Gary Evans - Chief Executive Officer
Magnum Hunter Resources Corp. (MHR) IPAA OGIS San Francisco Conference Transcript September 30, 2013 2:50 PM ET
So we have the last presentation before lunch. So the company presenting is Magnum Hunter Resources and with us is Gary Evans. He is the CEO, and I’ll go ahead and turn over to Gary.
Thank you. Magnum Hunter is, we are about a four-year old company, those of you don’t know, least management team. We have been bit of Ontario last couple of weeks with our share price. We had hit in the years with some accounting debacles but we’ve over come that and now we are working hard to truly get this stock up after we are out this to reflect our net asset value. So combination of the marketing and interest from larger institution has created the buying frenzy.
Today we are about $1.1 billion market cap, enterprise value right at $2 billion. We are still own target with our 25,000 barrel day exit rate that we have given earlier in the year. Proved reserves right at 60 million barrels, 3P 119 and contingent reserves right at 729 million barrels.
There is we are in, we’ve sold our Eagle Ford properties in April to Penn Virginia. We have just got a contract to sell our South Texas up, so we’ll only be Appalachia and Williston Basin soon. In Appalachia, we control about 400,000 acres and in up in the Williston Basin is about 175,000 acres.
Lot of companies talked about annual growth rate, we talk about quarterly growth rate, 21% per quarter. Reserve since we have gotten involved, we have grown on an annual basis of 128% on Boe per share 60%, we are very cautious not to issue equity and we don’t have to, so we used other forms of capital raising reserve have about 50% oil and gas even after the sale of the Eagle Ford, which was all oil, but that will change as we continue drilling Marcellus and Utica wells this year. We anticipate next year probably be in 65% gas, 35% oil.
As we have grown our efficiency has continue to improve, average annual decline rate of 41%, so we are down to about $21 total all in cost to lift the barrel out of the ground. And as our growth continues, obviously revenues and EBITDA increase an average growth rate of 437%.
This is a slide I am most proud of, because in four years we have accumulated over a 1 million acres of what I call shale scale and of that 727,000 are in this core areas where we are going to be developing now.
So to achieve this we continue now to focus when you are building the company from an embryonic stage, you don’t know which areas are going to be best, so we bought large positions in the areas that we felt like we wanted to be active in, now we are feeling off the dogs and cats and homing in on the core and that’s what going on today.
We have a lot of optionality with respect to what we want to sell. We sold already this month about $85 million of non-core assets. We have another $150. It will probably sell before the end of the year, being marketed by number of banks and institutions.
We are continuing to review the possible monetization of our midstream assets, but we have decided to differ that decision to year end because of all the activity we are participating in in the Utica over Southeast Ohio and takeaway capacity is a huge issue in that part of the world.
So accomplishment to date, these are the wells we drill just through our last reporting period June, 13 gross -- 13 in Marcellus, 33 in North Dakota and one in Saskatchewan. And we talked about the Eagle Ford Shale, we spud our first Utica well in April and we are now have another Utica well drilling called the Stalder, I’ll talk about here in minute.
So let’s jump directly into Appalachia, we have today right at 38 million barrel of proved reserves of which 25 is proved develop producing. As I mentioned, 490,000 acres, most of that I would say, 75% is held by production with shallow wells that hold the deep right. So we don’t have a real -- gone ahead and have to drill wells. Most of our West Virginia acreages in Northwest in West Virginia, Tyler, Wetzel County, some in Ritchie and Pleasants counties, we typically have three rigs running at any given time in the Marcellus.
This is our operations. You can see our most recent wells, some that we participate with others in the number of frac stages. So typically 9 million to 10 million a day gas wells in the wet Marcellus at Northwest West Virginia.
We finally got this plant up and going, I should say Markwest did in December of last year. This was a huge uplift for us about $0.75 to $1.25 because this gas is so wet. And so one reason we chose to be active in the Marcellus in West Virginia rather than Pennsylvania is because of the liquids rich nature of the reserves in this region.
So that drives returns well north of 77% even in a $3.74 gas environment. And I listened to other companies this morning talk about minimum returns of 20%. We don’t look at anything in our company under 50%. So what’s -- how could we say that because we have acreage in areas that generate higher rates of return.
So this is the map of the Marcellus. And this is where the huge growth is coming for our company in the last 90 days of the year. We have a number of wells being tied in as we speak into our Eureka Hunter Pipeline system. Most of the drilling that we’re doing now in the Marcellus is all in pad drilling over -- near the Ohio River.
And so now we’ll shift to Utica which is across the Ohio River but lot of people don’t realize gas also going to West Virginia. We’re actually going to be drilling our first Utica test in West Virginia in the next month and within Howard County.
