Paul M. Johnston - Senior Vice President, General Counsel and Corporate Secretary
Gary C. Evans - Chairman and Chief Executive Officer
Magnum Hunter Resources Corporation (MHR) Changing of Auditors Conference April 17, 2013 4:30 PM ET
Good afternoon. My name is Kyle, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Magnum Hunter Resources Changing of Auditors Conference Call [Operator Instructions] Mr. Johnston, you may begin the conference.
Paul M. Johnston
Thank you, operator. Good afternoon. Today is Wednesday, April 17, 2013. This is Paul Johnston, General Counsel of Magnum Hunter Resources Corporation, and I would like to welcome everyone to today's conference call.
The principal purpose of today's call is to discuss the information set forth in the Form 8-K filed by the company with the SEC late yesterday afternoon. Before we begin our presentation, 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 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 quarter, second quarter and third quarter 2012 quarterly reports on Form 10-Q. The full forward-looking statements disclaimer is included in the company's Form 8-K filed yesterday, April 16, 2013, which is posted on the company's website. This disclaimer is in effect for the duration of this conference call.
I will now turn the call over to Gary C. Evans, our Chairman and Chief Executive Officer.
Gary C. Evans
Thank you, Paul, and I know we delayed the call a little bit because we've had so many people dialing in. So hopefully, everybody is on the line and wanted to hear our presentation today.
As Paul indicated, we filed a Form 8-K after the market closed yesterday concerning the decision to change auditors, and I'm going to read a few things out of that Form 8-K to be sure everybody can understand -- went on here.
So on April 10, 2013, at the direction of the Audit Committee, the company's Board of Directors dismissed PricewaterhouseCoopers -- from this point forward, I'll call them PwC -- as the company's independent registered public accounting firm for the fiscal year ended December 31, 2012, effective immediately. PwC has been engaged as the company's independent registered public accounting firm since July 17, 2012, PwC has not completed an audit or issued an audit report on the company's consolidated financial statements for the fiscal year ended December 31, 2012. The decision to dismiss PwC was unanimously approved by the Audit Committee on April 10, 2013, and such decision was unanimously ratified and approved by the Board of Directors on April 13, 2013.
PwC was not engaged and did not serve as the company's independent registered public accounting firm at any time prior to its engagement as the company's independent registered public accounting firm since the July 17, 2012 date. During the period beginning on July 17, 2012, and ending on the date of their -- PwC's dismissal, there were no disagreements between the company and PwC on any manner of accounting principles or practices, financial statement disclosure, auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC would've caused PwC to make reference to the subject matter of the disagreements in connection with reports on the company's consolidated financial statements for the year ended December 31, 2012. So remember, there was no audit issued. So that's one of the reasons that this company and its board and its audit committee decided to change auditors.
A couple things I want to point out, also in the Form 8-K, is prior period restatements. The company has reviewed whether staff accounting bulletin board, Bulletin 99, might require certain errors, if any, and in prior fiscal years or fiscal quarters to be corrected in the applicable prior periods. The company has determined that adjustment to-date are not material, in other words they're immaterial adjustments and, thus, do not require any restatement of prior financial statements. Further, substantially all adjustments identified to-date with PwC have only been noncash items. I can't emphasize this enough. The financial statements that we reported and the financial statements we planned to report, the issues that are revolving around this have all got to do with noncash items.
Okay, let's talk about a few things. We got, as you can imagine, a ton of calls today, and unfortunately, I'm still here in New York and been able to meet with a number of our analysts directly. But I want to address some of the things that we've been asked so that, hopefully, they -- those can be cleared up.
Let's talk about the company's reserves. We have a highly qualified third-party engineering firm by the name of Cawley Gillespie, who's been doing the company's reserves since before I got involved with the company. They are -- there are no issues at all with the proven reserves and the reserve reports that we've reported. We typically do it every 6 months. And this is not just an audit, ladies and gentlemen, this is a full engineered reserve report. I mean, they go from scratch to the end and look at everything, look at our lease operating statements, look at the properties. So it's not a happenstance report. It's a expensive fully engineered report.
