Magnum Hunter (NYSE:MHR) Switches to Natural Gas Reserves


In view of recent dramatic drop in the global oil prices, the oil drilling companies are shifting towards options that are more favourable. Quite recently, Magnum Hunter Resources (NYSE:MHR) seems to have changed their business specialty. Earlier last year, the company crashed out of Eagle Ford and has similar plans for its presence in Bakken Shale before years end. The generated capital is projected to be invested to extend its natural gas business in Marcellus and Utica. This has made Magnum Hunter (NYSE:MHR) the undisputed leader in the natural gas market.

This has resulted in stocks reaching new heights. If this strategy works as anticipated, the company is expected to have 90% natural gas produce. In order to achieve this target, Magnum Hunter (NYSE:MHR) will need to sell remaining of its Bakken Shale oil assets. However, this task will be met with challenge due to significant drop in oil prices in recent times. Even if the company stays with the current field of action, it is an unlikely decision to invest such huge amounts on an investment that doesn’t have steady trends, since 9%, on least margin is a feasible return capital, provided oil prices per barrel are $75.

The natural gas outlet seems like a good escape in the current market scenario. According to statistics, even if gas prices fall $2 per MCF, the company will still have returns amounting up to 10%.

If the current spot price of$4  for natural gas is taken in to account, even with oil prices continue to drop, Magnum Hunter (NYSE:MHR) bags significant profit margins. Hence, current strategy seems to play in favour of the company and other setups might consider making similar shifts, which will certainly make it a more competitive market.

Hence, Magnum Hunter (NYSE:MHR) is expected to enjoy a wide margin of a low 37% to over 72% on its best yielding wells. It is due to these calculated figures that has compelled Magnum Hunter (NYSE:MHR) to shift its lone focus on the natural gas reservoirs in the Utica and Marcellus regions.

Magnum Hunter (NYSE:MHR) currently owns a total of 80,500 net acres in Marcellus shale, along with 118,000 net acres in Utica shale. According to estimates drawn by Magnum Hunter (NYSE:MHR), a total of 1,438 location in these acres remain untouched and ready to be explored. Given the size of the company, this is quite a significant growth opportunity as each of these sites is a treasure waiting to be unearthed.

The only constraint is unavailability of sufficient capital to chase this ambitious growth. Its previous oil drilling business had remarkable return values over the past few years. Hence, it is likely that Magnum Hunter (NYSE:MHR) won’t be able to fund its natural gas drilling plans in Utica and Marcellus. In addition, the debt market funding source also seems to be drying up.

However, Magnum Hunter (NYSE:MHR) continues to yield significant cash flow that generates from the new gas wells. Hence, it can continue to exploit reserves with current fiscal status.