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Wednesday, March 11, 2015

Analyst: Magnum Hunter Resources is in "Survival Mode"

From Seeking Alpha:
Summary
  • MHR's move away from oil and into natural gas did not give it an advantage during the oil price downturn because the price of gas declined as well.
  • In order to try to make it through the hard times, MHR slashed upstream capital spending from $470 million to $100 million.
  • MHR is also in talks to divest from assets it used to consider as the core of the business, such as its pipeline share.
As the price of oil started to slide and it became apparent that it was not just a temporary fluctuation but something that looks as if it will last for a while, Magnum Hunter Resources (NYSE:MHR) CEO Garry Evans was eager to highlight the company's shift from being a mainly liquids producer to becoming a mainly natural gas producer. He even went on CNBC to highlight this fact a few months ago. Yet that turned out to be not necessarily the best news ever. First, natural gas sells at a much smaller price per barrel of oil equivalent. Second, the price of natural gas did not hold up very well either.That is why MHR recorded a 27.7% drop in oil and gas revenue in the fourth quarter of 2014, compared to the same quarter in 2013, even though oil and gas production increased by 34% during the corresponding period. The switch to natural gas has not given MHR a big advantage over companies mainly producing liquids during the current price downturn. That's because the price of natural gas also declined significantly since last summer from a price of over $4.20, to about $2.7 as of right now. What's worse for MHR, Marcellus Utica gas sells at a deep discount to the spot price most of the time, due to transport issues. The price of gas in the region is more volatile and dependent on regional demand.
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