Just two days ago Magnum Hunter Resources Corporation (NYSE: MHR) tumbled to their 52-week low of 2.33, a dramatic crash from the 8.66 shares were trading at back in early April when oil was selling for more than $100 per barrel. With those prices now floating in the $75 range, due in large part to a tough economic climate that has decreased demand for oil, MHR appears to be in the same boat that many other small exploration and development companies engaged in the acquisition, development and production of oil and natural gas are in; sometimes appearances can be deceptive.
Investors simply have to look at the groundwork laid by management to recognize that MHR has the potential to become a real pay day. MHR has been able to purchase properties and small oil companies with valuable assets in three of the most prolific shale resource plays in North America, namely the Marcellus Shale, Eagle Ford Shale and Williston Basin/Bakken Shale. The company has stated they have proved reserves of 32 million barrels of oil and that figure is expected to jump when they deliver their next update in January, couple that with their belief that they sit atop more than 400 million barrels of supply and its clear MHR could be an attractive bet for investors.
Perhaps just as important to investors is the fact that MHR seemingly knows who they are, having entered into definitive services agreements with MarkWest Liberty Midstream & Resources, L.L.C., a partnership between MarkWest Energy Partners, L.P. and The Energy & Minerals Group which will provide for long-term midstream processing and related services in the liquids-rich Marcellus Shale including the natural gas produced in Northwestern West Virginia that is gathered through the Eureka Hunter Pipeline System, part of MHR’s wholly-owned subsidiary Eureka Hunter Pipeline, LLC, and this will include equity production for MHR’s wholly-owned subsidiary Triad Hunter, LLC as well as other third party producers.
What makes this so significant is that as part of the agreements Eureka Hunter has sold its under-construction 200 MMCFE per day capacity Thomas Russell cryogenic natural gas processing plant to MarkWest Liberty. The reason this is so important is simple, MHR is not a processor and this will enable them to concentrate on what they do best, drill and explore, while benefiting from the plant’s eventual installation, to be named the “Mobley 2” plant, adjacent to MarkWest’s 120 MMCFE per day capacity gas processing plant named the “Mobley 1” plant. MarkWest anticipates “Mobley 1” to be in commercial operation in the second quarter of 2012 and “Mobley 2” to be in service the following quarter.
In the press release announcing the agreements Eureka Hunter stated they would be extending their 20 inch gas gathering system to the Mobley processing complex on or before May 1, 2012 “in order to begin delivering unprocessed natural gas production to both Mobley Plants for processing. Eureka Hunter will be gathering both Triad Hunter’s and other third parties’ natural gas production for delivery to MarkWest Liberty’s Mobley processing complex.”
The impact that these agreements will have for MHR was summed up best by Don Kirkendall, Senior Vice President of Eureka Hunter Pipeline, LLC, who stated:
“Due to the very high BTU nature of the natural gas stream produced from the Marcellus Shale in northwestern West Virginia, it has been a priority for Eureka Hunter to not only be able to offer gathering services, but to also offer processing such that the extremely valuable NGLs within this production stream can be captured and then sold on a stand alone basis in order to realize full economic value. These new agreements with MarkWest Liberty will allow Eureka Hunter to become the midstream services provider of choice in Northwestern West Virginia. Adding Mobley processing as another delivery option for producers connected to Eureka Hunter expands the optionality that makes Eureka Hunter so unique in this region. The proceeds to be received by Eureka Hunter from the sale of our Thomas Russell cryogenic processing plant under construction further enhances our liquidity position and allows our expansion activities to accelerate. Eureka Hunter’s sister company, Triad Hunter, will benefit from having a pipeline ready to move its rapidly increasing raw Marcellus Shale production to sales and now processing. The ability of Triad Hunter to book additional NGL proven reserves is also now significantly enhanced. We are excited to be working with MarkWest Liberty in this new relationship. As the largest natural gas processor and fractionator in the Appalachian Basin, MarkWest has operated vertically integrated natural gas processing and NGL fractionation, storage and marketing services to producers for more than 20 years.”
MHR currently controls about 58,000 net acres in the Marcellus Shale region, and along with their positions in Eagle Ford and Bakken the company has generated a daily production exit rate of 8,000 Boepd for the third quarter ending September 30, 2011 and has confirmed their previously announced exit rate guidance of a minimum of 10,000 Boepd at year-end 2011.
While much has been made about the Marcellus Shale region MHR’s most important acreage may lie in the Bakken shale in North Dakota and southern Canada where they control more than 80,000 acres. Given the improvements in technology making it possible to extract oil and gas out of shale MHR should be able to capitalize on lower production costs while increasing output.
Financially MHR is on pretty stable ground as they have already obtained bank credit lines to cover their entire 2012 capital expenditure budget of $200 million, down from the 2011 capital expenditure budget of $255 million. According to the company they believe “the 2012 capex budget will allow for a fourth quarter-to-quarter production growth comparison rate of 35% to 40% and an annual total production growth rate of 80% to 90% when comparing 2012 to 2011. These substantial growth rates are achievable due to the production rates being experienced in the Company’s three unconventional resources plays.”
Obviously shareholders of MHR are hoping that shares have hit a bottom and will build themselves back up and this will depend heavily on the price of oil. That could depend heavily on the economic conditions in Europe, more specifically the continuing crisis in Greece, but by all indications it looks as if European leaders will take the advice of the International Monetary Fund and reinforce banks against worsening market panic. This has already helped push oil above the $80 mark on Thursday after hitting that low of $74.95 on Tuesday.
With shares trading around the 3.30 – 3.38 range on Thursday MHR is currently well below their 50-day moving average of 4.54 as well as their 200-day moving average of 6.50 yet they are trending above their 5-day average of 3.05 and heading higher. With a solid asset base and a stable 2012 ahead now might be the perfect time to jump on Magnum Hunter Resources.