The impairments that we have already disclosed relate to unproven properties. So they have absolutely nothing to do with what is in the reserve report. They relate to leases or properties that we may have acquired through either the acquisition of NuLoch or to the acquisition of NGAS or the acquisition of Triad or the acquisition of VIRCO. They do not relate to proven properties. They relate to leases that we probably have decided not to drill. As we've been trying to tell everyone, we're really homing in on the areas that give us the highest rate of return and are focused on drilling those properties. So we believe that those impairments have already been disclosed. We've already released that information. We do not believe there will be any additional disclosures there. If they are, they are, again, noncash. They are not cash-related problems.
One of the other questions we've keep -- been getting today has to do with our leases. Our lease inventory is valid and fully defendable. We've done extensive review of our -- of any title issues. And whenever we drill a well on any of our leases, we get a third-party title opinion. So a lawyer or a law firm is hired, and they do a complete title review before we spud that well. Usually, after the well is completed, we then get what's called a division order title opinion, which is required by the crude oil or natural gas purchaser in order to properly pay all the parties' interest in that well. There are absolutely no issues related to our lease inventory with respect to, do we have proper title? We have proper title. We have not had any issues that I'm aware of, of where there was a lease dispute. If it was, it was minor. And we do have a ton of leases. We've been -- with the companies we bought, as well as the leases we've been obtaining, especially in the Utica and the Marcellus and even in the Bakken. The new leases are typically 5-year leases, with extensions, and there are no issues there. And that -- the lease title, I don't believe it's been a problem with anybody. So we were getting a lot of calls today, do you own the leases that you own? And the answer is yes.
I want to also talk about the banks and the debt covenants. As indicated in the Form 8-K that we filed yesterday, we currently have no financial covenant issues with our senior bank group. We've already received the necessary waivers. The company believes it will be able to remain in compliance with all its financial covenants for this foreseeable future. This is even significantly enhanced because of our decision to sell the Eagle Ford, which is a definitive agreement signed with a huge deposit expected to close, we've been -- we're told yesterday, April 24. So we anticipate somewhere before the end of April to have the cash proceeds, which allows us to completely pay off our senior bank credit and have cash on the balance sheet, something the company hasn't had in a long time. So we don't believe we have any issues related to this late Form 10-K filing that we are working on with our banks.
Let's talk about the preferred stock. As you know, we have 3 outstanding series of preferred. We are, by the bond indenture related to our senior notes, prohibited from paying dividends under our -- the preferred stock issues that we have out until our Form 10-K for this year ended December 31, 2012, and our Form 10-Q for the 3 months ended March 31 has been filed. The dividends are cumulative. It's not going anywhere, just can't get them until we file these. We anticipate paying them in 60 to 90 days and bring everybody current. So they are cumulative dividends. They're not going anywhere, we just are not allowed to pay them.
So let's talk for a minute about the Accounting Department. We have today a new Chief Accounting Officer, who was hired in October. We have a new Head of Financial Reporting. We have a new Head of Internal Audit. We have a new Head of Tax. We have 2 new financial controllers. Our Accounting Department today at Magnum Hunter contains 42 highly qualified people versus 15 last year. That's a tremendous addition, and that all that has occurred in the last 6 months.
We've also -- during this process with PwC, in an effort to try to be sure we were doing everything possible to meet their requirements, we brought in another Big 4 accounting firm, a senior partner who has substantial oil and gas experience, and he sat by our side for the last 60 days, working with PwC on trying to address the issues that they had and we have. We have also implemented a new integrated accounting and land information system so that we do have better controls. We believe that we have made the right choice with respect to going to another accounting firm.
