UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

 


 

Date of Report (Date of earliest event reported):

July 18, 2014 (July 14, 2014)

 


 

MAGNUM HUNTER RESOURCES CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware
(State or Other Jurisdiction of
Incorporation)

 

001-32997
(Commission File Number)

 

86-0879278
(I.R.S. Employer Identification
Number)

 

777 Post Oak Boulevard, Suite 650

Houston, Texas 77056

(Address of principal executive offices, including zip code)

 

(832) 369-6986

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligations of the registrant under any of the following provisions:

 

o  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 



 

Item 7.01                                           Regulation FD Disclosure.

 

On July 14, 2014, Magnum Hunter Resources Corporation (the “Company”) issued a press release announcing the Company’s estimated total proved reserves at June 30, 2014 (the “Reserves Release”).

 

The Reserves Release contains certain non-GAAP financial information.  The reconciliation of such non-GAAP financial information to GAAP financial measures is included in the Reserves Release.  A copy of the Reserves Release is furnished as part of this Current Report on Form 8-K as Exhibit 99.1.

 

* * * * *

 

In accordance with General Instruction B.2 of Form 8-K, the information in this Item 7.01 of this Current Report on Form 8-K, including the related Exhibit 99.1, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any registration statement or other filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise expressly stated in such filing.

 

Item 8.01                                           Other Events.

 

The Reserves Release announced an increase of 7.7 MMBoe or a 10.7% improvement in the quantity of the Company’s estimated total proved oil and natural gas reserves at June 30, 2014, compared with total proved reserves at December 31, 2013 (adjusted for divestitures, as described below). The present value of estimated future net cash flows, before income taxes, of the Company’s estimated total proved reserves as of mid-year 2014, discounted at 10% (“PV-10”), increased 10.2% or $84.9 million to $916.3 million, compared with the PV-10 of such reserves at year-end 2013 (information herein regarding the Company’s proved reserves and associated PV-10 at year-end 2013 has been adjusted for previously reported divestitures of properties in Canada and Atascosa County, Texas that occurred in early 2014) (see “Non-GAAP Financial Measures and Reconciliations” below).

 

The Company’s estimated total proved reserves increased by 7.7 MMBoe to 79.8 MMBoe (38% crude oil and NGLs; 47% proved developed producing) at June 30, 2014, compared with 72.1 MMBoe (43% crude oil and NGLs; 52% proved developed producing) at December 31, 2013. Proved undeveloped reserves at June 30, 2014 increased 12% to 29.2 MMBoe, compared with those at year-end 2013. This was primarily due to the execution and continued delineation of the Company’s existing leasehold acreage position in the Marcellus and Utica Shales in West Virginia and Ohio.

 

At December 31, 2013, the Company had booked proved reserves of only one Utica Shale well. At June 30, 2014, the Company was successful at booking proved developed non-producing reserves of one additional Utica Shale well and also booked proved undeveloped reserves of two Utica Shale wells. At June 30, 2014, the Appalachian Basin (including properties in the Marcellus Shale and Utica Shale in West Virginia and Ohio and properties in Kentucky) accounted for approximately 80% of the Company’s total proved reserves volumes, the Williston Basin in North Dakota accounted for approximately 19% and other legacy assets accounted for the remaining 1%.

 

Under Securities and Exchange Commission guidelines, the commodity prices used in the June 30, 2014 and December 31, 2013 PV-10 estimates were based on the 12-month unweighted arithmetic average of the first day of the month prices for the period July 1, 2013 through June 1, 2014, and for the period January 1, 2013 through December 1, 2013, respectively, adjusted by lease for transportation fees and regional price differentials. For crude oil volumes, the average West Texas Intermediate posted price

 

2



 

of $100.27 per barrel used to calculate PV-10 at June 30, 2014 was up 4% from the average price of $96.78 per barrel used to calculate PV-10 at December 31, 2013. For natural gas volumes, the average Henry Hub spot price of $4.10 per million British thermal units (“MMBTU”) used to calculate PV-10 at June 30, 2014 was up 12% from the average price of $3.67 per MMBTU used to calculate PV-10 at December 31, 2013. All prices were held constant throughout the estimated economic life of the properties.

