Magnum Hunter Resources Corp. is back on track and projecting Herculean production growth after resolving accounting problems that caused the E&P independent to miss important financial reporting deadlines, leaving investors in the dark about how the company was actually performing.
Magnum Hunter fulfilled part of its obligation in mid-June when it filed its full-year and fourth-quarter 2012 10-K report, nearly three months after missing the March 18 deadline.
The filing of the company’s first quarter 2013 10-Q report on July 8, though also late, put Magnum Hunter back in good graces with U.S. Securities and Exchange Commission reporting mandates.
On June 17, Magnum Hunter said it received a letter from the New York Stock Exchange accepting the company’s plan to regain compliance for continued listing on the exchange, granting Magnum Hunter an extension until Aug. 13 to comply. The company has said by then it should be able to file its second quarter 2013 report with the SEC.
Magnum Hunter revenue soars
As was the case in 2012, the company turned in outstanding financial and operational results for this year’s first quarter, with revenues increasing 76 percent to $98 million, compared to revenue of $55.7 million for the first quarter of 2012.
The revenue increase was attributed primarily to increases in Magnum Hunter’s oil and natural gas liquids production due to previous acquisitions, and increased drilling activity in unconventional resource plays, as well as an increased focus on oil and liquids projects last year.
“We are confident that our leasehold acreage positions in both the Williston Basin and Marcellus and Utica shale plays will reflect great production growth as the year unfolds,” said Gary Evans, chairman and chief executive officer of Magnum Hunter.
Production jump projected
In fact, the company is forecasting a year-end 2013 production exit rate of 23,000-25,000 barrels of oil equivalent per day, a whopping 35-to 47 percent increase from current output of about 17,000 boe per day, and upward of a 71 percent increase when compared to average full-year 2012 output of 14,587 boe per day.
At least part of Magnum Hunter’s accounting problem has been attributed to failure in keeping pace with the company’s rapid growth. Management cleaned house, replacing Magnum Hunter’s chief accounting firm and revamping the company’s accounting department. The board fired its accounting firm, PricewaterhouseCoopers on April 10, and hired BDO on April 16 to complete the audit.
Evans told analysts in a June 9 conference call that the company still has additional work to do this year to get its accounting department in “tiptop shape.”
“You’ll see some additional internal control issues resolved that we’re working on feverishly,” he said.
“So, we feel like we finally got this black cloud off our head … related to financial reporting,” he added. “We’re back to drilling wells and doing things we do best. And we’re pretty excited about where we see production going.”
Evans reminded analysts that the company’s rosy 2013 production forecast does not include any production from its Utica shale properties in Ohio. “If we’re successful in some of these Utica well completions, that could have a nice boost as well,” he said.
Shut-ins hurt output in Q1
Magnum Hunter’s first quarter 2013 production total of 13,769 boe per day compared 12,624 boe per day for the same quarter in 2012 represents a fairly modest 9 percent increase. However, had it not been for a shut-in of wells due to an unforeseen pipeline problem, output would have averaged around 16,900 barrels per day during the first quarter, or a 34 percent increase over the last year’s comparable quarter.
“It was actually a good problem from the standpoint that they’re all related to Appalachia Marcellus wells, where the (high value) liquid component and content of that gas stream was much greater that we had ever anticipated,” Evans said.
But because the company had not planned for sufficient “pigging” operations on the Eureka Hunter pipeline, he added, “we had to make some significant changes to pipeline design” to move the liquids out of low areas of the pipeline. The company installed additional pig launchers and was forced to wait for approval of an air quality permit to increase compression before moving the gas. It took four months to resolve the problem and “that had a profound effect,” Evans said.
Q2 operational update
Though Magnum Hunter has yet to file its second quarter 2013 financial report, it did provide a quarterly update on its North American operations, including the Williston Basin’s Bakken petroleum system.
