Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Magnum Hunter Resources Corporation (MHR)

April 03, 2013 9:00 am ET

Executives

H. Baird Whitehead - Chief Executive Officer, President and Director

Steven A. Hartman - Chief Financial Officer and Senior Vice President

James W. Dean - Vice President of Corporate Development

Analysts

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

Scott Hanold - RBC Capital Markets, LLC, Research Division

Raymond J. Deacon - Brean Capital LLC, Research Division

Stephen F. Berman - Canaccord Genuity, Research Division

Stephen F. Berman - Pritchard Capital Partners, LLC, Research Division

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Gail A. Nicholson - KLR Group Holdings, LLC, Research Division

Lou Nardi

Edward Okine - Basso Capital Management, L.P.

Operator

Good day, ladies and gentlemen, and welcome to the Penn Virginia Corporation Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Baird Whitehead, Chief Executive Officer. Sir, you may begin.

H. Baird Whitehead

All right. Thank you, operator. Joining me today is Steve Hartman, our CFO; John Brooks, our Executive VP of Operations; Nancy Snyder, our Chief Administrative Officer; and Jim Dean, our VP of Investor Relations.

We want to go through with you today is based on the announcement we made last night about our acquisition of Magnum Hunter's Eagle Ford assets. As you would expect, we look at this as a transformational acquisition, which gives us a fairly extensive footprint in what we consider one of the premier resource plays domestically.

We now have almost 83,000 gross, 54,000 net of fairly contiguous blocky acreage. As you will see on a map, soon to be their acreage is adjacent to what we already have. We're very familiar with the geology, we're -- we've got pipeline systems on our own acreage. Of course, Magnum Hunter has pipeline systems on their acreage. So it's -- at the end of the day, I know synergistic is a buzz word you get used a lot, but it truly is a synergistic acquisition.

This enhances our production growth with 2013 estimated production of 7.5 months of about 5,500 barrels a day or about a 4% increase. This increases our drilling inventory in Eagle Ford Shale to 640 now locations. We, of course, have cited this before, but these are very attractive drilling economics with PV-10 breakeven, WTI prices of between $47, $57 per barrel with and without the LLS uplift. This acquisition will be accretive on cash flow per share in net asset value in both 2013 and '14. This increases our proved reserves by 11%, as 12 million barrels equivalent, 96% of which are liquids, 37% is proved developed.

And we think, over time, which is a big reason we did this, from a business standpoint, this makes perfect sense for us to make this acquisition. It gives us operational efficiencies. We can now drill laterals across acreage lines. We had the ability to drill longer laterals. We have the ability to add acreage. We think over time, because of our sheer size in this area, so in any case, it doesn't get any better than this as far as we're concerned, as far as the reason we did this.

We go to the next page, Page 4. You can see where this acreage is. Magnum Hunter shown in the beige acreage, us being green. We now have 54,000 net acres. We're paying approximately $400 million for 19,000 of very blocky contiguous acreage with a year-end SEC proved reserves of 12 million barrels, 90% of which is oil, 37% of which is proved developed.

As a PV-10, about $241 million, of which proved developed is $156 million. The year-end reserves included 44 producing wells in 51 locations, booked as [indiscernible].

But again, and I'll keep continuing to say this. This expands our footprint considerably as of the 345 gross, 169 net locations.

The next page just shows what we look like as far as some of the important characteristics of the company as a company in total, and our Eagle Ford position, in fact, went through everyone our proved developed reserves are increasing 9%, our total proved reserves are increasing sizably by 44%. The net inventory is increasing by 28%. Our 2013, February production is increasing by 20%. So of course, this is very accretive to what we already have in the company into -- especially our Eagle Ford position.

If we go to the next page, Page 6, you can see how we stack up now to our -- what we consider our competitors in this play. It certainly gives us some critical mass increasing our position from 35,000 to 54,000 net acres. It makes us a real player. We've got a very blocky acreage position now that we think probably gives us some additional advantages over some of these other players just because our acreage is so blocky. So I think there's enough to say about that slide.

Page 7 shows the players in this trend. Again, to remind everybody, we're in a volatile oil window. You can see us up there in the Northeast part of the trend. You can see the size we are now between ourself and Magnum Hunter that we are a real player. So in any case, I hope this certainly gets everybody's attention as far as Penn Virginia is here and is a real Penn Virginia player -- or a real Eagle Ford player, excuse me.