 

The estimates of the Company’s total proved reserves at both June 30, 2014 and December 31, 2013 were prepared by the Company’s independent engineering consultant, Cawley Gillespie & Associates, Inc.

 

Non-GAAP Financial Measures and Reconciliations

 

This report contains certain financial measures that are non-GAAP measures. The Company has provided reconciliations within this report of the non-GAAP financial measures to the most directly comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with GAAP that are presented in this release.

 

PV-10 is the present value of the estimated future net cash flows from estimated total proved reserves after deducting estimated production and ad valorem taxes, future capital costs and operating expenses, but before deducting any estimates of future income taxes. The estimated future cash flows are discounted at an annual rate of 10% to determine their “present value.” The Company believes PV-10 to be an important measure for evaluating the relative significance of our oil and gas properties and that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and investors in evaluating oil and gas companies. Because there are many unique factors that can impact an individual company when estimating the amount of future income taxes to be paid, the Company believes the use of a pre-tax measure is valuable for evaluating the Company. The Company believes that PV-10 is a financial measure routinely used and calculated similarly by other companies in the oil and gas industry. However, PV-10 should not be considered as an alternative to the standardized measure as computed under GAAP.

 

The standardized measure of discounted future net cash flows relating to the Company’s total proved oil and natural gas reserves is as follows:

 

 

 

Unaudited

 

 

 

June 30, 2014

 

Future cash inflows

 

$

3,629,151

 

Future production costs

 

1,456,377

 

Future development costs

 

369,976

 

Future income tax expense

 

95,808

 

Future net cash flows

 

1,706,990

 

10% annual discount for estimated timing of cash flows

 

838,595

 

Standardized measure

 

$

868,395

 

 

 

 

 

Reconciliation of Non-GAAP Measure

 

 

 

PV-10

 

$

916,253

 

Less income taxes

 

 

 

Undiscounted future income taxes

 

(95,808

)

10% discount factor

 

47,950

 

Future discounted income taxes

 

(47,858

)

Standardized measure of discounted future net cash flows

 

$

868,395

 

 

3



 

The report of Cawley, Gillespie & Associates, Inc., dated July 9, 2014, with respect to the Company’s proved reserves as of June 30, 2014 is filed as Exhibit 99.2 to this Current Report on Form 8-K.

 

Item 9.01                                           Financial Statements and Exhibits.

 

(d)                                 Exhibits

 

Exhibit
Number

 

Description

23.1

 

Consent of Cawley, Gillespie & Associates, Inc.

99.1

 

Press Release of Magnum Hunter Resources Corporation, dated July 14, 2014.

99.2

 

Report of Cawley, Gillespie & Associates, Inc., dated July 9, 2014.

 

4



 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

MAGNUM HUNTER RESOURCES CORPORATION

 

 

Date: July 18, 2014

/s/ Gary C. Evans

 

Gary C. Evans,

 

Chairman and Chief Executive Officer

 

5



 

INDEX TO EXHIBITS

 

Exhibit
Number

 

Description

23.1

 

Consent of Cawley, Gillespie & Associates, Inc.

99.1

 

Press Release of Magnum Hunter Resources Corporation, dated July 14, 2014.

99.2

 

Report of Cawley, Gillespie & Associates, Inc., dated July 9, 2014.

 

6




Exhibit 23.1

 

CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS

 

July 18, 2014

 

Magnum Hunter Resources Corporation

777 Post Oak Blvd, Suite 650

Houston, TX 77056

 

Dear Sirs/Madams:

 

As independent petroleum consultants, we hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-174879) and Form S-8 (Nos. 333-168802, 333-169814, 333-171168, 333-177488 and 333-186674) of Magnum Hunter Resources Corporation, and in each of the prospectuses and any amendment thereof, of (i) information relating to our report setting forth the estimates of the oil and gas reserves and revenues from the oil and gas reserves of Magnum Hunter Resources Corporation as of June 30, 2014; and (ii) and to the inclusion of our report, in the form and context in which it appears, in this Current Report on Form 8-K and to all references to our firm included in the Current Report.

