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First, Magnum Hunter is a turn around story. If you do some due dilligence, you will see that the current management team has cleaned house and taken the steps to turn MHR into a highly successful E&P resource play.
Second, earnings and positive cash flow are 2 very different animals. MHR is cash flow positive, earnings are a GAAP machination that is subject to numerous non cash charges.
Third, Production is rising rapidly as MHR commences several drilling programs in highly prospective basins (Marcellus and Eagle Ford).
Fourth, Magnum Hunter has something like 24,000 net acres in the Eagle Ford play. Many companies are paying as much as $5000/acre for this land. They have something like 27,000 acres in the Marcellus. Again, companies are paying huge sums of cash for this type of blocked, contiguous acreage, perhaps as much as $3000-$4000 an acre.
They also have a slew of existing production, around 2000 boe/d from a combination of conventional and waterflood properites, including acreage in North Dakota that might be prospective for the Bakken,Three Forks and Sanish formations.
Fifth, they have a nice pipeline system in Marcellus that they have JV'd with DCP Midstream and will be growing at a very fast clip over the next couple of years as sections of W. Virginia and Ohio that have never had take away capacity (ever!) are opened up to drilling. MHR is using that pipeline as a means to gain working interests, farm ins, JVs and partnerships to drill on acreage held by small mom and pop E&P's that cannot afford to drill a Marcellus well or do not want the risk.
Finally, if you look at most E&P companies, they are valued around 5-7x cash flow and in some cases more depending on the amount of acreage they ahve. If you look at MHR's production or rather its anticpated 2011 production, assign a $60/bbl netback, multiply it by 7x, you can see that this is easily a $8-$10 stock.
Join the ride, the train hasn't left the station yet.
Thank you for your articulate reply. I have a few questions.
Exactly what "GAAP machinations" are preventing MHR from showing a profit?
Even at the land prices you quote, the Eagle Ford land is worth about $120M and the Marcellus land is worth around $100M. That is a very long way from $450M. Do you really think they could get those prices today? Let's face it there is a natural gas glut that seems have no end in sight. At some point you have to expect land prices to fall.
Exactly how much experience does the current management team have with fracking? I understand it is very challenging technically and that what work in one area does not necessarily work in another.
I hope my questions don't sound too negative. I have found that considering the negative case for a company allows me to invest with confidence. I am a long-time investor (30 years). I understand the joy experienced by investors who acquired these shares for under $.50 a share. However, after reading many of the posts on this board I can not help but think the run from pennies a share to $6 has affected the judgement of some investors.
not a short go back and listen to conference calls that evans has held. MHR is expanding at a pace that will take it to 10-20 dollars in 12-18 months positive earnings is already there. minus one time charges with a double to triple in oil pruduction the sector is paying 18x1 for earning on average this points to the 12-15 dollar price i mentioned. so 1.00 in earnings which is well within reach in 20011 equates to a much higher price. ive listened to evans and it doesn't take a very smart person to see that this thing is just starting do some dd and you'll find out what i'm talking about.
Like many say, do your own due dilligence. We can only tell you what we are doing and why. The rest is up to you.
Perhaps you should look and see what the acreage is really worth. Look at what Penn Virginia paid. Look at what Plains Exploration paid. The numbers I posted were from memory and need to be verified.
As for GAAP, depreciation, depletion and amortization are huge for E&P companies. Numerous E&P companies struggle to post high earnings, but have enourmous cash flow.
Again, as I said, most E&P companies trade at 5x - 7x cash flow. If MHR is able to get production up to the 5000+ boe/d that they expect by year end 2011, then we are talking about some serious capital appreciation.
As for the gas glut, I totally agree. However, gas has been slowly rising in price as many producers are finally starting to abandon some of the drier fields (i.e. Haynesville...). MHR is fortunate that most of their Eagle Ford acreage is in the oil window and that their Marcellus acreage is in the liquids rich zone (i.e. natural gas liquids and condensate). That lifts the economics significantly.
Most small cap E&P companies are nothing but fluff and future projections and they typically spin their wheels but MHR management is far above average. The reality is that the E&P sector centers on capital discipline and economics Evans is a former banker, so he knows how to crunch the numbers. At the end of the day, it is about the money.
Got up this morning aqnd read the posts. Thanks for the summary - got all excited again, never hurts to keep the facts in front of you. This has turned out to be a great board with excellent analysis and info.
Looking also again at the chart this morning - pull up a two year line - linear chart and look at the trend line. Most all stocks have an upward trend over the last two years simply due to the improved economy from the pits of dispair a few years ago. But using May 09 as a reference point, the trend line in January 11 looks between almost $6.50 to $7+. By May 11 $8-9, Sept 11, $9-10, and Year end of 11 $11-12. If this holds, then a double next year. All depends on where you actually draw the trend line. Not including spikes, fantastic results, or the unexpected.