Next page gives you some details as far as our total vehicle position now. As I've said, we have roughly 54,000 net acres. We are the operator in Gonzales County with a 7% interest. We are an operator in Lavaca County with a 65% average weighted interest. There are -- there is some acreage, about 13,000 gross, 6,500 net in Gonzales County, there's offside offering, in which we have almost have a 50% interest.

I'm not going to go down through all the IP and reserves site information. But again, we continue to focus and say and reinforce our reserves in Gonzales County and Lavaca County exceed 400,000 to 500,000 barrels accordingly.

The proved reserves of our Eagle Ford now is about 38 million barrels, which consist of 82% oil; 10% natural gas liquids and 8% gas. And even though we don't -- we sort of danced around in our press release our 3P reserves now go from 70 million barrels at year-end 2012 in the Eagle Ford, and we're doubling it to 140 million barrels, so this is material to us.

The PV-10 at year-end '12 is $933 million, of which $784 million is proved developed. We now have 82 net producing wells. We've continued to say that we will lower our costs as the year goes on. Much of our completion costs, we expect to decrease anywhere from $1 million to $1.5 million, as our contract -- our pumping service contract rolls off. All of our guidance, all of our site curves now include our higher well cost of $9.1 million and $10.1 million accordingly for Gonzales and Lavaca counties, but I would expect those numbers to come down considerably as we not only reduce our completion costs with better pumping terms. But as importantly, as we go to more pad drilling, as we roll off some of our 3-year contracts on our day work rates and replace them with cheaper day work rates, all this is going to add up as the year goes on. There will be some fairly drastic changes in our cost coming down as we get into the second half of the year.

Next page shows, again, the acreage. It shows our acreage, Magnum Hunter's acreage. This shows the components of the Magnum Hunter acreage. I'm not going to go through each one of these. As I said earlier, we've got -- we're picking up about 19,000 net acres. You can see the locations for each one of these areas for a total location inventory of about 345 locations. So in any case, this adds materially to our total Eagle Ford position.

Next page gives the before and after of the Magnum Hunter acquisition. It is located in the Gonzales and Lavaca counties. Both of them, of course, we go from 35,000 net acreage primarily in the volatile well window. I want to remind everybody also that up until this press release, we have been saying that we had roughly 33,000 net acres. So just in a fairly short period of time through grassroots leasing and further nonconsents and drilling of wells in the Lavaca County acreage, we have added that acreage net of costs. So we've added a few thousand net acreage in a short period of time.

Again, this multi-year inventory, we plan on running 6 rigs in this acquisition, 4 of which will be operated by Penn Virginia, 2 of which will be operated by -- our nonoperator up in Gonzales County. But in general, at the end of the day, with 6 rig perpetual drilling activity, we have about 8 years of rig activity or drilling inventory. So in any case, we will continue, we think, add to that as we have previously stated.

Next page shows more detail about our acreage. Again, we have this inventory of 640 additional drilling locations between ourself and what we acquired. We have included 300 down space locations in the 640 that we feel has been tested by the industry, by ourselves and by Magnum Hunter. Magnum Hunter, from the get-go, has drilled some of their wells on 2 and 3 well pads. So that has already been tested as far as we're concerned. So we feel very good about the downspacing.

Also within the press release, we announced that we were no longer going to consider selling our Lavaca County acreage and bringing in a partner just to bring everybody up to date. The results that we have had continue to be very, very good. We have just the far extreme eastern part of the acreage, probably the second best well we had drilled within the Eagle Ford position in general. So at this time, we see no reason to sell it and we're going to hold onto it.

You can see down at the bottom, where our locations are, by Gonzales, Lavaca and the Magnum Hunter assets. Again, if you look at over in the far right-hand side on the acreage per location, the Magnum Hunter and our Gonzales acreage position is about the same. But we think we've got great opportunity to add locations in Lavaca County over time. And I think we have further opportunities to down space and add locations more so in Gonzales than in Hunter, the Eagle Hunter assets over time also. So in any case, again, these are all laterals that are on the map. They have geologically been supported, Isner [ph] been supported, so these are not strictly mathematically driven.

