Magnum Hunter Resources (ticker: MHR) is an oil and natural gas exploration and production company active in three shale resource plays in North America: the Marcellus Shale, Utica Shale and the Williston Basin/Bakken Shale. The company’s growth platform is supported with approximately 350,000 net acres spread across its core operating regions.
2014 Upstream CAPEX Focused on Marcellus/Utica
Magnum Hunter Resources announced that its 2014 capital expenditures budget, excluding acquisitions, will consist of $400 million. The upstream portion of the 2014 CAPEX is approximately $310 million which will be allocated as follows: $260 million to the Marcellus/Utica and $50 million to the Williston Basin. In 2013, the $300 million upstream budget was allocated 50/50 between Appalachia and the Williston Basin. The reduced spending in the Williston Basin and reallocation to the Marcellus/Utica should come as no surprise. MHR believes the Appalachian division will be the dominate growth driver for the company going forward as they continue to pursue non-core asset sales of approximately $200 to $400 million and use the lion’s share of 2014 capital in the Utica/Marcellus. The company anticipates growing production from between 23,000 and 25,000 BOEPD by year-end 2013 to 35,000 BOEPD by year-end 2014.
Utica Shale and Marcellus Shale Overview
The $260 million allocated for MHR’s two shale plays will be directed towards the area’s delineation and development. Approximately 65% of the company’s asset base lies in this region, and positions in Monroe, Noble, and Washington Counties, Ohio and in Tyler and Richie Counties, West Virginia, are the primary targets of the delineation plans. Approximately 180,000 combined net acres are held in the region, and the company anticipates drilling 23 to 25 gross horizontal wells in 2014 while running five rigs (operating two to three).
Eureka Hunter Brings Additional Value with Growing Volumes
MHR’s wholly owned midstream subsidiary, Eureka Hunter, will receive $90 million of the 2014 expenditures. The pipeline is positioned in the Marcellus/Utica and moves not only MHR’s production, but production from third parties as well. As the Utica and Marcellus continue to grow, the pipeline system will continue to grow in value for MHR.
Research Commentary
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Magnum Hunter Resources following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
Stifel Note – 12.12.13
2014 Capex Spending Plans Provided; In Line with Expectations
Investment summary. This morning before the open, MHR announced a $400mm 2014 capex budget that was roughly in line with Stifel and Street estimates and up 9% from its 2013 expenditures. 2014 exit rate guidance remained the same with no full year guidance provided. Capex spending will be mostly focused on its Uitca/Marcellus acreage with 2-3 rigs running in the area up from previous expectations of two rigs. Key Uitca well results are expected in 1Q14 from its Farley (Noble County), Stalder (Monroe County), and Tyler County Utica tests. However, given the mixed Utica results from PDCE yesterday, initial poor results from its first Farley well (previously disclosed) which did not have all the frac stages contribute, current EV/2014 EBITDA valuation of 10.2x, risk of 2014 consensus production numbers being too high (Stifel estimate of 22.4 mboe/d vs consensus of 26.2 mboe/d), and the leverage and FCF outspend, we maintain our Hold rating. If the upcoming Utica well results are positive and the Utica acreage is further derisked, we believe that the stock could potentially move up to the $9/sh area over the coming year. However, if the rates/EURs disappoint, we believe that this could be an approximately $5 stock with a worse balance sheet from the outspend. Given the upside/downside case, mixed industry Utica results yesterday, early nature of the Utica in the area, and the leverage/valuation/FCF situation, we maintain our Hold rating factoring in the risk profile.
2014 spending up 9%, asset sales should fund the bulk of the cash flow outspend.
MHR announced its 2014 capex budget, where the company plans to spend $400mm next year on drilling and midstream expansions, an increase of 9% from our 2013 capex estimate of $365mm and roughly in line with our previous estimate of $410mm. However, the announced midstream budget is nearly double our $50mm estimate with E&D spending lower than anticipated. The budget will be funded by operating cash flows, borrowings under its credit facility and non-core asset sales that could total $200-$400mm. Based on our cash flow estimate of $116mm and $26mm in dividends, we estimate MHR would outspend cash flow by nearly $310mm, which is roughly in line with the midpoint of the guided asset sale range.
Valuation. MHR trades at 10.2x its 2014 EV/EBITDA and 69% of its risked NAV versus our coverage average of 6.0x and 73%.
Appalachia takes center stage next year, operated Bakken drilling down. Next year’s budget is consistent with the company’s pivot toward the Marcellus and Utica with nearly 84% of its $310mm E&D budget going toward its key basin. MHR plans to run two to three operated rigs in Appalachia next year and drill approximately 23-25 gross horizontal wells. While the company did not give a split between Utica and Marcellus wells, we believe the focus will be primarily on drilling Marcellus wells given the more developed gathering and processing infrastructure. The remaining $50mm in E&D capex is allocated to the Williston Basin, where MHR will participate principally as a non-op partner in 15-20 gross wells located mostly in the Ambrose Field in Divide County.
Baird Energy Daily Dirt Note – 12.12.13
2014 capital budget set at $400MM to focus on Utica/Marcellus; reiterates 2014 exit rate of 35,000 boe/d. MHR announced a $400MM capital expenditure budget for 2014 this morning, which is just slightly below our $415MM forecast but in line with consensus $405MM. The company will allocate $260MM (65%) to the Marcellus/Utica, $50MM (12.5%) to the Williston, and $90MM (22.5%) to Eureka Hunter. The $400MM includes the planned mineral rights acquisitions in the Marcellus/Utica but excludes other potential acquisitions. MHR also reiterated its 2014 exit rate target of 35,000 boe/d, implying ~46% Y/Y growth from 2013 exit target. MHR expects to fund the majority of the capex through cash flow from operations and non-core asset sales of $200-400MM, as well as its existing revolver and a new Eureka Hunter revolver that is currently being negotiated. Stock reaction likely muted given this in-line announcement. Maintain Outperform.
Capital One Securities Morning Energy Summary Note – 12.12.13
Positive. MHR’s 2014 CAPEX & year-end 2014 production exit rate guidance of $400MM & 35 Mboe/d are positive vs our estimates of $448MM & 34.5 Mboe/d. The company plans to allocate $260MM to its Utica Shale & Marcellus plays (drilling 23 – 25 gross horizontal wells), $50MM to the Williston Basin (drilling 15 – 20 gross horizontal wells), and $90MM for midstream activities (compared to our $70MM estimate). MHR did not provide a liquids component for its production exit rate guidance, while we estimate oil will account for 45% of 2014 production.
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