Magnum Hunter Resources

In May 2009, Gary C. Evans, chairman and CEO of Magnum Hunter Resources, after a brief respite from the US oil and gas industry due to the sale of his prior company of similar name, reentered the sector. It was a time when oil prices fell from $140 per barrel to less than $40 per barrel and natural gas prices dropped from the teens to $5.00 per mcf. Many oil and natural gas operators saw credit lines squeezed and access to capital was nearly impossible. Undeterred, Evans assumed the role of CEO at Petro Resources. He renamed the company Magnum Hunter Resources and started building the company's assets base.

Today, Magnum Hunter Resources has grown from $10 million to approximately $1.3 billion in market value. Production has increased from a few hundred barrels of oil per day to more than 17,000 barrels of oil equivalent (boe) per day, headed to 25,000 boe per day in a few months. After all this growth, Evans believes that the catalysts that will truly define Magnum Hunter's future value will play out in 2014 and beyond.

Emergence of the Utica Shale

Twelve out of 18 sell-side analysts currently covering Magnum Hunter have strong-buys or buy recommendations on the stock. Many believe the company's upside potential lies in the upcoming drilling results in the Utica Shale play, or, as Evans describes it, "a carbonate reservoir surrounded by shale."

The Ohio Department of Natural Resources estimates the recoverable potential of the Utica to be between 1.3 billion to 5.5 billion barrels of oil and 3.8 to 15.7 trillion cubic feet of natural gas. Evans believes these figures to be low.

Instead of rushing to develop the play, Magnum Hunter, an operator that initially gained access to the play in 2010 through the acquisition of Triad Energy, elected to wait. As the company watched the play through 2012, it recognized a key change in the development and direction of the play. Acreage in the northern section—previously deemed as "core"—started to report less than stellar results. As the play evolved, more and more drilling results pointed toward development in the southeast where Magnum Hunter's acreage was held by production from shallower targets.

Recognizing the transition, Evans quietly amassed a position of approximately 100,000 net acres in what is now being deemed as the "core" portion of the Utica.

Evans believes at a $3.70 per Mcf gas price, companies still have the ability to generate internal rates of return north of 100% – making it more economical than just about every oil or gas basin in the US. "We believe the US will be in a $3.50 to $4.25 regime for quite a while," Evans said. "That's a positive for us because it prohibits many of the other basins from participating in future natural gas development." Operators in other basins simply can't drill economically in a sub-$4.50 natural gas environment – leaving a bigger piece of the production pie for companies like Magnum Hunter.

"The Utica is truly a world-class reservoir – it has all the characteristics you look for: porosity, permeability, total organic content, lithology, resistivity, shale barriers, pressure, and depth," he said., cautioning that early play hurdles such as midstream contraints and infrastructure limitations must continue to be addressed. The problem will continue to grow as new wells come online, said Evans, citing the limitations as one reason the company has its own midstream subsidiary.

Pioneering the southern portion of the play

The majority of industry activity in the Utica has been focused to the north of Magnum Hunter's acreage posotion in Noble, Carroll, and Harrison Counties, Ohio. However, in 2013, the company captured the industry's attention by spudding two wells in the southeastern portion of the play. Its first Utica well was drilled from the Farley pad in Washington County, but TD was actually in Noble County. While the company encountered a pressure kick and mechanical setbacks that prohibited full completion (10 frac stages compared to a planned 26 stages), results on the completed stages spurred the company to start drilling its second well off the Farley pad. Evans is drilling its second Utica well from the Stalder pad. A robotic drilling rig owned by Magnum Hunter's subsidiary, Alpha Hunter, is expected to drill eight wells in the Marcellus (one already drilled) and 10 wells in the Utica – a concept yet to be explored by other companies.

2014

Evans says Magnum Hunter's current goal is to bring on a new Utica well from the Stalder pad, a new Utica well from the Farley pad, as well as potentially drill a third Utica well – this time – in Tyler County, WV. This, coupled with its Marcellus and Bakken operational programs, allowed the company to re-affirm its 2013 exit rate guidance of 23,000-25,000 boepd and announce a 2014 exit rate guidance of 35,000 boepd. Near-term non-core asset sales targeting $200 million in Canada, the Williston Basin and Appalachian Basin will keep the cash-flowing towards the company's Utica and Marcellus projects. The recent Antero IPO and the generous cash-flow multiples that Utica-based operators are receiving positions the company well, said Evans. "A number of operators are drilling new wells around us in the area. We've been patiently watching the trend, buying acreage, and getting ready to come shooting out of the cannon in 2014."