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Magnum Hunter in Natural Gas, Not Oil: No Liquidity Problems

By fits and turns on Friday, Magnum Hunter Resources Corp. CEO Gary Evans dismissed rumors that the company is facing an imminent liquidity crisis as commodity prices continue to tumble, reminding financial analysts during a rare conference call to discuss its business that Magnum is no longer an oil company.

Evans started the call by quoting Mark Twain, saying "rumours of our death have been greatly exaggerated." At times he sounded aggravated with the rampant speculation surrounding oil's recent downturn, but he said it's to be expected given the nature of the business. He also struck a confident tone as he reviewed the company's strategy to weather the current environment.

Oil has tumbled some 50% since June, with some industry observers saying it could soon dip below $40/bbl. Evans said he doesn't have a "crystal ball" but added that company executives believe oil will remain depressed for at least the next 12-18 months. As a result, Magnum will adjust to operate within such an environment.

But as the company's stock has fallen precipitously since June, bottoming-out at a close of $1.65/share on Thursday, Evans pleaded with analysts to remind them that Magnum is no longer an oil company. Since 2013 it has been selling off noncore assets in the oilfields of Texas, North Dakota and Canada in favor of a strategy geared toward natural gas and natural gas liquids in the Marcellus and Utica shale plays, which account for 90% of its proved reserves (see Shale Daily, Oct. 2, 2014; Aug. 11, 2014).

"As many of you know, we made a decision to exit the oil business and get into the gas business. We have sold over $700 million of oil properties over the past year and a half," Evans said. "So, as Magnum Hunter sits today, we are by no means an oil company."

Last week, Standard & Poor's Ratings Services downgraded 23 U.S. exploration and production companies, including Magnum. It said the company's operating cash flows "will be insufficient to support its interest burden and maintenance capital spending on an ongoing basis under our price assumptions" (see Shale Daily, Jan. 22). Following the report, some analysts downgraded the company's stock to neutral. On Wednesday, Magnum announced year-end proved-reserves that came in below expectations -- mainly because its Utica Shale wells have not been online long enough -- which sent its stock sliding further.

Responding to liquidity concerns, Evans said there is no such squeeze at Magnum. In October, the company entered into a revolving credit facility with a borrowing base of $50 million and a second lien term loan of $340 million, neither of which will mature until 2018 at the earliest.

"We've always run this company in a tight way; we've always met our financial commitments and we've always paid our notes" Evans said. "We have no concerns of borrowing base reductions because we replaced our borrowing base predominantly with this second lien line of credit. There's a whole slew of companies in the market trying to do what we did back in October, and they can't get it done, or the cost is so prohibitive they can't get it done. We got it done."

Evans said the company is sitting on a "cash cow" with its Eureka Hunter Pipeline system, which reported record throughput earlier this month (see Shale Daily, Jan. 8). He said the company is positioning the system to eventually gather and move 2 Bcf/d of Appalachian gas. He said the company is also searching for a joint venture partner in Ohio that could give it additional capital through a drilling carry.

"If I need to raise $50 million, $100 million or $150 million, I can carve out a piece; I've got buyers" Evans said of Eureka Hunter, which he valued at up to $700 million. "There is a line out the door of people that want to buy into that pipeline because they see what we see, which is the huge growth of this midstream asset in some of the best plays in the United States. With people questioning our liquidity, it drives me nuts because we've got this cash cow in our hip pocket that we can always raise capital with at a moment’s notice."

Evans continued by saying the company's acreage position is "incredible" and sets Magnum up for a plan that eventually calls for pouring 50 pads and drilling 1,000 wells.

"We did something a bit unusual in 2014 that we plan to never repeat," he said. "We ended up having to shut-in a ton of existing wells in order to drill new wells on pads. All of that got eliminated here at the end of the year when we brought these new pads on...so you're going to see something very unusual out of Magnum Hunter every quarter in 2015 that other companies won't be able to replicate, and that is almost 100% production growth by quarter, every quarter in 2015."

Although the company hasn't issued guidance or year-end production, Evans said it expects to produce 30,000-35,000 boe/d this year, up from the 12,000-15,000 boe/d it likely produced in 2014. He did say, however, that Magnum does not have a 2015 budget, and it might not announce one anytime soon.

"We're not spending any money right now. We haven't announced a budget, and when you're in a death spiral of prices in this business, you're crazy to be spending money," he said. "So, I stopped all capital spending toward the 1st of January. When I say all capital, I'm talking about new drilling. We're not fracking any wells; we're not drilling any wells. We're doing nothing. I don't know what the budget is going to be."

He added that Wall Street has grossly underestimated the upward potential of natural gas, especially in the Northeast, where more infrastructure is expected to come online beginning in 2016 that could help lift prices. He also said industrial demand, fuel-switching at power plants and liquified natural gas exports would eventually lift natural gas prices back above $3.

A reduction in operating activity will inherently preserve cash flow, he said, and position the company to better meet demand when gas prices rebound.

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