Shale player Magnum Hunter Resources Corp. grew its total proved reserves by 116% last year, and the value of reserves grew 171% from the year-ago period, the Houston-based company said last week. And there will be more growth like that this year as the company, which has been on the prowl for unconventional gas and oil resources for several months, last week agreed to pay $325 million to acquire Bakken Shale producer NuLoch Resources Inc.

The C$2.50/share offer to Calgary-based NuLoch, unanimously approved by the boards of both companies, is 19% higher than its share price at market close last Tuesday.

Magnum Hunter CEO Gary Evans said the company looked at several transactions in the Williston Basin over the past 18 months before setting its sights on NuLoch.

NuLoch “stood out above the rest and presented the type of growth opportunities we have been seeking,” said Evans. “This transaction adds significantly to our ‘three-legged stool’ business model of having unconventional resource plays to explore for liquids-rich hydrocarbons across three regions in North America.”

During 2010, Magnum Hunter’s proved reserves increased by 7.2 million boe to 13.4 million boe [51% crude oil and natural gas liquids (NGL); 44% proved developed producing] as of Dec. 31, compared to 6.2 million boe (75% crude oil and NGLs 47% proved developed producing) at Dec. 31, 2009. The company’s reserve life remained flat at approximately 23 years as of Dec. 31.

The company is active in three of the “big five” emerging shale plays in the United States.

“As we have expanded our presence in the various unconventional resource plays where we are active and begun our efforts to de-risk the large acreage positions we have assembled, our proved reserve base has and should continue to grow at an exceptional rate,” said Evans. “We have just now begun the process of booking new proved undeveloped locations in the Eagle Ford and Marcellus resource plays as our recent drilling efforts have proven successful.

“However, with only two PUDs [proved undeveloped] booked in the Marcellus and four PUDs booked in the Eagle Ford at year-end, we have plenty of room for reserve growth in years to come due to our significant land positions. We also lost over 2.3 million boe of proven reserves when we sold our 10% nonoperated position in the Cinco Terry Field during the fourth quarter, which we more than overcame with reserve additions from these unconventional resource plays.”

The present value minus 10% (PV-10) of the company’s reserves at Dec. 31 increased by $112 million, or 171%, from $65.5 million at Dec. 31, 2009 to $178 million. Under new Securities and Exchange Commission guidelines, commodity prices used in the estimates were based on the 12-month unweighted arithmetic average of the first day of the month price for the corresponding periods. For natural gas the average Henry Hub spot price of $4.37/MMBtu at Dec. 31 was up 13% from the $3.87/MMBtu at Dec. 31, 2009.

Year-end 2010 proved reserves of 13.4 million boe reflect an organic growth of 28% from drillbit extensions and discoveries over pro forma proved reserves of 11.3 million boe as of Dec. 31, 2009, when including reserves related to the acquisition of the assets of Triad Energy Corp., which occurred last February. Organic reserves growth replaced fiscal 2010 estimated production by a factor of 5.4. When including fiscal 2010’s property acquisitions, the replacement factor increased to almost 11.9 times.

Magnum Hunter has become a big-time shale hunter after bagging two deals late last year that built its Marcellus Shale leasehold to close to 315,000 net acres (see NGI, Jan. 3). Those deals added to a bevy of unconventional resource potential, with a 45,000-net acre leasehold in the New Albany Shale and another 24,000 net acres in the Eagle Ford play. Recently Magnum Hunter said its 2011 spending would be focused mainly on the oil window of the Eagle Ford Shale (see NGI, Jan. 17).

“The acquisition of NuLoch and its oil production component is especially compelling as we watch world crude oil prices again nearing $100/bbl,” Evans said. “NuLoch’s 267 net identified Williston Basin drilling locations offer attractive rates of return in today’s operating environment. Fiscal year 2011 will see substantial growth in Magnum Hunter’s daily production rates and proved reserves bookings as we concentrate our efforts on creating significant incremental value for our shareholders.

“We are now anticipating an exit rate exceeding 10,000 boe/d for 2011. At closing of the NuLoch transaction, all financial measures are anticipated to be accretive to our shareholders. We have been most impressed with the entire operating team Glenn Dawson has assembled at NuLoch and are anxious to work with him and this talented group on future growth plans for the combined enterprise.”

NuLoch CEO R. Glenn Dawson noted that Magnum Hunter “has a superb management team that will guide development in three leading North American shale plays: Marcellus, Eagle Ford and now in the Bakken-Three Forks Sanish.”

NuLoch’s focus is in North Dakota and Saskatchewan, predominately in the Bakken-Three Forks Sanish formations of the Williston Basin, which is in the United States and in Canada. It has stakes in about 67 wells with productive capacity and six drilling rigs currently drilling wells.

The producer has assembled around 71,000 net acres total in its Williston Basin portfolio, with close to 33,000 net acres in Divide and Burke counties, ND, and close to 38,700 net acres in southeastern Saskatchewan. In addition NuLoch owns about 50,700 net acres of producing properties in Alberta.

Because the corporation is registered in Alberta, the purchase requires a Canadian Plan of Arrangement to complete the transaction. This type of merger plan requires two-thirds vote for approval of the transaction by the NuLoch common shareholders and a favorable Final Order by the Court of Queens Bench of Alberta. Magnum Hunter said it has obtained “lock-up” agreements to vote for the transaction from existing NuLoch shareholders, including management, representing close to 38% of the outstanding shares. NuLoch soon intends to distribute a proxy statement to all common shareholders announcing a shareholder meeting to consider the transaction.

The companies expect to complete the transaction before the end of April.

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