In two deals announced Monday Magnum Hunter Resources Corp. is growing its foothold in the Appalachian Basin in what CEO Gary C. Evans called "a long-dated call option in natural gas.
In the larger transaction Magnum Hunter is acquiring Appalachian Basin-focused NGAS Resources Inc. for about $98 million in common stock and assumed liabilities. The deal represents a 41% premium to NGAS shareholders. Also, the company's Triad Hunter LLC unit is acquiring oil and gas properties and leasehold mineral interests in Wetzel and Lewis counties, WV, in the Marcellus Shale from Oklahoma City-based PostRock Energy Corp. (see related story).
Lexington, KY-based NGAS is to become a wholly owned subsidiary of Magnum Hunter. The transaction will combine NGAS acreage and expertise in the southern Appalachian Basin with Houston-based Magnum Hunter's stronger financial resources, NGAS said. The deal is expected to close by March 31.
Assets being acquired include:
"We have been studying the possibility of a business combination with NGAS for most of 2010," said Evans. "This transaction enables our combined enterprise to own high-quality, long-lived proved developed producing assets with significant development upside covering approximately 300,000 acres. We believe the combination provides tremendous value for both companies' shareholders."
Magnum Hunter said the deal gives it:
During a conference call with financial analysts, Evans said Magnum Hunter management is conscientious about not overpaying for assets, particularly in the hot resource plays. He noted last week's announcement by EXCO Resources Inc. that it was buying Marcellus acreage from Chief Oil & Gas LLC for $459.4 million (see Shale Daily, Dec. 23).
"One of the things that we strive to do at Magnum Hunter is not go out and pay some of the outrageous acreage prices that we see happening throughout most resource plays," Evans said. "A case in point is right up here in the Marcellus, a company that was very active in the Barnett [Shale] here in Dallas called Chief Oil & Gas just sold out to another public company it was announced a week ago at $9,200 per acre."
Evans said that with its PostRock deal Magnum Hunter is acquiring wells along with acreage, and "I think if you'll look at the reserves already attributable to these properties and you back out the acreage costs it's very low in comparison to some of our competition."
With regard to the NGAS acquisition, Evans pointed out that the acreage is predominantly held by production and requires "minimal drilling commitments for the next couple of years and in areas that we believe will have a lot more interest in the market over the next couple of years as we all continue to get better at drilling these wells horizontally, going out further laterally, more frack jobs and now with the renegotiated gas transportation agreement, we can make them very economic.
"So our philosophy, like when we bought Triad, is to buy existing wells, hold production and try to pay a minimum amount for the leases so we truly have an opportunity to get the best rate of return for our shareholders as we begin developing those undeveloped leases."
Evans said he thinks natural gas prices have reached their bottom.
"...[W]hen you look at the overall economy, you look at gas demand, I don't think that the Btu disparity between oil and gas can stay at this level. It has never been at this level in our history," he said. "I just believe this [NGAS acquisition] is a tremendous call option on gas. Remember, though, the Marcellus, whether it's our own properties or what we're buying from PostRock, it's high-Btu. It's 1,250 Btu in equivalent so today it's $7-7.50 gas, so that's kind of a different animal than NGAS, which is still not 1,250 Btu...[but about 1,200]...We're not like a lot of the producers up in Pennsylvania that may have straight gas with no liquids. We are in areas where we can extract more value in the total stream and be able to realize that for our shareholders."
Each common share of NGAS will be transferred to Magnum Hunter for the right to receive 0.0846 of a share of Magnum Hunter common stock. The ratio, which is not subject to changes in market prices, was established based on an intraday price of $6.50 for Magnum Hunter stock, representing a value to NGAS shareholders of 55 cents/share, a 41% premium to the NGAS closing price on Dec. 23. Enterprise value of the deal is estimated to be $98 million. NGAS is a British Columbia corporation, and the transaction will be implemented as an arrangement under British Columbia law.
Magnum Hunter said it will issue 6.6 million shares, representing 8% of Magnum Hunter's fully diluted shares outstanding. The assumed liabilities will be refinanced under a new senior credit facility with an initial borrowing base of $120 million, to be provided by BMO Capital Markets Corp. The company also will make a $10 million payment to a third-party to restructure an "out-of-market" gas gathering and transportation agreement through issuance of Magnum Hunter shares at closing.
"At closing, all financial measures are accretive to our shareholder base," Evans said. "Additionally, Magnum Hunter's upside exposure in one of our three existing core areas, the Appalachian Basin, is substantially increased with the addition of NGAS to our portfolio. Significant cost savings from duplicative business operations and anticipated synergies will create substantial value accretion for the combined entity. The Company's acquisition of NGAS essentially creates a long-dated call option in natural gas while we continue to develop some of our other high-return resource plays. We have been impressed with the operating team at NGAS including the land, geology, and engineering professionals and see this group assisting our future growth plans for the combined enterprise."