MHR Buys Virco
Sale of 51,500 net Applachian Basin mineral acres in WV and OH, including 27,000 net acres in liquids-rich Marcellus shale.
A subsidiary of Magnum Hunter Resources Corp. (NYSE: MHR) plans to buy privately-held Viking International Resources Co. Inc., or Virco, for about $106.7 million in cash and stock.
The deal will allow Magnum Hunter to acquire about 51,500 net Appalachian Basin mineral acres in West Virginia and Ohio. The land includes about 27,000 net acres in the liquids-rich Marcellus shale, of which 19,000 are in Ritchie County, W.Va. and 8,000 are in Washington and Monroe counties, Ohio.
The acreage in Ohio includes approximately 9,000 net liquids-rich Utica Shale acres and more than 19,000 net dry Utica Shale acres. About 98% of the total acreage position is held by shallow existing production.
The deal, which was announced early Thursday, was still under review by many analysts who did not issue an immediate opinion. R.W. Baird & Co Inc. said in a published report the implied price was about $1,250 per acre (or $1,800 per liquids-rich acre), assuming Magnum Hunter can get $90,000 per flowing barrel of oil equivalent (BOE).
Gabriele Sorbara, vice president at Imperial Capital LLC, said the deal was good for Magnum Hunter. The deal implies a valuation of $28.84 per proved barrel of oil equivalent (BOE), $224,632 per flowing BOE of production and $1,472 per acre (after backing out a value for production). “We believe these are very attractive valuation metrics for undeveloped acreage in the basin,” he said.
The initial reaction from investors was more cautious. Magnum Hunter share prices fell nearly 3% on the day of the announcement at a time when the Standard & Poor’s 500 index held largely unchanged.
Virco shareholders will receive $69.4 million in convertible preferred stock in Magnum Hunter and about $37.3 million in cash. The preferred stock has a nominal value of $25 and an annual dividend rate of 8%. Each of those new shares is convertible at the option of the holder into common Magnum Hunter shares at a price of $8.50 per share. The transaction is scheduled to close around Nov. 2, with an effective date of Jan. 1, 2012.
The cash portion of the purchase price is expected to be paid from additional sales of preferred stock or the availability under Magnum Hunter’s existing senior revolving credit facility. Magnum Hunter said its bankers are reassessing the borrowing base of its senior revolving credit facility and it expects a “sizable additional increase.”
Current net production from the producing assets associated with this acquisition is approximately 475 BOE per day with a low decline rate. Total estimated proved reserves are 3.7 million barrels of oil equivalent as of Jan. 1.
Management has identified 105 gross drilling locations on the Virco acreage, including 74 in the Marcellus and 31 in the Utica. Once the deal closes, Magnum Hunter will have more than 85,500 net acres in the liquids-rich Marcellus shale and 81,800 net acres in the Utica shale.
Gary C. Evans, Magnum Hunter chairman and chief executive, said the acquisition has been in the works for almost a year.
“Virco’s leasehold acreage position is located in the states of Ohio and West Virginia, and fits extremely well with our existing acreage owned in this region. Additionally, we have identified over 100 new drillable locations with both Marcellus and Utica potential on a significant portion of this new leasehold being acquired at a very attractive price per acre,” he said.
“This new liquids-rich gas potential will have a significant impact to our Eureka Hunter midstream division as they will have the capability to provide gathering and transportation to processing facilities in West Virginia and/or Ohio. The southern part of the wet gas window in the Utica Play in Ohio appears to be some of the most prolific in the area,” he said.
Evans said recently-drilled wells in this region have had the highest initial production rates of the entire Utica play. Magnum Hunter plans its first Utica test in the first quarter of 2013 and expects the liquids-rich area of the Utica to be immediately profitable given the improvement in natural gas prices this year and the company’s new midstream cryogenic gas processing capability beginning in late November.