An acquisition made by Magnum Hunter Resources Inc. (NYSE: MHR) in October, combined with an already-established midstream network, is driving the oil and gas indie to grow from a small company to a large one, according to a recent report by Wunderlich Securities Inc. The investment research firm expects MHR to generate around 20% production growth during 2013.

Key to this growth is the acquisition of privately held Utica player Viking International Resources Inc. MHR bought the company, along with its 3.7 million barrels of oil equivalent (BOE) of proved reserves, 475 BOE per day of low decline production, and 51,500 net acres of land in the Utica and Marcellus shale plays in Ohio, last year for $106.7 million.

“All included, MHR now has 85,000 net acres in the Marcellus and 81,800 net acres in the Utica shale, up from a previous land base of 58,426 net acres and 61,151 net acres, respectively,” according to the report.

The company plans to drill its first Ohio Utica well in early March, and is planning three more with JV partner Eclipse.

MHR also has a midstream arm in place in the Utica and Marcellus, ready to move gas from the play to the MarkWest processing facility in Mobley, W. Va.

“Ultimately, whoever can get their wet gas to the market wins, and MHR, because of its midstream subsidiary, Eureka Hunter, will be many moves ahead of those without an aggressive marketing/midstream arm,” according to the report. The authors also note that Eureka Hunter’s main line is “optimally located to gather all sorts of stranded wet gas, a great piece of business, in our opinion.”

Despite the focus on the Utica, Wunderlich likes MHR’s “super rich” wet gas assets in West Virginia, noting that the leases are already delineated with very little exploration risks. “The flow rates are not shabby either.”

Wunderlich also noted several investment risks associated with MHR:

  • In 2013, the company's production will be leveraged to oil and liquids (52%) from the Williston Basin, Appalachia, and the Eagle Ford shale trend in South Texas. Any rapid decline in oil and NGL prices could negatively impact the top line, which, in turn, would decrease free cash flow and could impact share prices. In addition, local pricing could vary greatly with WTI.
  • The company has been ramping up its Marcellus production. In 2012, the production mix will be 49% dry gas. With gas below $4/MMbtu, the profit margins will be emphasized.
  • Logistical delays could occur despite well laid out plans. The industry has experienced tightness in fracture stimulation, completion and cost pressure. Delays could lead to lighter-than-expected production, depress margins, and could impact share price. We expect some growing pains in the early years as the company ramps up its activities.
  • In addition to its existing portfolio, Magnum Hunter Resources might still acquire assets. It might have to go into the capital market to raise cash from time to time. This can be dilutive, and market conditions might or might not be optimal for debt or equity issuances.