Magnum Hunter Resources (MHR) Chairman Gary C. Evans, who started the company with $1,000 nearly 20 years ago and built it into a $1.8 billion asset portfolio, announced Thursday that he will retire next April to focus on family life and to allow the company to “take it to the next level.” Until April, Evans plans to remain president and CEO and a director, and he will hold a board seat after retiring.

The company board has elected Jerry Box (age 66), a board member and a former president of Oryx Energy, as its interim chairman. Box also will lead a special committee set up by the board to investigate “all possible strategic alternatives available to the company for enhancement of shareholder value.”

“It is very unusual that an entrepreneur — which I believe I am — would be able to take a company to the size we have achieved today,” Evans said during a conference call on Thursday. “We are almost $1.8 billion in assets and $450 million-plus in revenues. Usually in a company’s growth, there are management changes throughout, and I feel fortunate enough that I’ve been able to learn and the board has supported me through all these years. But there also comes a point in time where there is a quality of life issue for me [and] there’s a decision that, hey, if we want to take this company to the next level maybe I’m not the one to do it.”

Evans promised shareholders that this move is designed to capture value inherent in the company’s assets, value that he said currently is not being captured by Wall Street. “[No one here] is trying to keep their job or earn a paycheck at the expense of the shareholders. We are trying to figure out…where do we go from here. I’m not a part of that…other than as a board member.”

Evans said he’s been considering this move for a year or two. “Some of the board members know that I have not been the happiest with [where the company is]. A lot of it has to do my own talents, I’m sure. I think this is the right decision at the right time to enhance our shareholders value,” he said.

He said the time is right for a number of different types of transactions. One analyst noted that the company recently estimated its net asset value at more than $17/share while its stock Thursday morning was trading at only $13.15/share. MHR shares, however, rose more than 12% Thursday to $13.50.

“We do believe that the company is worth something in a range above the current stock price,” said Evans. “That’s the purpose of this entire exercise is to look at those options.”

Management indicated that the company has not formally locked in a particular plan or transaction. “It may be in a different form than an outright sale,” said Evans. “There are financial buyers today able to do volumetric production payments (VPP). Look at some of the Apache and Anadarko transactions that recently occurred.”

Volumetric production payments, or VPPs, and other similar transactions are gaining in popularity because they allow producers to capture some of the future value of their production at current commodity prices through up-front payments and without giving up control of their assets.

Morgan Stanley Capital Partners recently agreed to pay $300 million of Apache Corp.’s $500 million purchase of some of Shell’s Gulf of Mexico assets. Morgan Stanley acquired an overriding royalty interest in a portion of the lower-risk Shell reserves to be produced over the next four years (see Daily GPI, July 7). Last year, Morgan Stanley affiliate Triana Energy Holdings purchased Columbia Energy Resources from NiSource for $330 million in cash and then Triana agreed to sell back 94 Bcf of production through 2006 to NiSource as part of the payment (see Daily GPI, Sept. 2, 2003).

With these types of deals, the producer receives a volumetric production payment up front and agrees to deliver the portion of production volumes over time while retaining the properties’ potential upside. Part of the attraction of VPPs currently is the difficult climate for mergers and acquisitions. High commodity prices have widened the valuation gap between buyers and sellers.

“We are in a unique environment today with very low interest rates and very high commodity prices,” Evans noted. “That’s why I talk about the [Nymex futures] strip; it is so strong going forward that there is value that can be obtained from these longer lived assets that we have in our portfolio.”

Evans said there is a lot of value in the company’s assets that is not being adequately portrayed on the company’s financial statements, and therefore, is not being recognized by Wall Street. “If we do break these [assets] apart or get an offer that is acceptable or find a merger, there are all kinds of [possibilities]. We are trying to keep our minds open and look at all the possible alternatives that might exist out there.

“We believe that the Gulf of Mexico portfolio may not necessarily match with the onshore portfolio,” said Evans. “There are Gulf of Mexico players and non-Gulf of Mexico players. However we slice [or] dice this entire portfolio, that’s what this board is going to ascertain in this exercise and the ultimate goal is to end with something that is greater than what we currently have today.”

Magnum Hunter has grown to more than 1 Tcf of proven reserves and holds a significant drilling inventory both onshore and offshore, covering nearly 10 million acres of minerals.

“Magnum Hunter has never been on more solid footing, both financially and operationally, than it is today,” Box said in a statement. “After founding the company nearly 20 years ago, then successfully leading Magnum Hunter’s growth in the intervening years, the board nevertheless respects Gary Evans’ decision to retire next year. However, we are grateful for his decision to remain a director of the company and to provide for a six month transition period.”

Box has served on the board since March 1999 and is the former president and COO of Oryx. Although he was elected chairman, Magnum Hunter’s board indicated that he might only retain that title until the board can find a permanent successor to Evans. The board still plans to retain an executive search firm. Box’s “election as chairman at this time provides senior executive continuity during and after Mr. Evans’ six month transition period,” the company said.

Magnum Hunter announced late last month that it expects third-quarter production to be down 5% from previous estimates because of shut ins due to Hurricane Ivan. The company also said its Gulf of Mexico operations were damaged by the storm and repairs would total about $500,000. However, it still expects its production to be up nearly 10% this year and recently raised its drilling budget by $20 million because of strong cash flow and high commodity prices.

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