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Magnum Hunter Resources Corporation (MHR)

March 18, 2013 11:30 am ET

Executives

Paul M. Johnston - Senior Vice President, General Counsel and Corporate Secretary

Gary C. Evans - Chairman and Chief Executive Officer

Ronald D. Ormand - Chief Financial Officer, Executive Vice President and Director

Analysts

Irene O. Haas - Wunderlich Securities Inc., Research Division

Kim M. Pacanovsky - MLV & Co LLC, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Jeffrey P. Hayden - KLR Group Holdings, LLC, Research Division

Operator

Good morning. My name is Dawn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Magnum Hunter Resources 2012 10-K Status Update Conference Call. [Operator Instructions] Thank you. Mr. Paul Johnston, you may begin your conference, sir.

Paul M. Johnston

Thank you. Good morning, everyone. This is -- today, Monday, March 18, 2013. This is Paul Johnston, General Counsel of Magnum Hunter Resources Corporation, and I would like to welcome everyone to today's conference call. I will be the moderator for the call. The principal purpose of today's call is to discuss the information set forth in the press release issued by the company earlier this morning.

Before we begin our presentation, however, I would like to advise you that today's call will include forward-looking statements within the meaning of the federal securities laws, specifically Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our presentation will include statements regarding our projections, estimates, expectations, beliefs, assumptions, intentions and future strategies. These forward-looking statements will relate to, among other things, the company's revenues and production. These statements are qualified by important factors that could cause the company's actual results to differ materially from those reflected by the forward-looking statements, including those factors set forth in the Risk Factors section of the company's 2011 annual report on Form 10-K, as well as the company's first, second and third quarter 2012 quarterly reports on Form 10-Q. Our 2011 annual report also includes a glossary of certain industry terms that may be used in today's conference call. The full forward-looking statements disclaimer is included in the company's press release issued this morning, dated March 18, 2013, which is posted on the company's website under press releases. This disclaimer is in effect for the duration of this call.

I will now turn the call over to Mr. Gary C. Evans, our Chairman and CEO.

Gary C. Evans

Thank you, Paul, and thank you, listeners, today. As Paul mentioned, we announced before the market opened the status of our annual report on Form 10-K, and we also released certain unaudited financial and operating data for the 3 and 12 months ended December 31, 2012.

Let me start out by saying that of the 20 years that I've been running public companies, I have never not met a mandated public filing deadline until today. And so is this a black eye? Absolutely. Is this being fixed? Most definitely. I have lots of excuses, but the excuses are totally unacceptable, and for that, we apologize to our shareholders and our lenders and our investors. I will give you the reasons why this occurred and tell you what we're doing to fix it.

First of all, most of you know that we have been in a very rapid growth mode. I am responsible for that. So most of you know, in my career, I've always been an acquisitive-type person trying to grow the enterprise. We also acquired 2 public companies, one of which was based in Lexington, Kentucky, being NGAS; the other being NuLoch, based out of Calgary. So one was a Canadian enterprise. That was difficult, 2 public companies within the same year.

So as we grew so rapidly, we did not have enough -- sufficient accounting personnel to manage the process, and we were delinquent in bringing qualified personnel that had the sufficient talent to handle the growth that we were undertaking. So with that, we are responsible.

We also changed accounting firms in July of last year. That has been definitely a difficult exercise. And that -- the work that we have done since the accounting firm changed and through today has been a huge undertaking on behalf of our company. It's been a big strain and it's really taken us away from things that we would like to do. However, there is nothing more important than fixing the problem. We feel like we're close to fixing it, and we had hoped to have it fixed by today, but that was not the case.

So what are some of the issues? We've got some internal control issues. We have not -- we are deficient in managing our internal controls. A lot of this relates to Sarbanes-Oxley, and we need to better manage an effective control environment and those changes are being made daily. And so let me just tell you a little bit about what we have done with respect to beefing up our accounting department in this regard.

We hired Fred Smith, who's sitting here next to me today, he's our senior Vice President and Chief Accounting Officer, in October. And Fred is responsible for helping us fix the problems of the past, and he's also responsible for bringing in a whole plethora of new people. We hired a new Appalachia division controller in November, we hired a new tax manager in December, we hired a new Manager of Financial Reporting the first part of January and we hired a new controller of operations the middle of January. We also promoted internal controller to corporate accounting.

As we have been going through the audit process with our third party accounting firm, we also brought in another big 4 accounting firm to assist in the process. So we have done everything that we possibly know to do to try to get through this process. Again, no excuses because there is no excuse for this, but these are the reasons.

I would like to say that, fortunately, we have a very strong bank credit group, and we received approval this morning after the press release was issued from all the senior lenders for the waiver that we had expected. So that has been fixed subsequent to the press release.