Next page, sort of gives you an overall inventory of things we have to do in the company, not only by oil, but also our gassy assets, which we continue to think, at some point in time, will have value.

Our total inventory is now 1,133 gross locations, almost all of which are horizontal in today's world. We have almost 700 locations in the Eagle Ford in Granite Wash, and we don't talk a lot about the Granite Wash today. But those drilling locations are still very economically even though we don't spend a lot of money in that play right now. But again, we do have a significant inventory of gassy locations to drill at some point in time. We don't plan on drilling gas wells, we have no intent to drilling gas wells. The economies of the Eagle Ford are so outstanding right now that the gas prices would have to get extremely high even to compete for that dollar investments. But in any case, it is something nice to have.

And with that, let me turn it over to Steve Hartman, please.

Steven A. Hartman

Okay, thanks, Baird. Looking at our 2013 updated capital plan, the mid-point of our new updated guidance range of $432 million to $482 million is $457 million. As Baird mentioned, that's a 6-gross rig program across both Eagle Ford areas. That's incremental capital spending of approximately $77 million, which is a 20% increase over our current guidance.

Looking down at the pie charts, we expect to spend 92% of our capital in the Eagle Ford with a minor amount, the same amount as before spent in the Mid-Continent in the Granite Wash play, and a little bit spent in exploration in other. And looking over to the right on how we're spending our capital, 87% of our capital will be related to drilling and completion costs in the Eagle Ford, and then a minor amount spent in the Granite Wash land and other.

Moving on to the sources and usage page and pro forma capitalization. This is a $458 million total consideration deal after you look at the acquisition amount, the post-closing adjustments and estimated fees and expenses. This is probably a little bit of a conservative estimate on the post-closing adjustments. We're assuming a May 15 close in these calculations, but it looks like it could be as early as the end of April. So if that's the case, that would be a lower post-closing adjustment. And you'd also see higher production and cash flow estimates when we release our guidance in May.

We're looking at doing a $400 million bond deal that's already been launched. And we've -- and we are looking at taking $40 million in equity probably with Magnum Hunter, taking back the equity, 10 million shares at $4, although that is at our options, so we do not need to do that. But that's what we're assuming in this analysis.

And in the balance of the consideration would be drawn from the revolver, $18 million in this example.

Looking over at our cap table. I won't read all of this, but I will highlight a few numbers. Our enterprise value pro forma as of the year-end was $1.4 billion. Our LTM-adjusted EBITDAX for 2012 would be $309 million, $248 million is our actual per year 2012. The $62.2 million for Eagle Ford is an audited number, so that is a good number. So we feel that, that is a very solid $309 million number for 2012.

Looking down at our proved reserves, we would be 28% oil; 45% oil and liquids together and 41% developed. We have close to a 19-year R over P. And then looking down at the credit statistics, our leverage ratio pro forma for the deal are, as shown here, LTM-adjusted EBITDA, debt-to-EBITDA, would be 3.3x. That compares to our 2.4x that we had at year end reported.

And then looking at our liquidity and the current undrawn facility, at year end, we had $300 million available on our credit facility, we had nothing drawn right now. Pro forma for the deal, that would be $269 million. And how we calculate that math would be our current $300 million borrowing base less $12.5 million adjustment for the bonds that are being issued and then less the $18 million drawn on the revolver. Where we stand today at the end of the first quarter is $38 million drawn. So doing that same math on where we would expect to be at the end of the quarter with pro forma would be $232 million.

A little note on the borrowing base, redetermination of as part of this deal, we have a waiver out to the bank group right now that would allow us to keep the borrowing base pretty much where it is right now, like I mentioned the $12.5 million adjustment. We expect to do our spring redetermination in about 3 to 4 weeks, and then we will true up with the actual borrowing base value at that point. And I expect that it would be probably where it's at right now, if not a little higher.

On the next slide, we show you our cash margins versus our peers. This is a very exciting slide for us. We like this story. On the left, we show you our adjusted EBITDAX back to first quarter of 2010 by quarter. So you can see the ramp-up in just our base business over time, as we add more oil into our portfolio mix.

But even more exciting than that is the trend line and our cash margin. The red line is showing you our cash margin, company-wide, not just the Eagle Ford. This is company-wide. And you could see in second quarter 2010, we were down to about $19 per BOE as a cash margin. And over time, as we added to the Eagle Ford position and the Granite Wash and improve those margins, you can see a consistent increase in these margins up to our latest fourth quarter 2012 margin of $43.72.

