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August 2012 Exclusive Story

Large Acreage Position Sets Up Years of Production Possibilities

Editor’s Note: Reflecting the mantra “There’s no such thing as a ‘typical’ independent,” the business strategies of independent oil and gas companies tend to be diversified, adaptable and ready to evolve as market conditions change and opportunities emerge. A case in point is Houston-based Magnum Hunter Resources Corp., a relatively new company with a familiar name.

Gary C. Evans, chairman of the board and chief executive officer of Magnum Hunter Resources Corp., founded Magnum Hunter Resources Inc. (MHRI), which was acquired by Cimarex Energy for $2.2 billion in 2005. MHRI itself had been created through the 1995 merger of Magnum Petroleum and Hunter Resources. In contrast to MHRI and its predecessors, which focused largely on offshore exploration, Magnum Hunter Resources Corp. is an integrated company with growing portfolios in four of North America’s most prolific onshore liquids-rich unconventional resource plays: the Marcellus, Utica, Eagle Ford and Bakken shale plays.

Even as the company amasses properties and increases production in oil and natural gas liquid-rich shales, it is strengthening its position as an integrated upstream/midstream operator through its Eureka Hunter Pipeline system, which runs from the Utica Shale in Ohio across the Marcellus play into the wet gas corridor in West Virginia. In March, Magnum Hunter took another step toward becoming a comprehensive midstream services provider with the acquisition of TransTex Gas Services LP, now known as TransTex Hunter. The company provides turnkey production, gas treating and processing services, specializing in amine treating plants, Joules-Thompson skids, refrigeration units and a range of production equipment.

Magnum Hunter’s average daily production increased 380 percent year-to-year in the first quarter of 2012. The 12,624 barrels of oil equivalent a day (35 percent oil and liquids) was a 38 percent jump over the fourth quarter of 2011. The company reported mid-year 2012 total proved reserves of 67.7 million boe (64 percent oil and liquids), representing a 51 percent increase in six months compared with year’s end 2011.

The production and reserve growth demonstrates the success of its drilling programs in each core play area as well as property acquisitions, which also are an integral element in Magnum Hunter’s strategy. In late May–a few weeks after closing a public offering of 35 million shares of common stock–the company closed on a $311 million acquisition of 50,414 net acres in the Bakken/Three Forks/Sanish play in Divide County, N.D. That transaction followed two acquisitions in the first quarter: a $24.8 million deal for 15,558 gross acres in the Utica Shale play in Noble County, Oh., and a $52.9 million acquisition of working interests on 15,500 gross acres (including 191 producing wells) in the Bakken play in four North Dakota counties.

To obtain an update on Magnum Hunter Resources’ expanding operational activities and learn what plans the company has for the reminder of the year, The American Oil & Gas Reporter presented a series of questions to Evans. Questions are in italics, and are followed by his responses.

Q: What is the overall strategy behind building the company’s portfolio in the Marcellus, Utica, Eagle Ford and Bakken plays? How is Magnum Hunter positioned to create value across these assets going forward? How does the company’s capital formation strategy complement its long-term objectives? What role do acquisition and joint venture agreements play in helping Magnum Hunter reach those objectives?

We have selected these specific shale resource plays because they provide the highest rates of return based on well costs, productions rates and ultimate hydrocarbon recoveries. It is critical in all of these plays to accumulate a significantly large-enough mineral lease acreage position to provide for many years of future drilling. Our goal is to become a very efficient drilling factory. Joint venture agreements in these plays typically become meaningful when units need to be formed with adjoining leaseholders, who are typically competitors. This becomes necessary in order to optimize well spacing given horizontal well lengths.

We try to minimize using equity and intend to leverage our proved reserves in a manner that provides the greatest potential for shareholder return. In addition, we have utilized two issues of perpetual preferred stock that total approximately $250 million. These series of perpetual preferred stock have provided us the liquidity necessary to exploit our leasehold position without any form of equity dilution.

Q: Magnum Hunters holds 400,000 net acres in the Appalachian Basin, including 58,426 net acres in the Marcellus Shale and another 61,151 net acres in the Utica Shale. How many Marcellus wells has Magnum Hunter drilled to date? What is the status of the company’s Marcellus drilling program? Has the company drilled any Utica wells? In Southern Appalachia, NGAS Hunter holds more than 300,000 net acres through Magnum Hunter’s 2010 acquisition of NGAS Resources Inc. What is the game plan for these assets?

Our wholly owned subsidiary, Triad Hunter, has drilled 14 horizontal Marcellus wells in northwestern West Virginia and southeastern Ohio since 2010. We have exploited all corners of our existing leasehold acreage position and continue to refine our completion methods. Our typical wells in the wet corridor of the Marcellus are 75 percent methane and 25 percent liquids. We have slowed our activity in 2012 in this region for two reasons. First, natural gas prices dipped below $2.00 an Mcf earlier this year. Second, we have been selling our gas stream wet with no liquids benefit because of a delay in constructing a 200 million cubic foot-a-day cryogenic natural gas processing plant. With the anticipation of the commercial operation of this facility prior to the end of this year, and the gradual improvement in natural gas prices back above the $3.00 an Mcf range by the end of July, we anticipate significant activity for this region in 2013.

We have accumulated more than 60,000 net mineral acres in the Utica Shale, predominately in southeastern Ohio. We have yet to drill a Utica well. However, we do have plans to test this new shale play in the near future.

Our company’s acreage position in Kentucky predominately revolves around the Huron Shale play. This resource play covers a very large acreage position acquired last year, and most of our mineral leases are held by production. Since the Btu content in this region is less than the wet Marcellus, we have chosen to defer any drilling activity in this area until natural gas prices improve to the $3.50-$4.00 an Mcf range.

