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Magnum to Take Midstream Subsidiary Public in Early 2015

Magnum Hunter Resources Corp. said Friday it plans to take its Appalachian midstream subsidiary, Eureka Hunter, public sometime early next year, as throughput on the system continues to rise and the company plans to bring a backlog of wells online in the Marcellus and Utica shales.

CEO Gary Evans said given Eureka's assets, and the success of other midstream master limited partnerships in the region, the company believes Eureka is valued somewhere between $1.25 billion and $1.5 billion.

"Our share of that today is 58% and [Eureka's worth] is greater than our current market value. So there's a huge disconnect in the market today with respect to this tremendous asset, and we're on a very fast track of getting that public -- hopefully in the first half of next year," he said. "We're shooting for March or April. We had a board meeting yesterday and we are full-steam ahead. We have bankers selected, we have auditors selected, we have everything we need going forward to accomplish that goal."

In September, Eureka's gathering system had a peak throughput rate of 325,000 MMBtu/d. During the third quarter, the system averaged 223,708 MMBtu/d. Magnum's production in Ohio and West Virginia accounted for about 30% of that total, with third-party operators pushing the rest through.

The company is busy building up the system for Marcellus and Utica volumes that are only expected to grow with interconnects on the way to the Dominion, Rockies Express and Texas Eastern Transmission interstate pipelines. Capacity is also expected to increase with expansions on the way soon at MarkWest Energy Partners LP's Mobley processing complex and Blue Racer Midstream LLC's Natrium complex, both in West Virginia (see Shale Daily, Nov. 4).

Magnum is focused heavily on Appalachia. Already this year it has sold about $210 million in noncore assets in South Texas, Canada and North Dakota, with more expected in the coming months, as it transitions to a pure-play focused on the Marcellus and Utica (see Shale Daily, Oct. 2; Aug. 11; April 22).

"We did really work hard in divesting assets. In the first nine months of the year we sold $210 million of assets," Evans said. "In the last two years, we've sold $700 million of oil producing assets. So the strategic decision to divest oil and concentrate on gas has turned out to be a pretty wise decision, especially as we're dealing with $75 crude oil prices."

Still, the company has faced a learning curve in Appalachia, where an air permitting snag has kept its key Stewart Winland pad in Tyler County, WV -- where the company's first Utica well tested at 46.5 MMcf/d in September -- shut-in for roughly 45 days (see Shale Daily, Oct. 10; Oct. 8; Sept. 25). Company officials said that pad is expected to come online by December, and they told financial analysts that regulatory issues would not be an ongoing problem.

While year-over-year production increased from 10,977 boe/d in 3Q2013 to 16,361 boe/d last quarter, sequential production growth since the first and second quarters has increased only by about 3%. The company's volumes have been curtailed due to a lack of pipeline connections and permitting issues, with about 8,232 boe/d shut-in at the end of the third quarter.

Magnum officials, though, reaffirmed the company's guidance of 32,000-32,500 boe/d, saying fourth quarter production would end somewhere around 24,000 boe/d, with some of its shut-in wells expected to come online before year's end.

Executive Vice President of Operations James Denny said Magnum is currently running one rig in the Appalachian Basin, but a second rig will be added in December. The company also leased another 1,151 net acres in Ohio and West Virginia and purchased 1,364 mineral acres at the shuttered Ormet Corp. aluminum plant that straddles both states (see Shale Daily, July 25).

Magnum's realized average natural gas price dropped from the $4.50/Mcf in 3Q2013 to $3.43/Mcf last quarter, while the same was true for its boe price, which went from $58.48 a year-ago to $41.53 in the third quarter.

The company also reported a net loss of $136.2 million (68 cents/share), compared to a net loss in the year-ago period of $311.3 million ($1.83/share). Last quarter's loss was mostly due to higher costs related to leasehold acquisitions, drilling and completions, and midstream and divestiture expenses.

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