With an inventory of 2,500 onshore prospects and 171 blocks on the Gulf of Mexico Outer Continental Shelf, Magnum Hunter Resources Inc., Irving, Tex., is well-positioned for an upswing in the oil and gas market for the next 3 years, said Gary Evans, chairman, president, and CEO.
"Right now, the stars are all aligned for independents, with low interest rates, high commodity prices, and low service costs. So the key is access to good quality prospects," said Evans. "The biggest challenge for most independents is to find good quality prospects. But that's not a problem for Magnum Hunter."
In March 2002, Magnum Hunter completed its merger with Prize Energy Corp., Dallas, to create a midsize US independent with an enterprise value of $1.2 billion. Under that merger agreement, Magnum Hunter exchanged 2.5 shares of its common stock plus $5.20 cash for each outstanding share of Prize Energy.
"Prize was our largest acquisition, and we made 85% of the purchase with equity. Prize shareholders ended up with 49% of the merged company to 51% held by Magnum Hunter shareholders. We acquired new reserves at a low cost of 82¢/Mcf, compared with acquisitions by other companies at costs of $1.25-1.50/Mcf," said Evans.
Good timing
"Timing is everything in this business," he observed. "At the time we made that acquisition, the 12-month strip [average price for next-month New York Mercantile Exchange futures contracts over the coming year] was $2.60/Mcf. It's now over $5/Mcf."
The company has consistently pursued a strategy that targets acquisition and exploitation of long-lived reserves when commodity prices are low. "We're a bit of contrarian," Evans acknowledged. "We try not to follow the crowd. In this business, you've got to be creative. We went into the Gulf of Mexico in 1999 when others were coming out. So we built our offshore infrastructure at junkyard-sale prices."
He said, "We've been fortunate in trying to assess trends, buying on the downside and selling on the upside. The bulk of our assets was bought from the majors at the trough [of the business cycle]."
Core areas
Magnum Hunter's primary operations are in the Permian basin, representing 51% of the company's reserves and 42% of its production; US Midcontinent, 31% of reserves, 23% of production; onshore Gulf Coast, 8% of reserves, 9% of production; and shallow-water Gulf of Mexico, 10% of reserves, 26% of production.
Some 1,000 of the onshore prospects in Magnum Hunter's inventory are located in New Mexico's San Juan basin, where the company unveiled its coalbed methane play in September. Recently, the company has concentrated its drilling activities in southeastern New Mexico and in the Gulf of Mexico.
The company announced Oct. 8 a new $165 million capital budget for fiscal 2003, following a previous $15 million boost to $115 million in July.
Magnum Hunter has maintained financial flexibility, through the bond market, equity market, private placement, and other forms of financing. "We can always dig into some pocket if we need to," Evans said.
Earlier this year, Magnum Hunter sold noncore properties acquired from Prize, including 1,750 wells, to a new private limited partnership with General Electric Capital Corp. for $50 million (OGJ Online, Aug. 5, 2003). It's Magnum Hunter's second LP with GE Capital in recent years. GE Capital has 95% initial ownership in the latest LP, with Magnum Hunter holding the remaining 5%. But upon payout within 10 years, based on a certain pretax rate of return, Magnum Hunter's position as general partner will increase to 37.63%.