Q: Through a series of transactions, Magnum Hunter has grown its Williston Basin leasehold to 125,000 net acres from North Dakota across the border into Alberta and Saskatchewan. The company also has raised its 2012 Williston Basin capital budget to $170 million to fund “significant” new drilling for the remainder of 2012. How many Bakken/Three Forks/Sanish wells are scheduled to drill this year? What is the average lateral length and number of completion stages?

After closing the $311-million Baytex acquisition in May of this year on 50,414 net acres in Divide County, N.D., we have significantly expanded our leasehold and ownership position in the Williston Basin. Therefore, our budget for drilling new wells in the Bakken/Three Forks/Sanish play has increased to 80 gross wells and 34 net wells in North Dakota and Saskatchewan. The average lateral lengths of wells in North Dakota are 10,000 feet with 30 completion stages per lateral. Because of royalty relief from the provincial government of Saskatchewan, we only drill wells in the Tableland Field at a typical average lateral length of 5,000 feet and our number of completion stages has continued to increase to 27 a lateral. We have added a second rig in the Tableland Field, where we own a 100 percent working interest, and have five drilling rigs running in North Dakota.

Q: In South Texas, Magnum Hunter owns 24,000 net acres in the Eagle Ford Shale play, all within the oil window in Gonzales, Lavaca, Fayette, Lee and Atascosa counties. What is the status of the company’s Eagle Ford drilling program? What is the average lateral length and number of completion stages? What has the company learned about geologic variables and productivity within the Eagle Ford oil window? What do you see as the biggest challenges for Magnum Hunter in the play going forward?

Magnum Hunter has been very effective at developing its 24,000 net acres using acreage swaps, unitization and working with offset operators to optimize drilling units. The company operates two modern skidable rigs in the Eagle Ford Shale and we plan to drill 24 gross wells (10 net wells) by the end of 2012. Our development drilling locations have an average of 6,000-foot laterals with 22 frac stages.

The geology and rock properties within Magnum Hunter’s Eagle Ford area are very consistent. We believe the productivity variable is related to “in zone” drilling and the volume effectiveness of the stimulated rock, or the “stimulated reservoir volume.” This is a function of the number of frac stages, spacing, complexity and optimized treatment of the lateral.

Magnum Hunter has an opportunity to grow its position within the Eagle Ford and use its successful operating processes for new acreage within this play. However, finding quality land for the right price is difficult.

Q: In general, why is ownership of midstream assets critical to Magnum Hunter’s business plan? In particular, what are the advantages of owning and operating the Eureka Hunter Pipeline system, and what synergies does it create for Magnum Hunter’s upstream operations in the Marcellus and Utica plays? Providing third-party production, gas treating and processing services is a new piece of the puzzle. Why did the company elect to add these assets and capabilities to its portfolio? What value does TransTex Hunter bring to Magnum Hunter’s exploration and production assets?

Eureka Hunter was formed out of necessity in order to provide another Magnum Hunter subsidiary, Triad Hunter, with the ability to produce liquids-rich Marcellus wells. Triad Hunter would not be producing from the Marcellus today without Eureka Hunter’s new 20-inch pipeline system in West Virginia. Triad Hunter’s leasehold acreage position is in an area of the country that was totally void of high-pressure gathering infrastructure.

The advantage Magnum Hunter has by owning its own midstream assets is that management can dictate when pipeline capacity needs to be available for new wells. Producers without this capability are handicapped by having to fight for gathering capacity in order to produce their wells. The midstream assets become valuable beyond their ability to move equity production; they create significant shareholder value because of favorable transportation rates.

The synergies created through Eureka Hunter include possible drilling joint ventures on the exploration side. Other regional producers recognize the value created by having a capable midstream company ready to build pipe as needed, as well as further expansions of Eureka Hunter’s midstream value through additional producer services such as low-pressure gathering, dehydration, treating and processing. Each of these services is a value added to the producer as well as the midstream provider.

TransTex Hunter is an excellent complement to Eureka Hunter’s gathering capabilities. This entity brings an existing inventory of equipment deployed in wellhead operations in several states as well as the ability to quickly respond to unique opportunities for Magnum Hunter that otherwise would go overlooked as simply “too difficult” for many other producers and midstream companies. An in-house treating company allows us to bring production on faster than other producers that are forced to seek treating solutions. The combination of Eureka Hunter with TransTex Hunter makes a very formidable midstream organization that continues to gain recognition in the industry.

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GARY C. EVANS is chairman of the board and chief executive officer of Magnum Hunter Resources Corp. in Houston. He founded Magnum Hunter Resources Inc. and served as its chairman and CEO for 20 years before MHRI was sold to Cimarex Energy in June 2005. That same year, Evans formed Wind Hunter Energy LLC, a renewable energy company that then was acquired by GreenHunter Energy Inc., a water resource company focused on oil field water management and clean water technologies. Evans has served as chairman and CEO of GreenHunter Energy since December 2006. He also serves as an individual trustee of TEL Offshore Trust, a publicly listed oil and gas trust, and is a director of Novavax Inc., a clinical-stage vaccine biotechnology company. Evans was recognized by Ernst and Young as the Southwest Area 2004 Entrepreneur of the Year for the energy sector and subsequently was inducted into the World Hall of Fame for Ernst & Young Entrepreneurs. He serves on the board of the Maguire Energy Institute at Southern Methodist University.

This story is a complement to the print edition of the American Oil & Gas Reporter. For other great articles about exploration, drilling and production, subscribe.
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