Having read today's release it is certainly hard to fault MHR for not making progress in each of their development zones, but there was little in the report to generate any significant near-term excitement. Maybe, just maybe, there will be some strong cash flow comments when they get around to their financial results conference at the end of February, but my gut thinks we will need to wait until the 1Q numbers are out in late May to see the results from recent term drilling and liquids processing hookup materialize. Until then, and absent an EF sale, I suspect the CF picture is going to hold back the PPS as the $300m in upstream CAPEX cannot be funded internally and the press release commented on "aggressive midstream expansion," the capital cost for which was not even mentioned but also needs to be funded.
All that said, I suspect the late-May release of 1Qtr financial results may serve to re-ignite some market interest as the uptick in EFS oil production kicks in financially (realize 4 big wells in today's release were brought online after Dec 12), the 11 SGY wells should all be operational, the Marcellus Rich operational kinks referred to as being ironed out by end of Feb will be worked out, and we might be getting completion results on Utica Well #1 about that time.
I agree with Oilman that the MHR story requires LOTS of patience and, to that end, I think all the long term holders have to simply chill here for another 3 to 4 months as, absent an EFS sale announcment, the PPS will be subject to negative pressure until then. Knock on wood, the May announcements will be exciting and we dont have to wait until late-August. Either way, we all need to keep our eye on the end of 2013 when MHR will likely appear to be a quite different animal. Good luck to the long term SHers and fellow January 2014 leap option holders.
Analyzing the Capex
95 m $ will be attributed to each region for drilling purposes .
Eagle Ford has about 178 drilling locations.
Each well costs 8.82 M $ , so we would have about 10 new wells this year. With oil at 95$ IRR would be 52% . Each 5 $ oil rises , the IRR would do 6 points.
Bakken / tableland has about 1125 drilling locations.
Well costs are 7 m $ in the Bakken , 3.4 m $ in Tableland.
I presume they will invest 66% in Bakken , representing 9 wells.
33% in tableland would also represent 9 wells. Might be higher , as they drilled 13 in 2012.
IRR with oil at 90$ would be 48 for Bakken , 43 for tableland.
Appalachian has more than 1564 drilling locations.
Marcellus has 290 or more, I don’t think the Viking deal is included yet.
Utica should have about 500 ( I took figures from GPOR than I translated to MHR situation).
With the depressed gas prices , only Marcellus seems interesting to drill , as they are obtaining an uplift due to the treatment of their gas.
Capex will be divided as follows :
31.6 m $ has to go to the JV with Eclips as agreed . A well in Utica scale ( GPOR info ) costs about between 8-10m $ . Mhr told us they would drill 24 wells for 200 m$ in three years , representing 2 Utica and 2 Marcellus wells in 2013.
That leaves 63.4 for the Marcellus at 6.5 m $ a well or about 9 wells. I hope they will be able to get an uplift passing true the Mobley station . Conservatively I took 3.5 $ for the averaged gas price received ,as not all the gas they produce will pass through Mobley. IRR would be 48%
I am pleased with the Capex , as this year they will spend it nearly entirely to drilling activities . It is about time they demonstrate the value of their assets.
Having more than 1300 drilling locations in oil rich leases , 28 wells this year is very meager. Maybe some good thought JV could unlock this hidden wealth sooner to our benefit.
I find it wise they still continue drilling in the Eagle Ford, It can only add to hidden value there.
It is also wise not to go full in the Utica now , off course they lose a little momentum GPOR has created with their recent well results , but we still are speaking of gas wells and prices being what they are, waiting is maybe not so bad. The lack of infrastructure will only downsize the price ultimately recovered from those wells for the moment. Good for MHR they bought their leases before those results. The Marcellus on the other hand, with Mobley and pipes finally in place can generate some nice cash flow . In a couple of months we will more drilling results and maybe MHR moment will be there earlier than some thought. With oil prices not so keen to fall as the World Economy is picking up, some good well results combined with strong oil prices can only benefit to MHR.
These analyze is based up a lot of suppositions . I would have liked to find some information about decline rate , so i could have given a figure for a 2013 production rate , but given the poor information i have , i can't make anything of it. If somebody has some good information about it , please be so kind to share it.
GLTA , thanks for your input LEX.
The January 2013 corporate presentation has graphs of actual decline
rates and a type curve. P. 14 for EF, P. 20 for Bakken, 22 for Tablelands
and 27 for Marcellus. There are also IRRs for various crude prices.
I do not know if the IRRs include hedging or not. I think the decline
type curve changes some month to month with January Bakken
higher and EF lower. The Bakken decline rates do not include NG
or NGLs which I think will start being processed soon.
Drie...nice summary with projections. A few differences with what they've stated on record, but basically a good road map of where they're going. BTW...since a lot of production is already hedged, an increase in crude pricing won't necessarily translate into the percentage gains often stated here.
I think they said they were going to drill 4 wells in the Utica this year...am I correct on that?
I do like their direction, but can't help but feel a lack of capital is holding this one down. More dilution? Not sure...unless it's for an acquisition of magnitude. But at this rate it'll take them "forever" to realize enough proven reserves to move the pps needle. Maybe the J-V route will be necessary. But somehow I still think monetization of either the pipeline or EF is necessary to get on with a fuller development program and unlock the true value of this equity. Sometimes you have to give up something of value simply to unlock a more promising future.
Well-argued. Thanks. However, MHR management is responsible for creating positive buzz where there is decent news. They do not do this and deserve to be faulted. This industry is still pioneering, but the real players are in the news--always--and MHR is not. I am long and have not made this decision lightly, but Gary and his team are infantile marketers. They are doing a good job looking to the future and a terrible job articulating just what they have accomplished in the present and the past. In balance, the management team is mediocre. This accounts for some of the dark dispositions on this board and elsewhere.
What's the oil/gas ratio in that 18,500 Boed exit rate? Did I miss that? What's up with the EF sale? Did I miss that too? And where's that $300 mil for Cap Ex going to come from? Wow, I missed that too. Maybe he'll tell us this when the stock gets to $3.00. I can't wait!
Excellent post.breaks down to EF ain't for sale issue more shares for Cap Ex and disappointing earnings as usual, but the best news is top management will still get free shares or shares penny on the dollar. I find it very invigorating rewarding employees when the company is so far in debt.
Sentiment: Strong Sell