Canaccord -> MHR - STAND AND DELEVER: FOCUS ON DRILLING AND RAISING CASH; REITERATE BUY AND $7 TARGET
Investment recommendation
Following a multi-year repositioning, mainly through acquisitions, MHR
has built solid asset bases in three of the leading liquids-rich
unconventional resource plays in North America: the Williston Basin
(Bakken/Three Forks), Eagle Ford, and wet gas window of the Marcellus.
Positions in the Utica and Pearsall also provide potential upside. We
believe a renewed focus on the drill bit and likely asset monetizations for
the purposes of growing production/cash flow and delevering the balance
sheet should act as positive catalysts for the stock.
Investment highlights
· After several delays, the Markwest Mobley gas processing facility
should be operational in early December. Having Mobley in service
should allow MHR to add ~1,500 Boe/d of Marcellus NGL realizations
as well as bring on ~1,800 Boe/d of production currently shut-in due
to lack of processing capacity, helping the company achieve its
targeted 2012 exit rate of 18,500 Boe/d.
· Interest has been high in MHR’s Eagle Ford assets, as ~15 potential
buyers have been through the data room. A transaction is expected to
be announced by year end. We believe a deal in the $500M range is
possible, with proceeds used to delever the balance sheet, which
would be a nice catalyst for the stock in our view.
Valuation
Our price target of $7 is NAV-driven and based on a ~20% discount to a
~$9/share NAV
APPALACHIA READY TO ROCK
The Markwest Mobley gas processing facility start-up date has been pushed back again,
this time from mid/late November to early December. Once in service, MHR anticipates
realizing ~1,500 Boe/d of NGLs from its current Marcellus production, with an uplift of
$1.25-$1.50/MMbtu, in addition to bringing on-line 1,800 boe/d of production that is
currently shut-in due to lack of processing capacity. Also, five net Marcellus wells are
scheduled to be completed in Q4/12. These factors are expected to help MHR achieve its
exit rate of 18,500 Boe/d vs. recent production of ~15,750 Boe/d, which includes shut-in
volumes. With additional infrastructure in place, MHR’s liquids-rich Marcellus assets will
be a focus area for the company in 2013. Driven by the Marcellus, after two straight flat to
slightly down quarters, we are modeling 21% sequential production growth in Q4/12, and
56% growth in 2013.
LIQUIDITY ENHANCEMENTS FRONT AND CENTER
MHR has brought more than 15 potential purchasers through its Eagle Ford data room.
The company is marketing ~21K net acres, 90% of which is in Gonzales and Lavaca
Counties. Its ~5.2K net acres in Atascosa County are not included due to its Pearsall
potential, although at the right price, that acreage could be included as well. MHR
anticipates announcing an Eagle Ford transaction by year-end, and we believe the assets
could be worth $400-$600M. The market cap of the entire company is ~$675M. An Eagle
Ford sale would provide the needed liquidity to help bring down a debt/preferred stock
load now in excess of $1B.
MHR continues to actively seek partners for a potential joint venture in the Utica. A “go or no go” decision on a Utica JV is expected in early to mid Q1/13. If MHR gets what we expect for its Eagle Ford assets it may be less inclined to make a Utica deal. The company talked about possibly doing a liquidity enhancing transaction on another of its
E&P assets next year, and reiterated its plan to carry out an MLP IPO of the Eureka
Hunter midstream business by late-2013.
MHR's borrowing base was recently increased to $375M from $260M. As of November
12, MHR had available liquidity of $150M, including cash and availability under its
revolver, plus the ability to issue another $80M of Series D Preferred Stock.
Incorporating new reserves from liquids production and the Middle Bakken into proved
reserves should provide for an additional increase in the borrowing base sometime in
Q1/13 when year- end reserves are re-determined.
DRILL BABY DRILL
Following its 2012 acquisition binge that saw MHR bulking up in the Williston, Marcellus
and Utica, we believe the company is now poised to focus on the drill bit to organically
grow production and cash flow. Acquisitions will more likely be of the fill-in variety, such
as this week’s announced purchase of 20K net Williston Basin acres in Divide County,
North Dakota for $30M. MHR already has working interests in these properties, will be
taking over operatorship, and plans to start drilling there in Q1/13. The company hopes
to duplicate its Tableland Field, Saskatchewan success in Divide. At Tableland, well costs
are $3.4M with 30 day rates of 250-300 Boe/d. With Tableland EURs now looking to be
in the 200-225 MBoe range, up from 185 MBoe, these wells are very economically
attractive, with IRRs north of 40%. In North Dakota, adding to the Bakken/Three Forks
economics is a third party midstream contract with ONEOK to gather and process
natural gas and NGLs in Divide County that is expected to take effect in phases starting
in Q1/13.
With 180K net Williston Basin acres, 85.5K net in the Marcellus, and 81.8K net in the
Utica, MHR has meaningful positions in three of the leading unconventional plays in
North America and is poised to drill and drill some more. The first Utica well is expected
to be drilled in Q1/13 with or without a JV partner. Given the success of others in the
play, we are excited about MHR’s Utica potential. For example, Gulfport Energy’s latest
well, the Shugert 1-12H located in Belmont County, Ohio, tested at an average sustained
18 hour rate of 28.5 MMcf/d of natural gas, 300 barrels of condensate/d, and 2,907
barrels of NGLs/d assuming full ethane recovery and a natural gas shrink of 10%, or a
very impressive 7,482 Boe/d. |