 

 

Very truly yours,

 

 

 

GRAPHIC

W. Todd Brooker, P.E.
Senior Vice President
Cawley Gillespie & Associates, Inc
Texas Registered Engineering Firm (F-693)

 




Exhibit 99.1

 

News Release

GRAPHIC

News Release

 

Magnum Hunter Resources Reports

Mid-Year 2014 Proved Reserves of 79.8 MMBoe

 

Proved Reserves Up 7.7 Million BOE From Year-End 2013 Volumes

PV-10 Increased $84.9 Million to $916.3 Million

 

HOUSTON, Texas — (Marketwire) — July 14, 2014 — Magnum Hunter Resources Corporation (NYSE: MHR) (NYSE MKT: MHR.PRC, MHR.PRD and MHR.PRE) (“Magnum Hunter” or the “Company”) announced today an increase of 7.7 MMBoe or a 10.7% improvement in the quantity of the Company’s estimated total proved oil and natural gas reserves at June 30, 2014, compared with total proved reserves just six months ago at December 31, 2013 (adjusted for divestitures, as described below). The present value of estimated future net cash flows, before income taxes, of the Company’s estimated total proved reserves as of mid-year 2014, discounted at 10% (“PV-10”), increased 10.2% or $84.9 million to $916.3 million, compared with the PV-10 of such reserves at year-end 2013 (information herein regarding the Company’s proved reserves and associated PV-10 at year-end 2013 has been adjusted for previously reported divestitures of properties in Canada and Atascosa County, Texas that occurred in early 2014) (see “Non-GAAP Financial Measures and Reconciliations” below).

 

Magnum Hunter’s estimated total proved reserves increased by 7.7 MMBoe to 79.8 MMBoe (38% crude oil and NGLs; 47% proved developed producing) at June 30, 2014, compared with 72.1 MMBoe (43% crude oil and NGLs; 52% proved developed producing) at December 31, 2013. Proved undeveloped reserves at mid-year 2014 increased 12% to 29.2 MMBoe, compared with those at year-end 2013. This was primarily due to the execution and continued delineation of the Company’s existing leasehold acreage position in the Marcellus and Utica Shales in West Virginia and Ohio.  The Company’s reserve life (R/P ratio) of its proved reserves at mid-year 2014 based on current production is approximately 12 years.

 

At year-end 2013, the Company had booked proved reserves of only one Utica Shale well. At June 30, 2014, the Company was successful at booking proved developed non-producing reserves of one additional Utica Shale well and also booked proved undeveloped reserves of two Utica Shale wells. The Company expects to significantly increase proved reserves in the Utica Shale, where it presently owns over 118,000 net leasehold acres, during the remainder of 2014 as a result of “pad” drilling and further delineation of its leasehold acreage position in this region. At June 30, 2014, the Appalachian Basin (including properties in the Marcellus Shale and Utica Shale in West Virginia and Ohio and properties in Kentucky) accounted for approximately 80% of Magnum Hunter’s total proved reserves volumes, the

 



 

Williston Basin in North Dakota accounted for approximately 19% and other legacy assets accounted for the remaining 1%.

 

Under Securities and Exchange Commission guidelines, the commodity prices used in the June 30, 2014 and December 31, 2013 PV-10 estimates were based on the 12-month unweighted arithmetic average of the first day of the month prices for the period July 1, 2013 through June 1, 2014, and for the period January 1, 2013 through December 1, 2013, respectively, adjusted by lease for transportation fees and regional price differentials. For crude oil volumes, the average West Texas Intermediate posted price of $100.27 per barrel used to calculate PV-10 at June 30, 2014 was up 4% from the average price of $96.78 per barrel used to calculate PV-10 at December 31, 2013. For natural gas volumes, the average Henry Hub spot price of $4.10 per million British thermal units (“MMBTU”) used to calculate PV-10 at June 30, 2014 was up 12% from the average price of $3.67 per MMBTU used to calculate PV-10 at December 31, 2013. All prices were held constant throughout the estimated economic life of the properties.

