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Could Natural Gas Be A Better Bet Than Oil?

Could Natural Gas Be A Better Bet Than Oil?

Gary Evans, Chairman and CEO of Magnum Hunter Resources Corporation (NYSE: MHR) is one smart operator. With over three decades of oil and gas exploration experience under his belt, Evans has a multi-billion dollar trophy to prove it. In 2005, he sold Magnum Hunter Resources, Inc. (MHRI) to Cimarex for $2.2 billion. He took a few years off, and then took over at MHR in 2009.

On September 24, 2014, Evans announced to the world that Magnum Hunter had discovered what is still the largest producing shale well in history. It’s a gas well in Tyler County, West Virginia, and the initial rate of natural gas production was 46.5 million cubic feet of gas. On a per-barrel of oil equivalent, that would be about 8,000 barrels of oil per day.

Evans made a decision in 2012 that will shape the direction of Magnum Hunter Resources. Throughout a two-year period, MHR liquidated over $700 million of their oil wells while prices were at their peak, raising abundant capital that would promptly be turned around and invested in natural gas wells, specifically in the Marcellus and Utica shale formations of Ohio, Pennsylvania and West Virginia. “We made a decision to focus totally on natural gas, so we’re 90-percent natural gas today. We believe that’s the future for the U.S. and we obviously have more control over that: we think industrial demand, chemical demand, LNG demand will continue to drive natural gas prices up,” Evans told CNBC’s Closing Bell in February. Related: Europe Overtakes Asia As LNG’s Hottest Market

Magnum Hunter even has a subsidiary midstream operation, Eureka Hunter, that often bring its pipelines right up to Magnum Hunter’s wells to transport their own gas straight to market. Smart.

According to the Energy Information Administration, the Marcellus and Utica shale formations hold enough gas to supply America’s current gas demands for well over 100 years. “Many people compare the Marcellus and Utica to Ghawar,” Evans says, referring to the per-barrel equivalent, suggesting the northeast could hold incredible amounts of a cheap energy source. Ghawar, located in eastern Saudi Arabia, is the world’s largest oil reserve.

What Evans is doing in the northeast with gas may very well set the bar for crude producers in other plays around the country like the Bakken, Eagle Ford and Permian. Evans is drilling multiple wells from pad locations, a technology where one rig site can drill multiple well bores from the same proximity. Additionally, Evans is drilling deep. His Stewart Winland monster reached a depth of 10,000 feet. Yet, in spite of these long well bores, Magnum Hunter is profitable with natural gas at prices below $2.00. Oil producers will eventually have to develop new technologies and strategies to drive per-barrel extraction costs down to a comparable rate. Related: Inefficiencies Abound In U.S. Shale

Evans big gas bet is based on more control, less overseas competition and growing domestic and international demand. Even President Obama has been advocating natural gas as one of the cornerstone energy sources in his “all of the above” plan for America’s energy future. Dow Chemical announced last week that it was investing $6 billion in new Gulf Coast manufacturing plants, laying a big bet that abundant, cheap natural gas will allow it to save money over offshore facilities.

“When you find reserves as cheap as we can up in the Marcellus and Utica, which is undoubtedly from a gas standpoint the lowest cost basin in the U.S., then we’re making great returns,” Evans says. “These cheap sources of energy is what will drive this country into the next generation for our children and our grandchildren,” he added.

The market has precipitously un-rewarded MHR’s stock price, plummeting it below $3.00 in the across-the-board sell-off, but Evans firmly believes traders and investors will eventually come back into exploration and production stocks, and he is working diligently during these down days to insure MHR is well positioned to provide that cheap gas to meet America’s growing energy needs.

It pays to be smart.

By Thomas Miller for Oilprice.com

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  • Ryan on March 05 2015 said:
    Can't be too smart. Last time I looked MHR had net debt to ebita ratio that was off the charts. They will probably default this year
  • zipsprite on March 06 2015 said:
    Yeah, you read things like "we can make a profit with oil selling at (pick a number, always lower than the one last week)", or in this case "Magnum Hunter is profitable with natural gas at prices below $2.00" and it begs the question, then why are they losing gobs of money? Almost makes one think this is a plug to drive up the price.
  • Thomas on March 07 2015 said:
    Thank you for the comments on the article. Zipsprite, full-disclosure - I do not own any MHR stock, common or preferred, nor do I have any immediate plans to. I would never jeopardize my career by mentioning a stock I own without proper disclosure and prior legal approval. This article was written from the perspective that here is a smart operator with a history of success and over 3 decades of experience who made a key strategy decision to bet the farm on natural gas. With so much tampering by OPEC with oil prices, you could understand that component of his decision. I'm impressed Magnum can produce below today's price drilling 10,000 foot wells - something that eventually will have to happen with oil. I find it a compelling strategic decision worth unpacking. Time will certainly tell whether it was a good one. With gas at 2.80-something, nobody's popping any corks right now for sure.

    There are a couple resources you might want to look at. Gary was on Jim Cramer's show in October, and Cramer was scratching his head about the valuation. Love him or not, Cramer does know how to analyze a balance sheet and define trends. He thinks the stock can go back to the levels it fell from based on fundamentals - once gas prices turn.

    https://www.youtube.com/watch?v=WQ9pikwV-e0

    This NYC private portfolio manager addresses many questions about the debt and cash flow in a Feb 2015 Forbes article -

    http://www.forbes.com/sites/greatspeculations/2015/02/18/why-panic-makes-magnum-hunter-preferreds-big-bargains/
  • Don on March 10 2015 said:
    I would also like to know how you say MHR is profitable even with $2.00 gas. Last year the company lost $.63 a share with gas prices averaging well over $3.00. The loss projections for both 2015 and 2016 are even larger. I would rather invest in a company that is TRULY profitable.
  • Timothy Smith, SFO on May 19 2015 said:
    Oil has a lot of upside from here but so does natural gas. Generally speaking natural gas will remain between $2.50-$4 MCF for next 5 years so yes there is upside but oil may have more room to grow. Also there is more over-leverage on oil with hedges rolling off later this year and it will create a lot of new opportunities. Both are attractive but oil will prove more lucrative next 12 months in my opinion.

    Timothy Smith, SFO
    Petro Lucrum, Inc.

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