Magnum Hunter Resources Corp (ticker: MHR) announced it will acquire Viking International Resources, a private company with approximately 51,500 net acres primarily in the Marcellus and Utica plays, for $106.7 million. The deal will be funded with $37.3 million in cash and $69.4 million in convertible preferred stock. The preferred stock will pay an annual dividend of 8% and will be convertible at $8.50 per share. The transaction is expected to close on or about November 2, 2012, with an effective date of January 1, 2012. Pro forma, MHR will have over 85,500 net acres in the liquids-rich Marcellus Shale and 81,800 net acres located within the Utica Shale.
The 51,500 net acres acquired in this transaction includes:
- 27,000 net acres in the liquids-rich Marcellus Shale
- 19,000 are located in Ritchie County, West Virginia
- 8,000 are located in Washington and Monroe Counties, Ohio.
- Additionally, the acreage position in Ohio includes approximately 9,000 net liquids-rich Utica Shale acres and more than 19,000 net dry Utica Shale acres.
- 98% of the total acreage position is held by shallow existing production
- Net production of approximately 475 BOEPD
- Total estimated proved reserves are 3.7 MMBOE as of January 1, 2012.
- 105 gross drilling locations (74 Marcellus and 31 Utica)
Based on the purchase price of $106.7 million, the transaction could be valued at $2,072 per acre. OAG360 notes this transaction is very similar to MHR’s acquisition of Triad back in 2009. MHR’s acquisition of Triad provided production, cash flow, running room on acreage that was held by production and upside in an exciting resource play that no one had heard about at the time: the Utica Shale in Ohio. Since May 2011, approximately 17 Utica acreage acquisitions/divestitures have averaged $4,741 per acre.
2013 Plans in the Utica:
While the company has not formally announced a 2013 CAPEX budget, MHR did say on its conference call that they plan to allocate approximately half of its 2013 CAPEX budget to the Appalachian region leaving us to believe MHR views its Marcellus and Utica plays as very attractive. OAG360 will also note that MHR is currently in the final stages of negotiating a Utica joint venture that in our minds would substantially speed up the drilling and testing process.
Production Levels – MHR Reaffirms 2012 Exit Rate:
Q3’12 production levels averaged 12,475 BOEPD (55% oil and NGLs), approximately 4% lower than Q2’12 primarily due to expected curtailments and shut-ins across some of MHR’s Appalachian assets. On a positive note, MHR increased its liquids percentage by approximately 17% quarter over quarter to 6,865 BOEPD. The company confirmed its 2012 exit rate guidance of 18,000 BOEPD. By adding 475 BOEPD through this acquisition, an additional 1,866 BOEPD in Appalachian curtailments, 8.6 Bakken well, and two Eagle Ford wells, we view the 18,000 BOEPD as a reasonable, and achievable growth goal to exit the year.
Williston Basin Bakken/Three Forks Operations Update:
During Q3’12, MHR completed six gross (5.4 net) wells in its Tableland field of Saskatchewan. The company reported initial production rates from 184 BOEPD to 893 BOEPD. An additional 10 gross (8.6 net) wells are expected to be placed on production during 4Q12. MHR continues to optimize its drilling and completion techniques to boost economics. The company’s recent results are positive, however, we believe the company should be able to significantly enhance production and recovery through extended laterals and pad drilling (like many others have demonstrated).
Eagle Ford Operational Update:
A large bullet point taken from the conference call was MHR contemplating selling some, if not all, of its Eagle Ford position to increase liquidity. The company drilled over 30 wells in the Eagle Ford and has seen excellent reserves and production; however, MHR has limited running room (inventory) – only about 26,000 net acres. Many of MHR’s other plays have a lower cost of capital and have much larger reserve bases. During Q3’12, Magnum Hunter completed five gross (2.3 net) operated wells, as well as two gross (one net) during the month of October. The company reported 24-hour IP rates ranging from ranged from 961 BOEPD to 1,819 BOEPD. Four gross (two net) wells are expected to be brought on production before year-end.
Appalachia/Marcellus/Utica Operations Update:
Approximately 9.5 MMcfe/d of MHR production in the region continues to be curtailed due to the lack of available processing capacity at Dominion Transmission’s Hastings processing facility. The company does not expect this production to come back online until MarkWest’s Mobley processing facility is operational (likely November). An additional 1.7 MMcfe/d has been shut-in across 400 natural gas wells in Kentucky due to natural gas prices and the cost to reduce ethane content for transportation.
Eureka Pipeline Operations Update:
In the news release, MHR updated investors on its final preparations to lay pipe under the Ohio River, final construction of its 20-inch high-pressure pipeline to the Mobley processing plant, and construction of its Carbide central production site in Wetzel County. OAG360 notes that in addition to serving MHR’s operations in the Utica/Marcellus in Ohio, the pipeline will a service a mid-stream stricken area in Monroe and Washington Counties, Ohio, and allow third party producers to tie in their Utica/Marcellus production. We view MHR’s midstream capabilities as a significant complement to the company’s growing E&P operations in the area.
Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. As of the report date, an employee of EnerCom has a long-only equity position in Magnum Hunter.