Serial entrepreneur Gary C. Evans is chairman and CEO of Magnum Hunter Resources Corp., holding that title since taking over Petro Resources, a small exploration and production company, in May 2009 and renaming it. Previously, he founded and ran a company by the same name, Magnum Hunter Resources Inc., for 20 years before selling it to Cimarex Energy for about $2.2 billion in June 2005.
Evans says he loves building companies, so true to form, following the sale of the first company, he started Wind Hunter Energy LLC, which was later acquired in December 2006 by another one of his companies, GreenHunter Resources Inc., a water disposal and fluids management company in the unconventional resource plays. He was also involved in founding investment banking firm Global Hunter Securities.
Evans was inducted into the World Hall of Fame for Ernst & Young Entrepreneurs, and won the Deal Maker of the Year Award in 2013 from Finance Monthly. He serves on the board of the Maguire Energy Institute at Southern Methodist University and speaks regularly at energy industry conferences around the world.
Recently, MHR announced a new Utica well that tested at a peak rate of 46.5 million cubic feet (MMcf) per day under huge pressures on its 100%-owned Stewart Winland pad, a major stepout that moved the play boundary southeast from Ohio into West Virginia. It’s one of the biggest shale flows ever in the U.S., and proof of why he’s remade MHR as an Appalachian Basin pure-play. In 2013, he sold most of his Eagle Ford assets at an implied internal rate of return of 80% over capital invested over three years. We caught up with Evans after he sold a large chunk of his company’s Bakken Shale holdings in October.
Investor: Despite reporting some huge wells and announcing more asset sales, MHR’s stock price has been hammered.
Evans: Well, everything is going pretty good—other than oil and natural gas prices and stock prices (laugh). Our production is up, reserves are up and debt is coming down. We think we have a great spot in West Virginia and Ohio, but the market doesn’t currently care. We have been caught in the downdraft with everybody else; it’s “Run for the door.” Natural gas the last time I looked was still around $4 and we’re still going to need it. And even at $4 per Mcf we’re still generating internal rates of return north of 80%.
I guess the hot money ran away, and there was more of it in the market than we realized. So this is the fourth or fifth downdraft I’ve lived through, and I am not losing any sleep over it this time. It’s incredible to watch, though.
Investor: You’ve divested Bakken and Eagle Ford. Are you done?
Evans: If you go back five years to 2009 when we founded this second iteration of Magnum Hunter, we didn’t know what we wanted to be, but we knew the shales were going to be meaningful, so we ended up with a three-legged stool: Bakken, Eagle Ford and Appalachia, two oil plays and one gas. We picked a really good spot in the Eagle Ford, but because of our size and capital structure, we couldn’t make it meaningful without more acreage. So, we sold it to Penn Virginia last year for more than $400 million. Gas prices were low during this period so we kept drilling in the Bakken.
Then at that time the Utica started arriving, and we felt it would trend farther south, so we started a significant acreage-buying campaign there. We’ve invested more than $100 million this year alone in Ohio and West Virginia, just buying more lease acreage. We felt the play was coming to us, and it looks like we’ve ended up in the heart of two extraordinary shale plays.
We’ve divested all of our Canadian properties; two sales there this year and we just announced two additional divestitures in North Dakota. Our final core assets in the Bakken are operated by Samson Resources, but that’s also in a new data room now and we hope to sell these properties by year-end. With this remaining Bakken sale, we’ll be done.
Investor: You’re betting all the way on Utica and Marcellus?
Evans: Number one, we have scale, with around 220,000 net acres in West Virginia and Ohio, and another 350,000 net acres in Kentucky that we aren’t doing much with as of yet. Number two, we own the midstream, so every molecule we produce goes through our own pipeline system, Eureka Hunter.
I tell people all the time, if you are in the natural gas business and you are not in the Appalachian Basin, you are going to have a very difficult time competing in the future. We have the lowest finding costs in the U.S.—about $0.25 to $0.50 per Mcf—and they are going to get even better.
