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Magnum Hunter's presentation mentions 41% IRR and approximately $6 million NPV-10 at $3 natural gas.

However, it appears that the presentation uses a lower natural gas split than average well production and higher realized prices than the current oil and NGL pricing.

Adjusting for that would make the average well produce approximately $1.5 million NPV-10 and 17% IRR at $3 natural gas and $50 realized oil.

This does not factor in cost of capital as well, which can be quite substantial as indicated by Magnum Hunter's borrowing costs.

Magnum Hunter needs at least $4+ natural gas along with improved oil/NGLs pricing. A $3 natural gas pricing environment plus current oil/NGLs prices leads to marginal returns for average wells.

During the discussion on my last Magnum Hunter Resources (NYSE:MHR) article, there were some comments about how Magnum Hunter can generate solid IRR and NPV-10 numbers from its wells (according to its presentation) even with natural gas prices at $3 per Mcf. My contention has been that Magnum Hunter really needs well over $4+ natural gas though, so I've investigated what may be causing the different conclusion.

Some of the difference is due to the fact that an individual well's IRR and NPV-10 does not reflect the financial state of the company in general. A well can be quite profitable on its own, but still insufficent to cover the interest costs for a company without a huge number of wells being put into production (which would require CapEx funds that a high-debt company often doesn't have).

In Magnum Hunter's case, it appears that a significant other part of the difference is that its "Magnum Rich" well from the presentation reflects more of an semi-idealized well than an average well, and also uses some pricing inputs that are a fair bit above current realities.

After adjusting for the current oil and NGL pricing environment, and also using Magnum Hunter's historical costs and production splits, the average Marcellus well would seem to have an IRR of 17% at $3 natural gas, rather than the 41% IRR mentioned in the presentation.

Historical Results

I've used Magnum Hunter's 2014 combined production results from the Post Rock and Middlebourne Field regions. This reflects what Magnum Hunter has proven capable of achieving. The production split for was 76% natural gas, 20% NGLs and 4% oil. Production costs $0.38 per Mcfe in 2014, while transportation, processing and other related costs averaged $1.47 per Mcfe. Using those inputs and realized pricing of $60 per barrel of oil and $30 per barrel of NGLs results in the following gross margins at realized natural gas...