Now keep in mind in 2012 -- 2011 we were 17% oil. In 2012, we were 35% oil. Pro formal for 2013, we expect to be 55% oil. So you could see that as we keep bringing that Eagle Ford oil, which I note above is $79 per barrel equivalent in fourth quarter 2012, we keep bringing on that high cash margin oil and decline off the lower-margin natural gas, which tends to be about $10 to $20 barrel of oil equivalent. You could see that we're real excited about that trend line and that cash flow continuing to grow.

And looking over to the right, it's a snapshot of what our reported and our pro forma EBITDAX margins were for the fourth quarter versus our peers. We were already very strong versus our peers at $43.72 pro forma for the fourth quarter. We would have been $78.41, so we continue to see those cash margins in our leverage to the Eagle Ford continue to strengthen.

And the next slide is to highlight the guidance table that was in the press release. I won't read all of these to you, but I'll highlight a few again. On the crude oil, we're looking at $37.50 MBO as the mid-point of our guidance range, which is at 28% increase over our February guidance. For a total equivalent production for the company, that's $68.47 is the mid-point MBO, that's a 16% increase over the previous guidance.

Jumping down to EBITDAX, we're looking at $322 million of the mid-point of the guidance range, which is $60 million to $70 million increase, or 25%. And that is not a pro forma number. I think that's important to point out that, that is not full year 2013 pro forma. That's assuming a May 15 closing date, so that would be cash flow being additive to the company from May 15 through the end of the year. Anything prior to that would have been a purchase price adjustment, so we don't take credit for any of those productions or cash flow statistics in this guidance table. And of course, if we closed earlier, like I'd mentioned, April 30, then these numbers would go up and we'll give you updated guidance in May.

And then looking down to capital expenditures, our new mid-point of guidance is $457 million, which is a 20% increase. We were -- we'll spend quite a bit of time looking at our capital program with the significant acquisition. And we -- you can see that we lowered some of our spending that we would consider discretionary on the seismic, some land and pipeline gathering facilities and are really looking to focus on our drilling to completion as we get this asset folded in.

Looking over at the next slide is proved reserve disclosure. We've gone through -- Baird went through most of this numbers, so I won't hit them. It's just there for your reference. But looking down at the bottom, pro forma for the full company at year-end '12, Baird mentioned that we were at $933 million of PV-10 value at year end. But you may recall from our January 29 operational update press release, that we've mentioned we had about $146 million of negative value puds on the books. And we gave you that disclosure in that press release. If you add back that same $146 million of negative pud value, our total proved reserve PV-10 would be about $1.1 billion, and we're about 45% oil and NGLs on a proved basis.

And with that, Baird, I'll turn it back over.

H. Baird Whitehead

Thanks, Steve. Anyway, just to summarize. I hope you can see that the benefits of this acquisition to us considering its location and considering our emphasis on the Eagle Ford shale. This is a fantastic business opportunity for us. We feel over time, we'll continue to grow it primarily organically. But for the leasehold acquisition, further down spacing, there are synergistic realizations with the pipeline systems that we can see over time. If we can combine or interconnect our pipeline system to their pipeline system, all of a sudden, you have an extensive pipeline system that also has real value, of course.

So with that -- and one other thing I wanted to mention that I think is important, we put in the press release the February production based on accounting numbers, was about 3,300 -- 3,271 BOE per day equivalent. There are 3 wells that Magnum Hunter has just drilled and completed. They're flowing back as we speak. It's one of the through up pads that are in this down space category.

As of yesterday, those 3 wells -- which is not included, by the way, of course, in that February number that I just gave, production number -- those 3 wells were averaging about 52 to 54 barrels of oil per hour. That's well in excess of 1,000 barrels a day per well flowing about 2,400x, each making about 700 McF a day of gas. So -- in any case, the quality of assets that we're picking up we feel is excellent and very complementary to what the company already has.

So with that, operator, we'll turn it over to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Kim Pacanovsky of MLV & Co.

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

I always said you guys were the natural buyer of these properties, so I am very pleased to see the acquisition. However, let me just ask a couple of questions about the financing. And the first is your comfort with the debt level and what you might be doing in the future to get that debt level down.