So the Utica we didn’t really talk about year and half ago and we’ve made decision to really take a risk here and build our position. We’re up to close to 100,000 acres. We’re now saving acreage by last month of 32,000 acres for $147 million at $4,400 an acre from a co-up of about 20 landowners in South Eastern Ohio.
What do we love about the Utica? It gathered all. It’s got resistivity. It’s got porosity, permeability, depth, pressure. It’s got fracking mechanisms. Everybody talks about the Utica Shale. Nobody drills the Utica, they drill the Point Pleasant and surrounded by Utica with a shale above and below it.
We’re seeing a geo-pressured regime here like we’ve never seen before. So our first well, the Farley well actually blew out on us in a natural fracture, we didn’t frac the well. So we’re pretty excited about what we’re seeing. We had totally changed our drilling techniques in this region using South Louisiana Gulf Coast technology with high pressure, well heads, 10,000 pounds well heads, double BOPs.
So we bought in gulf coast engineers to manage the drilling process. Nobody has seen this kind of pressure and this kind of flow rates. We’re talking about gas wells in this region that will flow 20 million or 30 million. I think we’ll see 50 million gas flows here next year.
So this is the acreage bar I just mentioned 32,000 acres at $4,400 bucks an acre. And we are pretty excited about this acreage and what it does for us. This is just I think one of the other banks that put together comparing the Utica to other plays in the U.S. based on productive capacity and development parameters and you could see why comparisons are still favorable.
The lithology, the Point Pleasant is actually a very thin, high-permeable carbonate stringers that can encased the rock. And the combination of that with over-pressured shales helps explain why the flow rates are so high. So it’s got really low water saturation, gives huge advantages of large reserves per acre. It doesn’t seem to be water sensitive which also is a major plus that we usually see in shales.
So this is our first well. The Farley is the one I mentioned that blew out on us. It’s about on the horizontal section. We came very, very close to losing this well. We had about 80 foot flare for four days. It’s a very rich gas about 40% liquids and we are completing this well as we speak.
We’ve gained us a tight hold. So I don’t give a whole lot of information out, but we continue to be actively leasing in the region. This pad is a 10-well pad and one of the things that people don’t realize about the Utica is this part of the country is very, very mountainous and people talk about acreage they have but ask them how much of it they can drill.
And that’s a big key in our acreage acquisition. It’s making sure that we have sufficient acreage that allows for this kind of pad drilling because you have to basically take the top of the mountain down to build a pad over here. So this will be 10 lateral locations. The well they are growing now that we’re completing the rig that I am going to show you in a second. It’s on the Stalder pad coming back here to drill a second one here in the next 30 days.
This is the Stalder pad. This is over by the Ohio River. We have already drilled the Marcellus well here. This is what’s very unique about our company. It is not any companies that they can say this other than Exxon which is just north of us and that is we have Marcellus and Utica on top of one another and it’s only because of the location of this acreage along the river that permits that.
So what we have here is a very, very wet Marcellus, almost pure condensate wells and very, very dry Utica high volume, 20, 30, 40 million a day gas wells. So you can imagine pipeline issues here are significant. We typically land two to three lines to the pad so that we can reduce the wet liquids and then produce about very high dry gas in the same area.
So this is a new rig that we designed last year for drilling this area. The first rig this kind of the world is robotic, walking, drilling rig. It will rotate 360 degrees and walk any direction on the pad without dismantle. And this is drilling. It already drilled our first Marcellus, it’s now drilling the second Utica on the -- the first Utica on this pad, our second Utica well. We just ordered a second one of these rigs here about a week ago.
So this is the activity. Everything you see in yellow on this map is the acreage controlled by Magnum Hunter, the combination of Triad acquisition back in February 2010. Chesapeake’s acreage, we have all other acreage in Southern Ohio a year and half ago, when everybody saw Northern Ohio was the place to be at 2,000 bucks an acre. We bought Virco another 25-year-old company last year 2,000 bucks an acre and then we’ve just announced MNW deal which is the 4,400 bucks an acre.
So we believe based on work done by ourselves and one of our banks on the information we have in this region that the dry gas will be better in Saskatchewan and Northern Pennsylvania, and that acreage I think Dan Dinges of Cabot is saying is worth of 100,000 an acre and so we’re hoping that’s right. So the biggest key in this part of the country is takeaway and I’ll show you what we’re doing there.
Let’s jump to Williston Basin. This is our second leg of our stool up in the northern North Dakota. We’ve got about 19.5 million barrels of which 10.6 is proved develop producing. Our acreage has dropped because we sold some acreage to Oasis about a month ago. So we’re 175,000 net acres to our interest. We’re producing about 6,000 to 6,500 barrels a day. We’ll exit this year right around 7,000 barrels a day here in the Williston Basin. Typically have two to three rigs running at any given time.
