Magnum Hunter Resources Inc. on Monday doubled the amount of oil and natural gas properties it holds in its successful onshore core region of southeastern New Mexico with a $243 million purchase from EnCana Corp., which obtained the properties through its acquisition with Tom Brown Inc. The properties represent a 72% increase to Magnum Hunter’s existing 32 MMcfe/d of production from existing properties in New Mexico and approximately 11% of its current total net daily production.

The properties are located near Magnum Hunter’s Morrow/Atoka/Strawn drilling program in Lea and Eddy counties, and an independent engineering firm estimates the new properties represent about 99 Bcfe of proved reserves (77% natural gas), including 45 proved undeveloped locations. Internally, Magnum Hunter’s team of geologists and engineers has so far identified a substantial number of additional locations, and current estimates show a range of 50-70 additional Morrow formation locations to be ultimately developed into proven reserves. Although still under review, Magnum Hunter’s internal reserve estimates provide for 50 Bcfe of proved, probable and possible reserves from these additional wells.

“We think we have an advantage here,” CEO Gary Evans said during a conference call to discuss the acquisition. “We believe the acreage position we’ve obtained will prove to be some of the best acreage this company has ever obtained.”

Magnum Hunter obtained its first large New Mexico acreage in 1997 from Burlington Resources, and in 2001, it upped its reserves there with an acquisition from Mallon Resources. Since Magnum Hunter began to focus on the area in 1999, it has participated in 66 successful wells out of 68 attempted at a finding and development cost of $1.02/Mcfe. Now running a two-rig drilling program in New Mexico, Evans said the company will probably double its rigs by the end of the year.

In addition to the 458 producing oil and gas wells, Magnum Hunter will also be acquiring approximately 44,000 net acres of undeveloped leasehold mineral interests. Approximately $26 million of the $243 million purchase price has been allocated to the undeveloped mineral acreage position. The properties to be acquired currently produce approximately 18 MMcf/d of gas and 870 bbl/d of hydrocarbon liquids, or approximately 23 MMcfe/d.

“Our management team has been chasing this group of assets for over three years,” said Evans. “While these assets have gone through a number of different owners during this period,” he said there had been minimum development.

In a research note, Lehman Brothers analysts Jeffrey Robertson and Eric Conklin noted that Magnum Hunter expects to grow its production 5% or more with the EnCana acquisition. They said Magnum Hunter has “enjoyed significant success in the Morrow-Atoka-Strawn play,” and “recent wells have held total reserves of approximately 2 Bcfe gross, and cost on the order of $2 million to complete.” The producer “has extensive experience in the basin and continues to acquire more acreage with a 20,000 acre farm-in recently completed and additional opportunity to add 15,000 gross acres currently under negotiations.”

The Lehman analysts upped Magnum Hunter’s production estimates to reflect the acquisition, increasing 2004 full-year equivalent production by 10 MMcfe/d to 222 from 212 (assuming a July 31 close to the transaction) and production of approximately 23 MMcfe/d. “Our 2005 full-year equivalent production estimate is moving to 254 MMcfe/d from 231 MMcfe/d to include of a full-year contribution from the EnCana assets, conservatively producing at a rate flat with current levels.”

Magnum Hunter intends to finance the acquisition by issuing 15 million shares of common stock, plus borrowings under its credit facility. The Irving, TX-based producer has requested, and its lead commercial bank, Deutsche Bank, is recommending to its bank syndicate, a $100 million increase in the borrowing base under its credit facility. Magnum Hunter is targeting availability of $105 million under the credit facility and a debt-to-capitalization ratio of between 51-54% after completing financing. The acquisition is expected to close by July 30, with an effective date of May 1.

In conjunction with this property acquisition, Magnum Hunter has entered into 20,000 MMBtu/d of new 2005 natural gas swaps at $6.25/MMBtu and new 2006 natural gas cost-less collars with a floor price of $5.25/MMBtu and a ceiling price of $6.30/MMBtu. On the crude oil side, the company has entered into approximately 1,000 bbl/d of new 2005 crude oil swaps at $34.90/bbl and new 2006 crude oil cost-less collars with a floor of $30/bbl and a ceiling price of $35.85/bbl.

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