 

The estimates of Magnum Hunter’s total proved reserves at both June 30, 2014 and December 31, 2013 were prepared by the Company’s independent engineering consultant, Cawley Gillespie & Associates, Inc.

 

Magnum Hunter Management Comments

 

Mr. Gary C. Evans, Chairman of the Board and Chief Executive Officer of Magnum Hunter, commented, “As we continue to drill in new areas of the Marcellus and Utica Shale plays in both West Virginia and Ohio, new proved reserve additions will continue. Also, as new wells currently being put on production begin to have a consistent production history, we typically have been successful at increasing our ultimate economic recoveries.”

 

Non-GAAP Financial Measures and Reconciliations

 

This press release contains certain financial measures that are non-GAAP measures. We have provided reconciliations within this release of the non-GAAP financial measures to the most directly comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with GAAP that are presented in this release.

 

PV-10 is the present value of the estimated future net cash flows from estimated total proved reserves after deducting estimated production and ad valorem taxes, future capital costs and operating expenses, but before deducting any estimates of future income taxes. The estimated future cash flows are discounted at an annual rate of 10% to determine their “present value.” We believe PV-10 to be an important measure for evaluating the relative significance of our oil and gas properties and that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and investors in evaluating oil and gas companies. Because there are many unique factors that can impact an individual company when estimating the amount of future income taxes to be paid, we believe the use of a pre-tax measure is valuable for evaluating the Company. We believe that PV-10 is a financial measure routinely used and calculated similarly by other companies in the oil and gas industry. However, PV-10 should not be considered as an alternative to the standardized measure as computed under GAAP.

 



 

The standardized measure of discounted future net cash flows relating to Magnum Hunter’s total proved oil and natural gas reserves is as follows:

 

 

 

Unaudited

 

 

 

June 30, 2014

 

Future cash inflows

 

$

3,629,151

 

Future production costs

 

1,456,377

 

Future development costs

 

369,976

 

Future income tax expense

 

95,808

 

Future net cash flows

 

1,706,990

 

10% annual discount for estimated timing of cash flows

 

838,595

 

Standardized measure

 

$

868,395

 

 

 

 

 

Reconciliation of Non-GAAP Measure

 

 

 

PV-10

 

$

916,253

 

Less income taxes

 

 

 

Undiscounted future income taxes

 

(95,808

)

10% discount factor

 

47,950

 

Future discounted income taxes

 

(47,858

)

Standardized measure of discounted future net cash flows

 

$

868,395

 

 

Certain Definitions

 

The SEC requires oil and natural gas companies, in filings made with the SEC, to disclose proved reserves, which are those quantities of oil and natural gas that by analysis of geoscience and engineering data can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations.

 

About Magnum Hunter Resources Corporation

 

Magnum Hunter Resources Corporation and subsidiaries are a Houston, Texas-based independent exploration and production company engaged in the acquisition, development and production of crude oil, natural gas and natural gas liquids, primarily in the States of West Virginia, Ohio, and North Dakota. The Company is presently active in three of the most prolific unconventional shale resource plays in North America, namely the Marcellus Shale, Utica Shale, and Williston Basin/Bakken Shale.

 



 

Availability of Information on the Company’s Website

 

Magnum Hunter is providing a reminder that it makes available on its website (at www.magnumhunterresources.com) a variety of information for investors, analysts and the media, including the following:

 

·                  annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after the material is electronically filed with or furnished to the Securities and Exchange Commission;

·                  the most recent version of the Company’s Investor Presentation slide deck;

·                  announcements of conference calls, webcasts, investor conferences, speeches and other events at which Company executives may discuss the Company and its business and archives or transcripts of such events;

·                  press releases regarding annual and quarterly earnings, operational developments, legal developments and other matters; and

·                  corporate governance information, including the Company’s corporate governance guidelines, committee charters, code of conduct and other governance-related matters.