I would like to now take a minute and talk a little bit about some of the numbers we did release today. And it should give the listeners some degree of comfort that in order for us to release any numbers, we've got to be pretty doggone close to getting this work done. So the numbers we released this morning were revenues for the year, which was $274 million. That was up 141% from 2011's numbers of $114 million. We also reported production, 4.8 million barrels, which was up 139% from 2 million barrels last year. Average daily production was up 140% to 13,200 barrels of oil equivalent per day from 5,500 barrels equivalent a day reported in 2011. And then, their EBITDA, which is one of the most important numbers that we can report, was up an outstanding 217% from -- it's up to $160 million from $50.4 million reported in 2011. As many of you know, we made a significant shift in 2012 from moving from a predominantly gas company to predominantly an oil and liquids company, with production today in a 60% to 65% oil liquids, gas being 35% to 40%.

We also reported in the third quarter that we had right at 14.9 -- 14,900 barrels of oil equivalent production as an average for the fourth quarter of 2012. It's important for our listeners to know that production was significantly back end-loaded due to the Mobley processing plant coming in online in late December. So the real bump in production for the company occurred in late December.

Now we've, since then, had some production shut-ins. Today and since the first part of January, we've got about 2,500 barrels of oil per day equivalent shut-in up in Appalachia. Why? Pipeline issues, compressor issues and weather issues. All of those are being rectified. We got delayed from an air permit's perspective on a compressor station that is supposed to be fixed by the end of March, so we're anticipating that 2,500 BOE per day drop that we've experienced to start back up April 1.

I want to also now talk a little bit about our liquidity. As we mentioned in the press release this morning, our liquidity is right at $100 million, and that's before any asset sales. I can tell you that our target is to have at least $400 million to $500 million of asset sales in 2013. That is the plan and that is the goal, and we are working hard on accomplishing that.

One of the items we mentioned this morning in the press release relates to some noncash charges for impairment of predominantly our unproved properties but also some of our proved properties. And the numbers we released were $49 million for unproved, $16 million for proved. These impairments predominately relate to the Williston Basin and the -- some of the Canadian assets that we acquired from NuLoch. Why are we having to write some of these leases off? We have made the decision that we're really going to focus on much higher return wells than Williston Basin in 2013 and beyond, and therefore, we're going to let leases expire that we don't deem to be economic or as economic as what we already have in our inventory. That's what that predominately relates to.

Let's talk for a minute about our reserves. We just reiterated our reserves that we did preannounce, and I believe we announced it in January. But I want to also mention to you that we've done a fair amount of hedging over the last 90 days. And so today, we have on crude in 2013 right at 8,000 barrels of oil hedge at a 9x average price of $92.50 per barrel. And then on the natural gas front, we've got about 35 million cubic feet equivalent per day hedged at an average price of $4.02 per Mcf. So we feel pretty good about these hedges in light of the volatility that all of us are experiencing in the commodity markets and believe that these will bode well. They also are typically prices above the consensus of most of our analysts, and we think that will bode well in the future as well.

We are going to take some questions today. I have to preface this by saying that any of our listeners that wish to ask questions about the accounting issues that we have discussed today, we're not going to be able to answer. We're in the middle of an audit. The audit is not complete. Our accounting firm does not want us to talk about that and our lawyers don't want us to talk about that. So don't put us in an uncomfortable position of trying to answer something we can't answer. We've basically disclosed today everything we can disclose. There will obviously be updates and additional information coming as we get closer to completion of the audit. And so I would ask that if you have questions today of us, and with me is Ron Ormand, our CFO; as well as Fred Smith, our Chief Accounting Officer, we'll be happy to try to answer. We prefer that we focus more on the operational side, which I should be able to answer most of your questions there.

So with that, operator, I'd like to turn over the call to our listeners.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Irene Haas with Wunderlich Securities.

Irene O. Haas - Wunderlich Securities Inc., Research Division

Just wanted to pick up on what Gary said earlier. You are talking about asset sales, $400 million to $500 million, during 2013. We're aware that you have Eagle Ford out there, and are there any other items? And could we have some feel on the timeline, please?

Gary C. Evans

Okay. Eagle Ford, as you know, is something we've been working feverishly on, Irene. And we have 3 active parties that we're continuing to have discussions with. Some are further along than others. And I've told all 3, it's the first one to the finish line. They're all in the same price range. So from our perspective, it doesn't really matter who ends up with it. But we do feel like we will have an announcement on that in short order. With respect to the other assets that you mentioned, we have some assets in the Williston Basin, some of which were legacy Petro Resources assets up in Burke County. We would like to dispose of those assets this year. We're actually drilling a well right now on those properties. In fact, the well, I think, has already been drilled. We're completing the well to enhance the production, and we will actively market that property. We also have received some offers on some of the non-core Williston Basin Bakken properties that we will likely continue to negotiate to try to sell. The third may be some Kentucky properties. We've identified some properties in Kentucky through the NGAS acquisition that are no longer core. So collectively, those are $50 million to $150 million of additional assets.

