Magnum Hunter Resources Announces Partial Monetization Of Midstream Subsidiary
Purchased 28% stake in midstream operations including Eureka Hunter Pipeline in WV & OH.
HOUSTON -- Magnum Hunter Resources Corp. (NYSE: MHR) announced on March 21 a definitive agreement for the placement of $100 million of convertible preferred units in its subsidiary, Eureka Hunter Holdings LLC, to an affiliate of ArcLight Capital Partners LLC. Eureka Hunter is the holding company for Magnum Hunter's midstream operation, including the Eureka Hunter Pipeline located in West Virginia and Ohio. ArcLight, based in Boston, will also have the right to invest up to an additional $100 million of Preferred Units, based certain terms and conditions which includes the ultimate approval of Eureka Hunter, bringing the total potential investment to $200 million.
The initial investment of $100 million will give ArcLight an approximate 28% ownership interest in Eureka Hunter, establishing Eureka Hunter at an enterprise valuation of approximately $400 million. Of the initial $100 million investment, approximately $60 million will be distributed to the parent, Magnum Hunter, and the remaining $40 million will be used to fund a pending acquisition. Additional investments will be used to develop Eureka Hunter's gathering system network currently located in West Virginia; develop the company's expansion plans into the Utica Shale in Ohio; and fund other accretive midstream growth projects and/or acquisitions.
The Preferred Units are entitled to receive an annual dividend distribution of 8%, payable quarterly. A significant portion of the annual dividend distribution may be paid in additional Preferred Units in lieu of cash, at the option of Eureka Hunter. Eureka Hunter will have the right to convert the preferred units into common units of Eureka Hunter upon the consummation of an initial public offering of Eureka Hunter or subsequent to the fifth anniversary of ArcLight's initial investment, subject to minimum internal rates of return objectives.
Ronald D. Ormand, executive vice president and chief financial officer of Magnum Hunter Resources, commented, "We are very pleased to announce the initial investment by ArcLight in Eureka Hunter. This investment provides a clear valuation of our midstream business that management has been seeking for some time. In addition, the capital commitment from a well funded and experienced capital provider like ArcLight will allow Eureka Hunter to more quickly expand our footprint in West Virginia, begin to develop our gathering system in the Utica Shale in Ohio, and accelerate our ability to complete an IPO of Eureka Hunter without any additional required funding from Magnum Hunter. In addition, the initial distribution will immediately increase Magnum Hunter's liquidity by $60 million, which enhances the company's resources for our upstream capital expenditure program."