Steven A. Hartman

Kim, this is Steve. Were comfortable with the debt level right now, but we're mindful that we need to get it down over time. And the way we have it modeled, it looks like we will be able to do that. So I would expect that we're going to be able to -- we'll be at, like I mentioned in the presentation, we'll be at 3.3x leverage pro forma for the deal. I think we'll probably end up around 3.3x at the end of the year. And then they'll start coming down to 3x, which is more in line with our target leverage by the end of 2014, and then getting very comfortable with the increase in cash flow into 2015. So it will take us probably 1.5 years or so to get back to where we would really like to be, but we are comfortable with it. Go ahead.

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

I was going to say, so there are no asset sales contemplated in Granite Wash or elsewhere?

H. Baird Whitehead

There are not. I mean, it's always something that we have the ability to do, of course, to accelerate that thing cleaning up our balance sheet further. And the other thing I want to point out is the pipeline system. The pipeline system that we have constructed is a first-class pipeline system. If we could get it interconnected with Magnum Hunter's pipeline system, and even if we couldn't, with a growing asset and increased throughput, that pipeline system has real value. And of course, there would be no proved reserve implication if we decided to divest to that some at point in time. So -- and that would be a material number to the company.

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

Okay, great. And then why the 10 million shares? I mean, it seems to me to be such a drop in the bucket as compared to the size of the acquisition to issue 40 million of shares on a $400 million acquisition to then dilute your stock to that extent. So I'm wondering how that all came about. Did Magnum want some of the upside with the properties? Or I just don't understand why you would issue stock.

H. Baird Whitehead

Well, to answer your question, number one, it's an option; number two, Magnum Hunter was interested in having our shares. We think it lends support to the transaction, them willing to take our shares. And number three, in order to get executed on the debt offering, we needed a -- we needed some support on the equity side, as small as it may be.

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

Okay. Got it, okay. And then, finally, on the properties. How many locations does Magnum have ready to drill?

H. Baird Whitehead

I don't know exactly to answer that question. We have a drilling schedule from them for the remainder of the year and from the outside operated. But as far as teed up, permitted, those kind of things, I'm not exactly sure at this time other than we have -- we'll not be a problem, we don't think that's any problem at all.

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

Okay. And as you were reviewing their well results over the course of evaluating this deal, did you find that they were doing anything different from you? Is there anything you thought you were doing better or they were doing better that you might incorporate in future completions or drilling et cetera?

H. Baird Whitehead

Probably the most significant thing that they did differently than us because their geological setting allowed them to do so is they were drilling fairly routinely longer laterals. Some of these 2,000 plus barrel a day equivalent kind of IPs that she have seen, number one, they were down space wells, which gives us a lot of comfort. Number two, they were longer laterals. So in general, we -- we plan on -- we have started to drill longer laterals in Lavaca County because the geology allows us to do so. But that's probably the most significant difference.

Operator

Our next question is from Scott Hanold of RBC Capital Markets.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Steve, a little bit more on sort of the funding for the acquisition. I know you kind of went to that a little bit. Maybe if I can ask a question a little bit different manner. When you look at your CapEx and your growing cash flows, when do you suspect you're going to be more in a free cash flow neutral position that serve your base activity levels right now?

Steven A. Hartman

We think that we're going to be program neutral in 2014. And what I mean by that, as we look at our quarterly EBITDAX into 2014 versus what we're spending on the capital in 2014, and they're about equal. So the only thing that we're outspending even as early as 2014 is our financing costs. So when we look forward in 2015 and when we get neutral on our financing cost, and I think that we probably are approaching total company neutral in cash flow by the end of the year.

H. Baird Whitehead

And just to point out, just to add one thing -- I didn't mean to interrupt, Steve. I mean really, this has not changed from pre-Magnum Hunter. We've been saying the same thing because of the acceleration of the EBITDAX even though our capital program has gone up, the advantage of the growth in EBITDAX is outweighed to increase in CapEx. So we sort of get sort of cash flow, self-sourcing situation about the same period of time.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay. And just so I understand that you present [ph] by the year-end '15 or is that for 2015 on average you'll be free cash flow neutral, including financing costs?

Steven A. Hartman

Toward year end.

