can see from the following chart.
Until just a day ago investors were languishing due to the brutal summer sell off that sent the stock down more than 26% on the year. And then in whiplash fashion the stock rocketed as much as 13% higher in pre-market trading on Sep 25. Here's what's behind the stock's wild ride.
Magnum Hunter Resources started 2014 off with solid results. The company delivered pretty decent first-quarter results as production surged 59% over last year's first-quarter. The company delivered solid results again in the second quarter as it reported a narrower than expected loss, and production again surged, this time by 49% year-over-year. In fact, shares jumped higher after the company announced second quarter results.
The only other news the company announced this quarter was that investment bank Morgan Stanley (NYSE:MS) was buying a stake in the company's Eureka Hunter midstream operations. Under the terms of that deal Morgan Stanley Infrastructure would buy out Magnum Hunter's current partner's 41% stake in the business as well as an additional 6.5% stake from Magnum Hunter. The deal valued the midstream business at a billion dollars and sets the stage for an MLP IPO sometime next year.
Operationally all of the company's news this year has been good. So, why did the share price tumble this summer? Because oil prices are tumbling.
Blame oil for the crash
There is a very direct correlation to Magnum Hunter Resources' stock price with the price of oil. So, when oil prices started falling this summer so did the price of Magnum Hunter Resources' stock.
Overall, Magnum Hunter Resources doesn't produce a lot of oil. Last quarter it produced just 411,000 barrels of oil, which was just 28% of its total output. However, oil represented more than half of the company's revenue and a lot of cash flow. So any slide in the price of oil will really pinch the company's profits.
To make matters worse, Magnum Hunter Resources announced in the second quarter that it planned to monetize all of its oil operations in the Bakken shale. Given that the price of oil has been really slipping, it's taking the potential value of those assets down with it. So, it makes it less likely that Magnum Hunter Resources will be able to sell the assets at the high end of its target range at well over a half billion dollars.
Thank natural gas for the rebound
The story almost ended there on that sour note. Then the fortunes of Magnum Hunter Resources shifted after it announced on Sept 24 that it discovered one of the best shale gas wells ever recorded in the U.S. The company's Steward Winland well located in West Virginia's Utica shale tested at a peak rate of 46.5 MMcfe/d. It's an extraordinary result not just because of the amount of natural gas flowing out of the well but the location of the well is in the most Southwestern part of the play. This seems to confirm that Magnum Hunter Resources' Utica shale position is loaded with natural gas, which is why investors once again started buying the stock, sending it rocketing higher.
Magnum Hunter Resources investors can expect the company's wild ride to continue. It's betting big on the Utica shale by selling its oil assets in the Bakken to put all of its focus on the Utica and Marcellus shale plays. Only time will tell if that bet will pay off, but the company's recent well success is certainly reason to be optimistic.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.