How to Play the World's Most Profitable Treasure Hunt

What small-cap E&P player is scouring America for treasure? Magnum Hunter Resources has a stake in the Bakken, the Eagle Ford, the Utica, and the Marcellus yet has a market cap of just $1.3 billion. 

727,526 net acres
Magnum Hunter has gone on a buying spree, acquiring over 700,000 net acres in various shale plays. Now that it has plenty of acreage it wants to deleverage a bit and focus on core assets to begin its resource hunt. To do this Magnum Hunter is going to sell off an additional ~$250 million in non-core assets, on top of the $447 million asset sales YTD.

The additional cash will enable Magnum Hunter to pay down debt and focus on its growth properties. Magnum Hunter is hoping it can find more reserves in those plays that are partially developed.


Bakken
Magnum Hunter is actively hunting in the Bakken with three rigs. So far the play is ~40% developed, which leaves Magnum Hunter with ~500 gross locations to drill and keep up the search in the Ambrose sweet spot. The Bakken is a liquids-rich play where each well usually pumps out 90%+ crude oil, which is the best kind of production mix you can have.

Roughly 50
The hunt doesn't stop there. Magnum Hunter has developed about half of its acreage in the Appalachian Basin, which includes the Marcellus, Utica, and Huron/Weir plays. In those plays Magnum Hunter sees 774 net locations to drill to find more of the estimated ~400 million boe of potentially recoverable reserves.

The more locations a company can drill the better chance it has to increase its recovery rates. Magnum Hunter wants to access as much of the play as it can to pump out as much profit as possible. The more Magnum Hunger drills the more it can revise upwards its proven reserves, which points toward a successful hunt if it is able to do so.

Deep down
Stone Energy has plans to search the Gulf of Mexico to tap into its 15 billion barrels of oil in the Lower Trend and more.

Stone Energy has an operation in the Gulf known as the Pompano. Every time Stone Energy completes a well in the area that well brings on an additional 6,000 boe/d of production. 

Stone Energy is going to start drilling in the first quarter of 2014. Each well has the potential to offer plenty of upside or downside due to the huge spread in EUR (estimated ultimate recovery) guidance. The company is guiding for 2-18 million boe of potentially recoverable reserves per well.

Deepwater assistance
Diamond Offshore Drilling is an oil and gas contractor for offshore developments. E&P companies pay it to drill deep down and search for resources in its leaseholds.

In the third quarter of 2013 Diamond Offshore will bring in two extra rigs to drill 25,000-30,000 feet down in the Gulf of Mexico through 5,000-7,500 feet of water. Ocean Victory and Ocean Onyx will enable the massive treasure hunt for crude to continue while also providing Diamond Offshore with two new streams of cash flow.

With a flurry of recent finds in the area these additional rigs will allow Diamond Offshore to be ahead of the curve when the drilling really gets under way.

Diamond Offshore also has four midwater rigs in the Gulf, with the capability to drill through 450-5,000 feet of water to depths of 25,000 feet. While these rigs won't be able to capitalize on the Lower Trend, the big play in the area, Diamond Offshore still will be able to assist companies in smaller plays just off the coast.

Final thoughts
Since major finds from North Dakota's Bakken to the East Cost's Marcellus to the Gulf of Mexico's Lower Trend, America has gone on the biggest treasure hunt ever -- for crude. Crude oil also happens to be one of the world's most profitable resources and provides investors major upside when the liquid gold is found. 

The article How to Play the World's Most Profitable Treasure Hunt originally appeared on Fool.com.

Callum Turcan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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