H. Baird Whitehead

Yes.

Steven A. Hartman

For the full year '15, we would expect that there would be a minor outspend for the year.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay, understood, great. And sitting back and looking at this acreage, I mean, it's very contiguous with what you all have in, I guess, a part of the Magnum Hunter's acreage is a little bit further to the north than yours. Can you talk about the relative economics on their acreage relative to yours? Is it very similar? Or is there -- are there changes based on location?

H. Baird Whitehead

No, we think it's very, very similar. There is a piece that would be a little bit farther north that primarily is the outside-operated stuff. If you look at our results in about the same neck of the woods, we don't see quite as high as IP rates because it is oilier. But one thing that we do see is the type curve and the decline is a little bit different, whereas you get to a lesser decline in a shorter period of time. So at the end of the day, the reserves are about the same. It's just the matter of how they're produced within that time frame. But at the end of the day, no, things are very, very similar between our stuff and their stuff as far as results and economics.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay, understood. And then one other question on the Lavaca acreage that you had been looking for a partner but now are deciding to hold yourself. Again, looking at -- I think part of the reason you were looking at to find that partner to help was to help you fund that. Relative to where you were then to now, how is -- why is that changed? I understand the economic vehicles [ph] are good, but from a funding perspective, what has changed here?

H. Baird Whitehead

Well, what's changed is the results we have seen with just a handful of additional wells in the eastern part of our acreage, Scott. They have been outstanding wells. We are seeing different parts of the Eagle Ford. They are probably perspective on our acreage in upper Eagle Ford and the conventional part of the lower Eagle Ford. So we have figured that at -- we still have the advantages of keeping this thing now versus selling it and not getting any value for these upsides was the right thing to do. So we just decided not to follow through and sell.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay. And I guess specifically I was wondering, I think there was a well you guys drilled the farthest southeast that was a little bit of a delineation. Do you have sort of a well rates or at least an update on what that looks like?

H. Baird Whitehead

Well, I prefer not to give you exact information right now. But I'll tell you, and I think I alluded to, it was actually the second best well we have drilled in the Eagle Ford across our entire exposition. So puts it in perspective.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay, that's very good. And I lied, I have one more quick one. You're looking at Pearsall. And I think if I'm not mistaken, you were drilling a Pearsall test well. Is the Pearsall perspective as well as the Magnum Hunter acreage? And when could we hear more about that result?

H. Baird Whitehead

As far as with work, yes, it would be perspective. We could, of course, put no value on the Pearsall. I mean, there's a lot left to learn about the Pearsall, exactly where you need to drill. Does it make sense to get further done than what we were? We're still testing our well. But yes, to answer your question, it would -- if it works, it would work across our acreage also.

Operator

Our next question is from Ray Deacon of Brean Capital.

Raymond J. Deacon - Brean Capital LLC, Research Division

Baird, on the Lavaca County well, the one for the South, is -- does the gas component change much as you move south or is it kind of fairly consistent with the other wells?

H. Baird Whitehead

It has increased slightly, Ray, but it's not material. I mean, what we saw was, yes, the gas is up. But we're seeing much higher pressures. But the oil rates are also up. So there's subtle differences in GOR as we get to the farthest southeast location we have drilled. I think it was around 1,500 standard cubic foot per barrel, which is still considered an oil well ratio.

Raymond J. Deacon - Brean Capital LLC, Research Division

Okay, got it. So the returns are pretty similar, if not maybe a little better.

H. Baird Whitehead

Well, yes, these are better. I mean, if we could perpetuate and drill additional wells like this last one we drilled down there, the returns are excellent.

Raymond J. Deacon - Brean Capital LLC, Research Division

Right, got it. And could you just maybe try to quantify what you're talking about in terms of combining the transportation system and what -- so what would -- could that mean to the $79 a barrel cash margin? I mean, do you see that going higher on a combined basis over time or...

Steven A. Hartman

Well, probably not. What it does, and this is really just an idea at this time, if you can get the pipelines combined, it may be -- well, it may be is not even the right word, it does make it more attractive as a potential assets of sale. I mean, we're not in the pipeline business. We don't get advantages in our share price for pipelines. But there are people who do, of course, and be willing to take that pipeline system, continue to expand it, get into the routine gathering business like these guys do and it'd be a good footprint to start from. This is what I'm trying to say.

