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Challenges Mounted, Curtailed Growth at Magnum Hunter Last Year

Magnum Hunter Resources Corp.'s progress in both the Appalachian and Williston basins plodded along in 2013, set back by inclement weather late in the year, processing issues in Appalachia and an increase in labor and operating costs in North Dakota.

For the second straight year the company reported a net loss, but it remains focused on growing liquids production in both basins and a few highlights in its 4Q2013 earnings report have officials there positive about the future.

Oil and gas production increased by 26.9% in 2013. The company continued to switch its focus to the Utica, Marcellus and Bakken/Three Forks shale plays from a past that included big results in the Eagle Ford, where the company sold 19,000 net acres last years, and  left behind some of the best wells it had drilled in its history (see Shale DailyApril 4, 2013; Dec. 31, 2012).

Overall, oil and gas production went from 2.8 million boe in 2012 to 3.5 million boe last year, with liquids accounting for 52% of overall production.

In recent years, Magnum has stressed the importance of its assets in the Williston and Appalachian basins and emphasized how the potential of those operations will grow future reserves and boost estimated ultimate recoveries (EUR).

The company plans to spend more than half of its 2014 capital budget in the Marcellus and Utica shale plays, while it reported $500 million worth of non-core divestitures last year and plans on selling another $400 million worth this year.

In 2012, the company purchased 51,500 Appalachian acres (see Shale DailyOct. 26, 2012) and significantly bolstered its position in a sweet spot of the Marcellus Shale, but its new strategy has not come without challenges.

The company reported a net loss of $278.9 million (minus $1.64/share) for 2013. That's compared to a smaller loss of $167.4 (minus $1.07/share) it reported in 2012.

A 48% boost in pre-tax earnings and a 72% increase in oil gas revenues was offset last year by higher lease operating expenses per barrel of oil equivalent in the Appalachian Basin and an increase in maintenance, labor, transportation and higher gas transportation reservation charges in the Williston Basin.

Revenue increased to $280.4 million in 2013, up from $140.5 million in 2012, but overall operating expenses increased respectively as well, going from $248.6 million in 2012 to $465.2 million last year.

Specifically, shut-in production due to adverse weather and pipeline delays hurt sales and production numbers. And in 4Q2013, a shut-down at MarkWest's Mobley processing facilities in the Appalachian Basin cost Magnum 925 boe/d during the three month period.

That processing issue has since been resolved, and Magnum's potential lies with the wells it is currently working to drill and complete, company officials said.

"In 2014, we will continue our divestiture efforts with respect to non-core assets which could bring in approximately $400 million of proceeds, an amount much greater than our current capital expenditure funding gap," said CEO Gary Evans. "The high grading of our portfolio is being reflected in our proved reserve additions, higher EURs per well and higher production rates on new drills."

After a month of weather delays, Magnum said on Feb. 14 that its first Utica well in Monroe County, OH tested at a peak rate of 32.5 MMcf/d, which had financial analysts optimistic about the future of its operations in the Appalachian Basin (see Shale DailyFeb. 14; Dec. 20, 2013). That pad, known as the Stalder, is designed to handle 10 Marcellus wells and eight Utica wells.

Magnum said completion operations at the Stalder's first Marcellus well will commence in the next several weeks.

Last year, the company increased its acreage position in the Williston and Appalachian Basins to 642,643 net acres combined. It drilled 12 wells in the Marcellus and Utica Shales, while throughput at its midstream division, Eureka Hunter, which serves third parties and the company's wells in Appalachia, increased by 390%. The company also said it drilled 24 new wells in the Bakken/Three Forks play.

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