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Magnum Hunter Buying 51,500 Appalachian Acres

October 29, 2012
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Magnum Hunter Resources Corp. unit Triad Hunter LLC has agreed to buy all of privately-held Viking International Resources Co. Inc. (Virco) for $106.7 million, picking up 51,500 net Appalachian Basin mineral acres in West Virginia and Ohio.

The acreage includes 27,000 net acres in the liquids-rich Marcellus Shale, of which 19,000 are in Ritchie County, WV, and 8,000 are in Washington and Monroe counties, OH. The acreage in Ohio includes 9,000 net liquids-rich Utica Shale acres and more than 19,000 net dry Utica Shale acres. About 98% of the total acreage is held by shallow existing production.

"We have been working on this acquisition for almost one year now," said Magnum Hunter CEO Gary C. Evans. "...[W]e have identified over 100 new drillable locations with both Marcellus and Utica potential on a significant portion of this new leasehold being acquired at a very attractive price per acre. This new liquids-rich gas potential will have a significant impact to our Eureka Hunter midstream division as they will have the capability to provide gathering and transportation to processing facilities in West Virginia and/or Ohio."

Net production from the producing assets is about 475 boe/d "with a very low decline rate." Total estimated proved reserves are 3.7 million boe as of Jan. 1. Magnum Hunter has identified 105 gross drilling locations (74 Marcellus and 31 Utica) on the Virco acreage. After closing, the company will have more than 85,500 net acres in the liquids-rich Marcellus and 81,800 net acres within the Utica Shale.

"The southern part of the wet gas window in the Utica Play in Ohio appears to be some of the most prolific in the area," Evans said. "Recently drilled wells in this immediate region have had the highest initial production rates in the entire Utica Play." Magnum Hunter has planned its first Utica test to take place in the first quarter.

"With the combination of the recent improvement in natural gas prices this year from $2.00/Mcf to approximately $3.50/Mcf, our new midstream cryogenic gas processing capabilities beginning in late November (will add approximately $1.25/Mcf to our net price), and improving overall well economics in this region, this liquids-rich area becomes highly profitable," Evans said.

About 65% ($69.4 million) of the consideration is to be paid in Magnum Hunter convertible preferred stock and 35% ($37.3 million) in cash. The company said it anticipates that the Appalachian division of the company will garner a significant portion of its 2013 capital expenditure budget.

Magnum Hunter average production was 12,475 boe/d during the third quarter, a 137% increase from a year ago the company said Wednesday in an operations update. Although sequential third quarter production decreased slightly on a boe/d basis, the company's oil/liquids production increased 17% to 6,865 boe/d in the third quarter (55% of company-wide production) from 5,862 boe/d in the second quarter of 2012.

Third quarter production was diminished by Appalachia curtailments due to the lack of available processing capacity at Dominion Transmission's Hastings processing facility and shut-in of gas wells in Kentucky. Curtailments and shut-ins decreased third quarter production by about 10 MMcfe/d (1,665 boe/d). Without curtailments/shut-ins, third quarter production would have been about 14,140 boe/d, representing an increase of 9% from the second quarter. Current production is about 15,200 boe/d. Magnum Hunter said it expects all curtailments to be remediated by mid-November.

"...[S]teps were taken to prepare for a significant production boost during the fourth quarter, especially in our Appalachian division," Evans said. "Management remains confident that the 18,000 boe production target exit rate projected earlier this year can be accomplished from wells already drilled and currently being completed. Our production curtailments will also be eliminated with the start-up of the Mobley Gas Processing Facility, which has long been anticipated."

Triad Hunter President James Denny said the liquids uplift from the Mobley facility "will allow us to immediately increase our production, reserves and cash flow. The Appalachian division has been preparing all year for significantly increased activity for calendar year 2013 that we have just recently begun implementing."

In the Eagle Ford Shale, proved reserves continued to grow and estimated ultimate recoveries increased, said Eagle Ford Hunter President Kip Ferguson."We believe this is a direct result of our careful on-target drilling execution and comprehensive completion process with longer laterals and more frack stages allowing us to more effectively treat the lateral hole," he said. "Additionally, we are continuing to use electric submersible pumps as part of our reservoir monitoring solution, which allows us to more efficiently produce the wells. The goal is to continue to allow each well to produce 100,000 boe within the first nine-12 months of production, which we determine to be pay-out, with minimal bottom hole flowing pressure decline."

In the Williston Basin during the third quarter the emphasis was on the Sanish/Three Forks with the use of two-mile long laterals on high- well density pads, said Williston Hunter President Glenn Dawson. "Additionally, extensional and exploratory drilling over the quarter, including several Middle Bakken tests, have shown prolific rock properties in the region, which has opened up new areas," he said. "Creative and flexible crude oil marketing initiatives, coupled with easing price differentials to WTI, have allowed us to realize significant margin improvement in both Saskatchewan and North Dakota."

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