Operator

[Operator Instructions] Our next question is from Steve Berman of Canaccord Genuity.

Stephen F. Berman - Canaccord Genuity, Research Division

I think I just have one question left. Baird, there were 7 pro forma rigs and you're going down to 6. Can you just talk a little bit about the rationale there? Why not just stay at 7?

H. Baird Whitehead

Well, it -- being mindful of the liquidity situation and outspend, Steve, it was strictly a sensitivity that we ran a few different ways, as far as the -- what kind of outspend and trying to stay within these appropriate and longer-term goal, credit statistics. And we felt that 6 rigs was a better way to go than 7 rigs. That's really -- that's it in a nutshell.

Stephen F. Berman - Pritchard Capital Partners, LLC, Research Division

Okay. It's probably in this presentation somewhere, but I'll ask anyway. Is there a breakdown between the 54,000 net acres between the 2 counties in here?

H. Baird Whitehead

I don't know the answer to that question. Steve?

Steven A. Hartman

Yes, on Page -- if you look at Page 11, that's as close as we have. The Eagle Hunter, which is the Magnum Hunter assets, are still combined, but it's a majority in Gonzales County.

Operator

Our next question is from Biju Perincheril of Jefferies.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

So Baird, you talked about -- it looks like you're expecting pretty nice ramp up from the acquired properties in the back half of the year. Beyond the 7 months that are waiting on completion, can you talk about how many wells you're planning bringing online for the remainder of the year?

H. Baird Whitehead

Jim Dean, do you have that answer handy?

James W. Dean

For the -- in the presentation, we talked about drilling 62 wells this year, 39 net.

H. Baird Whitehead

That would be both ours and Magnum Hunter's assets.

James W. Dean

Got it. We're drilling approximately 30 wells on their acreage in that number.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

30 gross wells, correct?

James W. Dean

Yes, so we'll have, I guess, approximately 6 less of our own wells.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Okay. And just most of that will be online?

H. Baird Whitehead

Yes. I mean, there may be a few straggle over into very early 2014, Biju. But in all practical purposes, most of them will get turned in line.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Okay. And the -- in that number, the number of wells that we're waiting online at the end of the year. What was the Magnum's number end of 2012?

H. Baird Whitehead

Jim Dean, do you have that answer?

James W. Dean

Could you repeat the question, Biju? Sorry about that.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

So the 7 wells waiting online -- or let me ask you this, the number that you just gave me, does that include the 7 wells that are waiting online?

H. Baird Whitehead

No.

James W. Dean

There was part of their wells that will be in the closing adjustment. We're talking about wells post closing.

H. Baird Whitehead

So all that stuff -- Jim is exactly right, Biju. All that stuff is either drilling or just these 3 wells that I just discussed earlier, those will be sort of post closing kind of adjustment kind of wells. But they will have a production component associated with them after we close, of course.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Got it, okay. And so the 6 rigs you're running total, what are your expectations as far as increasing activities there at some point? Is that primarily cash flow-driven or any other factors that you're looking at?

H. Baird Whitehead

Well, we could increase the rig count. But we felt more comfortable with the 6 rigs. And we've continued to say that we are focused on the balance sheet and liquidity. It's something we will -- we manage and try to get below this 3 number that Steve talked about earlier over time. So we've felt just keeping with 6 rigs, we've built into the economics 4 rigs on the Magnum Hunter assets long term. There was no ramp-up assumed. It was just stated for. Could we make it bigger? Yes, we could, if things change. But at this point in time, for long-term reasons and liquidity reasons, we felt that 6 rigs was the right answer.

Operator

Our next question is from Gail Nicholson of KLR Group.

Gail A. Nicholson - KLR Group Holdings, LLC, Research Division

I just had a quick question regarding hedges. Do you guys plan to add some additional hedges with the increase in production that you guys have from the acquisition?

Steven A. Hartman

We do. We hedge pretty aggressively going into the acquisition. We hedged up to 70% on oil and NGLs in anticipation of this acquisition. But even going forward, we probably want to add about 1,500 to 2000 barrels, given today's commodity prices.

Gail A. Nicholson - KLR Group Holdings, LLC, Research Division

Okay, great. And then you mentioned about for the potential downspacing on the acreage. I was just curiosity when do you guys have a plan to test that theory?