As we’ve developed this part of our company, we’ve focused in only Ambrose field which is in northern Divide County. We’re getting typical wells 400,000 to 700,000 barrels. We got about 500 locations, so funding costs are 10 to 17 bucks a barrel, averaged IP rates up to 1,200 barrels a day, 30-day rates at 500 to 800. So what’s key about this area is low cost. These wells only cost $7 million and you would typically see wells like this in other parts of Williston Basin cost $9 or $10.
So these are average flow rates 24 hour, 30-day rates, number of frac stages per well and you can see how much better we’re performing in the type curves given by our third-party engineers Cawley Gillespie, the average is in the red line. And again, rigs return exceeding 55%, 70%, all the wells we’re drilling now in North Dakota high case, so well over 70% returns.
So let’s jump back to the Eureka Midstream system which is our pipeline that handles all our Marcellus and Utica. We own 60% of the system. We bought this from Triad back in 2010 for nothing out of bankruptcy.
We’ve now built 100 miles of 20th steel that can move 200 million a day with compression up to 350 and this has been a huge integral part of our ability to get Marcellus production out of the Northwestern West Virginia. There has been no infrastructure in this region. We’ve sold 40% of this pipeline system over the past year and a half to ArcLight and we control 60%, oops, I put the wrong way here.
So as I was mentioning, the three pipe solution that’s what we have to do over in Ohio now to get those well liquids out. We did bore on Ohio River last year. So this is what’s happened with volumes. So this is pretty much unheard of gathering system.
Last year, 23 million cubic feet a day, you can see the monthly rate going up to 98. We’re at 120. We will be at 200 in 90 days. So we have taken the pipe from basically zero to 200 million cubic feet of gas a day in a year. We can -- we are at -- I just ordered all the compression to take this to 350 million cubic feet of gas per day.
So the red here on this map shows you the pipe that we’ve laid over the past year and a half is 100 miles of pipeline system now goes under the river and you can see it up in Monroe County. Now we’ll have to lay the system into Washington County to tie in our new wells we’ll be drilling there next year.
We also have another subsidiary in Eureka called TransTex which is aiming plants that handle gas treating process and dehydration. We have 60 plants out on lease and this company has really taken off for last six months. We’ve extended the lease terms and revenues were up 35% from last year.
So let’s jump to financial review. Our focus is much more on our bringing our production up significantly from the basins that we’ve -- are now really coding on. We have a borrowing base and credit line of $265 million which almost all of that’s available today.
We do maintain the very active hedging program. I’ll talk about that here in a second. There is a capitalization. On that, we have about $600 million of higher yield debt out today. Series B Preferred is callable now. We have to begin calling that for year end. On Series C -- I’m sorry series B, that’s callable until next March. So jump-in adjusted EBITDA reconciliation over the last three years.
Then our hedging, layered in hedges just a week ago $5 million a day, 4 or 3. So we continue to pump up our hedges for 2014. So we’ve been in a good position. I do expect some basis differential changes in Appalachia. The important thing for us is that we’re in the most southern heart of Appalachia Basin. So if we’re going to go south, we go to Midwest. Our basis differential should be minimal compared to those producers up in Pennsylvania.
So this is our divesture program. We sold some Burke County properties. We’ve sold the Penn Virginia stock, the gold mine we inherited, and now the Pearsall that’s under contract. We have water floods coming. So all this will happen before year end. The table-end field, we’re in negotiation with as well. So basically be completely out of Canada as we go by year end.
And next year, I have on the play to sell all our Kentucky properties which is another $100 million. So we’re really homing in on the areas where we need to be spending our money. So this is net asset value slide. We just recently put together kind of shown the range of $8 to $13 what we think will work. This is one reason I think the stock has kind of taken off you lately.
So this is the theme we’ve done this before, little different manner. Magnum Hunter one was a 20-year ride that was all buying, producing properties from the majors. This is obviously all shale properties, but we feel very, I have never -- I've been in this business 30 years. I have never seen the light clear down the tunnel on where we’re going to be in the next six month to year and we continue to improve our balance sheet.
And our optionality have gone up significantly. We’ve been approached all the time by industry partners wanting to buy acreage partner with us, foreign companies who want to partner with us and right now we’re just kind of hope that till end of years see how the Utica wells develop. We want to get three or four online so we can talk about them and make decisions of where we go next in 2014.
I can promise you a bigger part of the focus on capital spending next year will be in the Utica and probably two-thirds of our budget in minim.
So with that, that’s end of my presentation and I’ll go to breakout room and answer any specific questions you have. Thank you.
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