This week has seen two very significant developments for Magnum Hunter Resources (MHR) that didn't involve Magnum Hunter. A basic principle in the oil and gas exploration-and-production sector is that "the play's the thing." So companies that are drilling in the same plays should have similar results, and acreage in those plays should have similar valuations.
Given the proliferation of unconventional shale drilling in the U.S., there is no shortage of data. Magnum Hunter Resources CEO Gary Evans has staked the future of the company on his bullishness on the Utica play in particular, and many others are working in that area of southeastern Ohio.
On Monday, Antero Resources (AR) announced Utica results that were so strong, I at first thought there were typographical errors in the news release. The "white whale" in the Utica has been the 30MMcfe/d well. All the operators talk of "30 million per day" wells, and we have seen some from operators such as Gulfport Energy. But Antero harpooned the whale, as its Milligan No. 2 well in Noble County, Ohio, posted an initial production rate of 40.2MMcfe/d. So much for the "30 million per day" well, and it wasn't one fluky gusher, as Antero's five new wells in Noble County collectively averaged 32.2MMcfe/d.
This validates Magnum's bullishness on the Utica and its decision to aggressively purchase acreage in Noble, Monroe and Washington counties in southeastern Ohio. Magnum's best well, the Stalder No. 3 in Monroe County, was scheduled to begin production last week with an IP rate estimated at 22.5MMcfe/d. As Magnum moves up the curve and makes progress toward finding 30MMcfe/d wells of its own, I believe there will be upside to Magnum's targeted 2014 exit rate of 35,000 Boe/d of total company production.
Then it's a question of what is all that volume worth ... and that was answered with a massive transaction in the Utica yesterday. Hess (HES) is selling 74,000 acres in the Utica to a private buyer (The Wall Street Journal reported the buyer as American Energy Partners, Aubrey McClendon's private-equity-backed vehicle) for $924 million. This acreage contains production mainly of dry gas -- lacking the ethane, butane and propane "liquids" that realize higher prices -- but dry gas is valuable in and of itself (especially in this weather), and the Hess transaction tells us how valuable.
The average price per acre was $12,486, matching recent transactions in the Utica, and actually given the dryness of the acreage sold (Hess's stated reason for the divestiture), it would seem to place a floor on Utica acreage valuation. Magnum has a page on its corporate presentation that includes a suggested self-valuation that assumes an average price per Utica acre of $10,500 in the dry-gas window and $11,500 in the wet-gas window. Well, the Hess transaction shows that those figures are too low, and presumably way too low on the valuation in the wetter gas areas, if poor old dry gas can fetch $12,500 an acre.
Although I would never use a company's self-valuation (it's our job to figure out what it's worth, isn't it?), but Magnum Hunter Resources' figures are presented within the standard industry framework, so it's a place to start. Subscribers to my newsletter, The Portfolio Guru Post, will receive a much more detailed valuation analysis on Magnum Hunter, but because of space constraints, I'll just give the highlights:
Magnum Hunter's reserve valuation (as of Dec. 31, 2013, so very recent) is $922 million, and the next step is to value its undeveloped acreage. I used $12,500 per acre for its Utica assets and much lower valuations for their Bakken and Marcellus assets. Giving Magnum Hunter credit for a $1 billion valuation on its Eureka Hunter pipeline asset (Magnum Hunter owns 58%, and I am more convinced than ever that is a billion-dollar asset) and stripping out Magnum's $1.07 billion of debt and preferred stock leaves a fair value per share of $12.25.
That is a huge premium to Magnum Hunter's current share price of $8.24. That analysis is possibly conservative (the company is getting very little reserve credit for its Utica assets because its production there is so new), and this is the reason I am buying MHR shares today for my clients.