H. Baird Whitehead

Well, we've already tested it. Just understand our own acreage. Magnum Hunter has spend more of it on their acreage because of the pad drill they've been undertaking. We've been more interested in getting acreage earned and getting it held by production. So you're going to start seeing us do more of it in 2013 with pad drilling on our own acreage as the year progresses. But we will probably do more of it or similar to what Magnum Hunter was doing on their own acreage. So it will become a bigger part of our overall program as time goes on.

Operator

Our next question is from Lou Nardi of Global Hunter Securities.

Lou Nardi

I just wanted to ask that same hedge question. So you said you've added some going in. So what does the total look like now?

Steven A. Hartman

We're about 70% hedged for 2013 for both oil and natural gas.

Lou Nardi

So on the oil side, something on the order of 7,000 barrels a day or...

Steven A. Hartman

Yes.

Operator

Our next question is from Edward Okine of Basso.

Edward Okine - Basso Capital Management, L.P.

With the $72 million to $82 million at CapEx program. I'm just trying to find out what's your estimate your -- as it at a production rate the acquired assets?

H. Baird Whitehead

If I understand the question, out of the $77 million of additional CapEx, what is the production associated with those acquired assets?

Edward Okine - Basso Capital Management, L.P.

Yes. I'm just trying to find out what your asset rate might be for 2013?

H. Baird Whitehead

Just for the assets we're buying or for the total...

Edward Okine - Basso Capital Management, L.P.

Correct, correct, yes.

H. Baird Whitehead

Jim, do you have that answer?

Edward Okine - Basso Capital Management, L.P.

Because it was -- sorry?

H. Baird Whitehead

No, go ahead.

Edward Okine - Basso Capital Management, L.P.

No, because I thought it was approximately 3,200 at the time of acquisition. And I believe you gave 3,700 to 4,400 BOPD for the last 7 months. So I'm just trying to find out what your assets rate might be.

H. Baird Whitehead

Well, for the total company, would be about 21,000, 20,000 and 21,000 BOE per day equivalent.

James W. Dean

Baird, we calculated it here real quick. It's probably, for the acquired assets, fourth quarter is going to be around 5,500 to 6,000 net.

Edward Okine - Basso Capital Management, L.P.

Okay, that was the fourth quarter, right? The fourth quarter average, 5,500 to 6,000?

James W. Dean

Correct. So it will be higher in December theoretically than October.

Operator

We have a follow-up question from Scott Hanold of RBC Capital Markets.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Just a little bit more on the downspacing. Can you remind us on your acreage in -- on the Magnum Hunter's acreage? What is the closest testing that's been done to date? And I know you, on average, you talk about 110-acre spacing, and I think that is somewhat of an engineered number. But ultimately, how close are you going to test these in the next couple of years and where do you think ultimately that could go?

Steven A. Hartman

I think 60 acres is probably the right answer, Scott. The wells they drilled, that we have drilled have been approximately on that acreage. We're talking about 450 to 500 feet between laterals. So I think 60 acres is important. I think that trying to do that early on in the process would also be important. So you probably start to see us do more pad drilling initially as we go on. But as I said earlier, we wanted to get our acreage sell by production. But I think the 60-acre kind of number is in the ballpark.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay. So that 8-year inventory that you talked about was based on your 110 spacing, so...

H. Baird Whitehead

That's correct. On the one page we have where we talked about acreage per well. I think there's about 104, 105 for Gonzales and 133 for Lavaca. So we have a lot more running room and the ability to add locations over time as we get more comfortable.

Operator

Our last question is from Steve Berman of Canaccord Genuity.

Stephen F. Berman - Canaccord Genuity, Research Division

A question for Steve Hartman. On the guidance table, Steve, the exploration expenses. How much of that is noncash?

James W. Dean

Yes, Steve, it's all about $1 million.

Operator

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Baird Whitehead for closing remarks.

H. Baird Whitehead

Anyway, thank you very much for listening in. It's a pretty exciting day for our company and being able to get this deal done. I think it changes the company a lot, and we're looking forward to the future. So with that, have a good day.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Penn Virginia's CEO Hosts Acquisition of Eagle Ford Shale Assets Conference (Transcripts)
This Transcript
All Transcripts