Magnum Hunter Jan. 23 Conference Call
Gary Evans drew on some famous American humor to lead off this morning’s conference call “to discuss macro events affecting the energy sector and company specifics.” Evans paraphrased the famous quip from North American author Mark Twain after the author saw his own obituary.
Crude Oil Prices and OPEC
The Magnum Hunter Resources (ticker: MHR) chief executive discussed the 55% price drop in crude since June: “This is the fourth downturn I have lived through. I don’t believe OPEC has done this for a temporary fix. They are wanting to get market share and they can only do that by keeping the market flooded with oil. So I am expecting, and our management team and board is expecting, for prices on oil to stay down for at least 12 to 18 months. … Prices will undoubtedly rebound. It’s all going to depend upon whether OPEC makes the decision to reduce their volumes or just allow world supply growth to catch up.”
Evans said a price decline “will get fixed, perhaps quicker than we think” but it depends upon world demand growth from China and India and increasing use of cheap gasoline by consumers in the U.S. Evans also said he was very bullish on natural gas long term.
The company announced 2014 reserves in a press release this week, reporting an increase of 16.5 MMBoe or a 25% improvement in the quantity of estimated total proved oil, natural gas and natural gas liquids reserves at December 31, 2014, compared with total proved reserves at December 31, 2013. The release also reported that PV-10 increased 22% or $163.5 million to $909.3 million, compared with the PV-10 of such reserves at year-end 2013, adjusted for divestitures.
Magnum Hunter said its estimated total proved reserves increased to 83.8 MMBoe (70% natural gas; 66% proved developed producing) at December 31, 2014, compared with 67.3 MMBoe (60% natural gas; 53% proved developed producing) at December 31, 2013. Reserve life (R/P ratio) of its proved reserves at year-end 2014 based on current production is approximately 8.5 years. Magnum Hunter said that it had successfully replaced approximately 266% of its 2014 production with reserve additions through the drill bit.
“At December 31, 2014, the Appalachian Basin (including properties in the Marcellus Shale and Utica Shale in West Virginia and Ohio and properties in Kentucky) accounted for approximately 90% of Magnum Hunter’s total proved reserves volumes, and the Williston Basin in North Dakota accounted for the remaining approximately 10% of the Company’s total proved reserves volumes,” the company said in the press release.
Magnum Hunter also filed a Form 8-K with the SEC today, announcing updated leasehold information in the Marcellus and Utica.
Waiting for Price Reductions to Drill
In his conference call today, Evans explained that his company doesn’t have to drill wells to hold acreage, as do many other operators, saying that more than 60% of his company’s leases are held by production. Evans said the company has no lease expirations pressuring it to drill. “That gives us the luxury of waiting till these [drilling and completion] service costs do come down. … I’m not going to spend $2 today to do something I can do six months from now for a dollar,” Evans said in the call.
Pipeline Interconnects were Worth the Investment
During the Q&A, Evans discussed his company’s 2014 capital expenditures for the Eureka pipeline infrastructure and interconnects. “These interconnects are creating such new opportunities to move gas that you didn’t anticipate. … I can’t impress enough how important they are. They’ve been a huge pain and a huge expense—that’s one thing that everybody needs to understand. In 2014 we spent $359 million at Eureka and buying leases. Now that doesn’t happen in 2015. It was a huge investment on our part. It strained our financials but we knew that we were spending money very, very wisely and it would pay off in spades down the road. And it’s proving to be the case.”
No Gun to our Head
“There’s no gun to our head, guys. There’s no imminent problem. We’ve got incredible asset base that many, many companies are envious of. I’m very proud of what we’ve done so far. Production growth, 100% quarter-over-quarter without spending a dime of capital. And what is our capital spend going to be this year? I don’t know yet. You tell me when prices finish dropping and where service costs level out, and then I’ll tell you.
“At this point, for the first six months of 2015, it’s hunker down, get better at what we do, cut our costs. We’ve been cutting our G&A right and left with the office closings. We consolidate Houston into Dallas in March, and we’ll wait and see. So, we’re in a very, very fortunate situation. We do have hedges in place at $4.09 per Mcf. I wish there were more. The reason we don’t have more is because our production grew so much in the last 30 days, and our banks restricted us from putting more hedges on it. But we’re 30% hedged approximately on our gas and we can weather the storm,” Evans concluded.
The complete conference call, including Evans’ comments and the complete Q & A may be heard here.
Magnum Hunter’s January 2015 company presentation may be viewed here.
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