Operator

Your next question comes from the line of Kim Pacanovsky with MLV & Co.

Kim M. Pacanovsky - MLV & Co LLC, Research Division

I know that Colin Gillespie brought the EU's -- EURs stands slightly in the Williston Basin. And just curious, those -- your wells there were performing above the type curve, so if you could just address why they were being so conservative, and what will it take to move those EURs back up? And then secondly, if you could just give us an update on the Middle Bakken.

Gary C. Evans

Sure. Good 2 great questions. One of the things that affected us in -- at the year end 2012 was that we changed engineering firms. We were using a Canadian firm that actually uses a little bit different philosophy with respect to how they evaluate the Three Forks Sanish and Middle Bakken. And Colin Gillespie, I would say, is a more conservative firm and took a more conservative approach. Now as we've found in all these shale plays -- I mean, that's one reason we do engineering updates every 6 months, because of our growth, we find that the engineering firms come up on their EURs and come up on their production curves as time goes by. Obviously, time dictates how well the properties are going to perform. So I think when Colin looked at the Williston Basin asset, they looked -- they took a broad approach, and that's one of the reasons we are really focused on a portion of the Williston Basin where we believe EURs will be significantly greater. When I say that, I'm talking 500,000 to 750,000 barrels per well, and that's really where we're focused this year. So that's the answer as to what happened with changing the engineering firms to the U.S. firm. Colin now does all of our reserves company-wide, so we don't have 2 engineering reports. The question on the Middle Bakken. As you know, there's been some very nice successes in the acreage area where we're active, and we are drilling Middle Bakken wells. And we'll have results of those activities after the end of the first quarter that we can announce to everybody.

Kim M. Pacanovsky - MLV & Co LLC, Research Division

And you already have some wells that are completed there, is that correct?

Gary C. Evans

Correct.

Operator

Your next question comes from the line of Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

One operational question, and then I'm going to take a stab at an accounting question. We'll see where it goes. On the operational side, you talked about the 2,500 BOE a day shut-in for the various issues. Just to make sure I'm understanding that, I think you mentioned that at the end of the year, your production had surged to about the 18,500 BOE a day range. Should we then assume that it's 2,500 BOE a day off of that number? And then are the issues for that before you kind of -- before the hydrocarbon gets to the processing plant, or are there issues with the NGLs and the NGL transportation as well?

Gary C. Evans

Okay. Good question, Brian. We did surge at year end, and the issues that we had were subsequent to year end. And let me give you a little more detail of exactly what those were. The liquids component in many of the wells in the Marcellus that are tied into our Eureka Hunter Pipeline were much greater than we anticipated, which means that's a positive thing, obviously, with this price environment, but we did not have sufficient pigging in the lines to handle the liquids. So what we had to do is actually shut-in part of the pipeline, cut the pipe and put pigging operations that would remove those liquids. At the same time, we had applied for air permits for 2 compressor stations with the same entity, the governmental entity, I don't want to name it. One of the parties at that governmental entity immediately improved compression station #1. The other bureaucrat at that entity did not approve and made us go through all kinds of rigamarole, public hearings and public notices and what have you. So that's the one that's getting the April 1 approval. So we had to literally shut-in production that was anticipated to be flowing in the first quarter through the Eureka Hunter Pipeline because that compressor station did not have the proper air permit. That all gets resolved again by April 1. So the pigging has been fixed, the compressor air permit should be fixed, and then I don't know if you've watched the weather conditions in this part of the world, but they've been horrendous. I was up there 3 days last week, and it was snowing and raining and just horrible weather. So weather has also delayed us. So to answer your question, you should back off 2,500 barrels a day from the 18,500 for the first quarter.

Brian Singer - Goldman Sachs Group Inc., Research Division

Great. That's very helpful. And then I guess on the accounting side, you mentioned in your opening comments that the change in accounting firm had really kind of -- well, it has been a source of a lot of the delay. Is there any more color that you can add? I mean, we do see companies change accounting firms from time to time. Was there anything, I guess, unique about either this change or the differences in new firm versus old firm?

Gary C. Evans

I wish I could answer that question wholeheartedly, but unfortunately, it's not one of the questions I can answer because this firm is our auditors, and we just -- they are handling our work and we really just can't say.