Investor: How are you making them better?
Evans: Our first two Marcellus wells were in Tyler County, West Virginia. We put them on in December 2010 and were pretty excited because the EURs were around 5 billion cubic feet [Bcf] each. Today, in exactly the same locations, we’re getting reserves of 12 Bcf and much better IPs, which really enhances your internal rate of return.
We have learned how to drill better, use different cocktails for the frack jobs, different sand mixes, etc. In every play, as time has gone by, we’ve been able to lower costs and increase EURs. Last week, we drilled a Marcellus lateral of 3,000 feet in 24 hours. Shoot, normally that would have taken four days. Just imagine the impact that has in helping us to further lower our cost structure.
It really has to do with the people, their experience and know-how. We have six of our own drilling rigs, but we use third parties, too. On this last well, we used a third-party contractor.
Investor: How are you fixing your balance sheet, a big concern for investors?
Evans: By selling assets, we’ll continue to improve it as we have done over the past couple of years. Last year we sold about $500 million, and this year we’re at $220 million and heading higher, hopefully by year-end, especially if we sell that remaining Bakken piece.
The debt looks high in relation to our production and reserves, but that will soon change. Our production is at 19,000 barrels a day, but it’s going to 32,000 in the next 60 days. Keep in mind, we invested a huge amount of capital to create this tidal wave of production that’s coming.
This company won’t look so levered 60 days from now. Many small growing companies typically are in this position [over-levered]. What you want to see is their ability to get out of that at some point in time.
Investor: Did these incredibly big Utica wells surprise you?
Evans: No. I kind of promised my friends over at Rice Energy that I was going to beat them. [Editor’s note: Rice announced one of the biggest Utica wells a few months ago.] In reality, all of us are producing in the 15- to 25 million a day range and these wells will hold up for a longer period of time. The Stewart Winland 1300U is at 25 MMcf per day now—but it could do more, and that has nothing to do with infrastructure. We just want to keep it on a flat decline and steady for a while. Three Marcellus wells on the same pad have recently gone online to production sales. These Marcellus wells have a significant amount of associated condensate production.
About $150 million of invested capital will come online with new production by year-end, and the pipe has already been laid to get this production out.
It’s about timing and has nothing to do with natural gas prices. We basically have to cut down the top of a mountain to get these wells drilled and build the necessary lines.
Investor: It’s the production lumpiness we see from pad drilling.
Evans: That lumpiness will pretty much go away in 2015. All of our plans in 2015 are on new pads that have never been drilled before on both sides of the Ohio River. We’re unique in that we have such a large acreage position and many of our pads are dual Marcellus and Utica. Some will be Marcellus only, some Utica only, and some both.
Investor: What breakeven natural gas price are you modeling?
Evans: I think if natural gas goes down to $2 (which I don’t believe it will, given the current supply/demand dynamics), we would probably slow down. Remember, it’s all about the weather. The basis differential today is $0.80 to $1.25 per Mcf in our area. The oil and NGLs do matter, because we get a nice uplift due to the liquids component of the gas stream.
Investor: What about your midstream plans?
Evans: When you find a core area, you mobilize around it. When you have good rock, it allows you to do a lot of things. We’re in discussions with three companies to joint venture for up to 600- to 800 MMcf per day of additional capacity, and we’ll own 50% of that new pipe and gas processing.
We started Eureka Hunter from scratch three years ago, and already it’s moving more than 300 MMcf per day. Our plan is to take it public as an MLP in 2015—it can eventually move over 1.5 Bcf per day in the hottest two resource plays in the U.S.
We recently brought in Morgan Stanley to invest in Eureka Hunter. Their implied equity value of Eureka Hunter was $1 billion.
Investor: What’s your biggest challenge now?
Evans: Commodity prices. That dictates our future. Everybody is battening down the hatches right now. A downdraft is coming, mark my words. We need more LNG—they’re talking about exporting 8 Bcf per day of it and we need 30 Bcf.
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