Why did we choose BDO? The 3 senior partners assigned to our account are based in Dallas, Texas, and they have substantial oil and gas experience, 25, 30 years of experience each. They are veterans in our industry and have a complete understanding of our business. We do not have to worry about reporting to the national office with BDO. That was one of the issues that we had with PwC, as we had difficulty of having a complete relationship with the parties that are telling us what we need to do. BDO has 65 energy clients. I'll name a few that are on the New York Stock Exchange: Emerald Oil, Vanguard Natural Resources, Sanchez Energy, Rose Rock Midstream, Natural Gas Services and Dril-Quip, just to name a few. So this is a very highly qualified accounting firm, one much more suited to meet the requirements of a company our size and to assist us in getting this audit done. They have given us -- we did a thorough review of the BDO personnel and interviews, as they've done a thorough review of us, as you can imagine. BDO was very comfortable with our prior accountants, Hein & Associates. Over the past few days, they've been working with their work papers, and we fully expect to meet the deadline that we've outlined of 60 days from this filing to have a audit of our 12/31 financial statements of Magnum Hunter.
So when this 8 -- Form 8-K was filed yesterday, announcing our unanimous decision by our Audit Committee and our Board of Directors and our management team, for that matter, to change auditors from PwC to BDO, we took into account recommendations and input from PwC that was incorporated in this Form 8-K. In light of the sensitivity around this Form 8-K and the things that we can and can't say, I'm not opening up the call today to any questions, on the advice of our counsel. We felt like it was very important to express to all of you, many of which are investors who, undoubtedly, are not very happy with especially the way the stock performed today, down 15% on almost 35 million shares of stock traded.
There is no smoking gun here. I know, like many of you, when there -- you have this much smoke, there's probably a fire somewhere. There is no fire. We haven't had any issues with our cash accounting. It's -- the issues we've had have been noncash, and we think we've already disclosed them. So we felt like the decision to change accounting firm was to give us and give you certainty that we could give you an audit. Your audit should have been out at the end of February. And here we are, the middle of April, and it's not out yet. We figured the best way to resolve this was to clean the slate and bring in a new firm that we knew could respond the way you deserve and we deserve to be treated.
So we appreciate your support. Obviously, we have a whole bunch of new shareholders today. I am available; Ron Ormand, our CFO, is available; Chris Benton, our IR person, is available, to speak with you if you have specific questions that we can address. It's an open book. There's nothing to hide, and we are -- have no further desire to do anything other than get this audit completed as soon as possible. That is priority #1, as I said in our call 30 days ago, that there is nothing more important for us.
I've also was asked today some questions about, what about operationally? Operationally, this company is doing fantastic. If you did not hear my presentation yesterday at the IPAA here in New York, I encourage you to listen to it. We had a great breakout session. The company is running on all cylinders. It's unfortunate that these accounting issues have got us in a deep hole, and we're digging out of it, and we're going to fix it. This is going to be a bright future for Magnum Hunter in 2013. I recognize it, our Board of Directors recognizes it, and our management team recognizes it. So we've got a tremendous group of assets, some of the best assets in the business. We've homed in on where we want to be in those assets. We're drilling our first Utica well. We've got lots of Marcellus wells coming on. Our Williston Basin division has got new wells coming on, bigger, better wells. And we've now sold a division where we got a phenomenal return, 80% internal rate of return in 3 years. And we've got a lot of cash to pay down debt. One of the issues we've heard for 6 months, 2 years, we don't like your balance sheet. Well, we're fixing it. In a week, it's going to be fixed. And so we think that we've taken all the measures to get this company positioned to have a significant positive future with its performance and ultimate share price. And we're all big shareholders, so we're like you, we care about where this company is going.
I appreciate very much your time, a lot of you who are on the call today, I think we have over 500 people on the call, and we appreciate your support. Hopefully, this call today has calmed some of the fears that are out there about what is going on. We did this to make sure that you get an audit. You deserve an audit. We have -- that's our job, to give you an audit, and we felt like we couldn't do it without making a change. So that's what we've done. Thank you.
This concludes today's conference call. You may now disconnect.
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