Operator

Your next question comes from the line of Richard Tullis with Capital One South.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Gary, looking at the monetization that you had brought up a little earlier. On the Eagle Ford, could we -- should we look for this to be an all-cash sort of transaction, or is it some -- likely to be a combination of cash and carry, or another mechanism?

Gary C. Evans

Two of the 3 parties are all cash, and 1 is cash and a little bit of equity.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Okay. Are you still looking to potentially monetize the Pearsall as well?

Gary C. Evans

Yes. In fact, I should've mentioned that in the other -- when Irene was asking about the divestitures, I failed to mention Pearsall is definitely something that we would look at divesting. In fact, we are working with a bank to begin that process. It's probably something -- it's not a big number. Maybe $25 million.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Okay. And then just lastly, Utica drilling activity, what's the outlook there? Have you spud that first well?

Gary C. Evans

I would love to say that I had. The weather has prohibited us from getting the location built. I'm told now that sometime between April 1 and the 15, we will spud that well. I know the rig's trying to get moved in, just the sloppy weather because we had to make such a large pad. This is a 16-well pad, so we plan on drilling 8 Marcellus wells and 8 Utica wells in this area. So it's a significant undertaking. And we are taking delivery of a new drilling rig that we've been designing for the past 9 months. They will be drilling, for the next 18 months, our Utica wells. This first well, we're using a third party contractor, but all subsequent wells, we'll be using our new robotic Schramm drilling rig. We -- I should mention, we continue to be extremely excited about the Utica. We have leased additional acreage just here in the last 30 days. We continue to add to our acreage position and are most anxious to begin drilling. Our Eureka Hunter Pipeline division is working feverishly to get the pipe over to the areas as we complete wells so that we can tie them in. Weather, again, has been a delay for them as well, trying to lay pipe in muddy, snowy weather. So hopefully things will begin drying out some and we can get moving faster.

Operator

Your next question comes from the line of Jeff Hayden with KLR Group.

Jeffrey P. Hayden - KLR Group Holdings, LLC, Research Division

A couple for me. Gary, first one just on the production. I mean, if we just take the 2,500 off that, so about 16,000 a day for Q1, is that the number we should think of with that kind of 60% to 65% oil, or is that percentage based more on kind of the pro forma production once these issues are resolved?

Gary C. Evans

No, the 60% to 65% is the correct mix, and I would say the numbers are somewhere around 15,000 to 16,000 BOE per day in the first quarter is kind of what -- the range we're giving.

Jeffrey P. Hayden - KLR Group Holdings, LLC, Research Division

Okay. And then just jumping to the Williston. Can you give some more color on which areas that you guys kind of looking at writing off? And about what percentage of your acreage is really going to be this focus area where you're seeing the kind of 500 to 750 MBOE EURs?

Gary C. Evans

The areas that we're probably least excited about are further east. The areas that we're more excited about are further west. So we also -- when I mentioned that we were writing off some of the unproved as well as proved, some of that was also legacy NuLoch assets were over in Alberta. We had some gas properties that we bought when we bought the company that, because of gas prices, the economic viability of those additional leases came into question, so we went ahead and wrote those off. So it wasn't just Williston, it was also partial Canada. So to answer your question, we definitely like Divide County more so than we like Burke County with respect to what we're trying to achieve. There's others that are more interested in Burke County, so that's fine. So we decided that with our acreage position, we really need to home in on the best areas. We really watch water cuts significantly, making sure that water cuts are in the 20% to 30%, 35% range versus 50% to 60% range. It makes a huge difference in EURs. So there's been some great well discoveries, and we've been taking in actually some significant farm-outs that others have offered to us in this area. So we really know, from a geological standpoint, where we want to be, and we're really homed in on that.

Jeffrey P. Hayden - KLR Group Holdings, LLC, Research Division

Okay. And then just one last one. Would you guys be able to provide the oil-gas NGL split for Q4 production?

Gary C. Evans

Do we have that, Ron?

Ronald D. Ormand

About 60% liquids.

Gary C. Evans

Yes. But he wanted the NGL.

Ronald D. Ormand

Oil, yes. Our NGL is about 5%.

Gary C. Evans

Yes. The NGLs are pretty minimal because, remember, fourth quarter, the Mobley plant didn't go on until late in December, so NGL component was minimal. It was mostly oil.

Operator

And there are no further questions at this time. I would now like to turn the call over to our presenters for any closing remarks.

Gary C. Evans

I thank all of you for taking the time today. Again, we're working hard to get this audit done and get it released and move on. We think this year is going to be a great year for 2013 for Magnum Hunter, and excited to report some positive results as we make progress throughout the year. Thank you, and feel free to contact us directly if you have any specific questions. Chris Benton is our Investor Relations Manager and can direct you to the right parties. Have a good day.

Operator

This concludes today's conference call. You may now disconnect.

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