Second quarter activities in North Dakota included bringing 19 gross (5.5 net) wells on production. At the end of the quarter, there were eight gross (1.6 net) wells fracture stimulated awaiting flowback, 11 gross (2.9 net) wells drilled awaiting completion operations and four gross (1.4 net) wells drilling, the company said.
Magnum Hunter noted that Middle Bakken exploration across the Ambrose Block has accelerated in 2013. Capital expenditure guidance provides for up to 40 gross Middle Bakken wells to be drilled by the end of the year. So far, 13 test wells have now been placed on production, all yielding positive results. Eight new laterals are awaiting completion, and two multi-well eco-pads are currently drilling. Further delineation of the formation will continue this year “with significant step-outs planned,” company said.
Becoming a bigger player
“Williston Hunter’s shift to becoming an operator in North Dakota continues to gain momentum,” Williston Hunter President Glenn Dawson said, noting the company’s first well in a 10-well program for the balance of 2013 spud in late June at its Mohall Madison Unit in Burke County. “The remainder of the drilling program targets high working interest Middle Bakken wells in Divide County.”
During the second quarter, the focus of activities in the Tableland Field in Canada shifted from drilling and completions to facility optimization, with the third phase of field electrification initiated. The gas conservation project will connect Tableland gas to the Oneok North Dakota system, in an effort designed to cut down on gas flaring.
In Appalachia, Magnum Hunter said it completed the horizontal section of its first Utica well on the Farley Pad in Washington County, Ohio. The company currently plans to fracture stimulate this 100 percent owned well in late July. It will then rest the well for 30-45 days with an anticipated production test in late September. Earlier this year, two 100 percent owned Marcellus wells were drilled and cased in Magnum Hunter’s Ormet area of Monroe County. Fracture stimulation of the wells is timed with planned additional midstream capacity on the Eureka Hunter gathering system, which is scheduled for completion in the fourth quarter.
More pad drilling for Marcellus
“Now that we have essentially drilled the corners of our existing leasehold acreage Marcellus Shale position, we plan to perform more pad type drilling, as we enter the ‘factory’ stage of development in this play,” said James Denny, president of Triad Hunter LLC.
Magnum Hunter said that following the sale of core properties in the “oil window” of the Eagle Ford shale in Gonzales and Lavaca counties, Texas, it is left with about 7,000 Eagle Ford acres in Fayette, Lee and Atascosa counties, of which 5,100 net acres are prospective for a combination Pearsall-Eagle Ford oil play in Atascosa. The Pearsall is located about 2,500 feet beneath the Eagle Ford at depths ranging from 9,000 to 12,000 feet and is about 300-to 400 feet in thickness.
“Our internal technical analysis, core samples, our McCarty Unit A 1H well, and the recent third-party well results in the area, indicate potential for both Eagle Ford Shale and Pearsall Shale productivity on this Atascosa County acreage,” said H.C. “Kip” Ferguson, president of Shale Hunter LLC.
During the second quarter, the company also drilled and cased one gross (0.98 net) horizontal Eagle Ford well, which is awaiting fracture stimulation. In addition, it placed on production one gross (0.3 net) well in South Texas. And the company participated through a 31 percent non-operating working interest in a horizontal Pearsall well with Marathon Oil Corp. as the operator.
$56 million spent on upstream
Magnum Hunter’s upstream capital expenditures were $56 million for the second quarter, with $31.9 million for the Williston Basin, $21.6 million for the Appalachian region and $2.5 million for the South Texas region.
As a result of the Eagle Ford property sale, the company reallocated its 2013 upstream capex budget of $300 million, with $150 million allocated to the Appalachian Basin, almost all of which is for its Marcellus and Utica plays, and $150 million allocated to the Williston Basin’s Bakken play.
The company said it allocated a significant portion of its 2103 upstream capital budget to the Marcellus and Utica to take advantage of its processing capacity, which went live in December 2012 at the MarkWest Mobley processing plant. Additionally, the company spent $19 million for expansion of the Eureka Hunter gas gathering system.