 

Magnum Hunter’s goal is to maintain its website as the authoritative portal through which visitors can easily access current information about the Company.  Over time, the Company intends for its website to become a primary channel for public dissemination of important information about the Company.  Investors, analysts, media and other interested persons are encouraged to visit the Company’s website frequently.

 

Certain information included on the Company’s website constitutes forward-looking statements and is subject to the qualifications under the heading “Forward-Looking Statements” below and in the Company’s Investor Presentation slide deck.

 

Forward-Looking Statements

 

This press release includes “forward-looking statements.” All statements other than statements of historical facts included or incorporated herein may constitute forward-looking statements. Actual results could vary significantly from those expressed or implied in such statements and are subject to a number of risks and uncertainties. Although Magnum Hunter believes that the expectations reflected in the forward-looking statements are reasonable, Magnum Hunter can give no assurance that such expectations will prove to be correct. The forward-looking statements involve risks and uncertainties that affect operations, financial performance, and other factors as discussed in filings made by Magnum Hunter with the Securities and Exchange Commission (SEC). Among the factors that could cause results to differ materially are those risks discussed in the periodic reports filed by Magnum Hunter with the SEC, including Magnum Hunter’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and its Quarterly Reports on Form 10-Q for the fiscal quarters ended after such fiscal year. You are urged to carefully review and consider the cautionary statements and other disclosures made in those filings, specifically those under the heading “Risk Factors.” Forward-looking statements speak only as of the date of the document in which they are contained, and Magnum Hunter does not undertake any duty to update any forward-looking statements except as may be required by law.

 



 

Contact:

Cham King

AVP, Investor Relations

ir@magnumhunterresources.com

832-203-4560

 




Exhibit 99.2

 

CAWLEY, GILLESPIE & ASSOCIATES, INC.

 

PETROLEUM CONSULTANTS

 

13640 BRIARWICK DRIVE, SUITE 100

306 WEST SEVENTH STREET, SUITE 302

1000 LOUISIANA STREET, SUITE 625

AUSTIN, TEXAS 78729-1107

FORT WORTH, TEXAS 76102-4987

HOUSTON, TEXAS 77002-5008

512-249-7000

817- 336-2461

713-651-9944

 

www.cgaus.com

 

 

July 9, 2014

 

Magnum Hunter Resources Corporation

777 Post Oak Blvd, Suite 650

Houston, Texas  77056

 

 

Re:

Evaluation Summary

 

 

Magnum Hunter Resources Corp. Interests

 

 

Total Proved Reserves

 

 

As of June 30, 2014

 

 

 

 

 

Pursuant to the Guidelines of the

 

 

Securities and Exchange Commission for

 

 

Reporting Corporate Reserves and

 

 

Future Net Revenue

 

Ladies and Gentlemen:

 

As requested, this report was prepared on July 9, 2014 for Magnum Hunter Resources Corporation (“MHR”) for the purpose of submitting our estimates of proved reserves and forecasts of economics attributable to the subject interests. We have evaluated 100% of MHR reserves, which are made up of oil and gas properties in various fields throughout the United States. This evaluation utilized an effective date of June 30, 2014, was prepared using constant prices and costs, and conforms to Item 1202(a)(8) of Regulation S-K and other rules of the Securities and Exchange Commission (SEC). The results of this evaluation are presented in the accompanying tabulations, with a composite summary of the values presented below:

 

 

 

 

 

Proved

 

Proved

 

 

 

 

 

 

 

 

 

 

 

Developed

 

Developed

 

Proved

 

Proved

 

Total

 

 

 

 

 

Producing

 

Non-Producing

 

Developed

 

Undeveloped

 

Proved

 

Net Reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

- Mbbl

 

8,909.9

 

441.6

 

9,351.6

 

8,490.0

 

17,841.6

 

Gas

 

- MMcf

 

136,500.0

 

61,763.0

 

198,263.0

 

99,880.5

 

298,143.5

 

NGL

 

- Mbbl

 

5,813.2

 

2,329.1

 

8,142.3

 

4,106.3

 

12,248.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

- M$

 

818,793.0

 

39,171.3

 

857,964.3

 

778,120.6

 

1,636,084.9

 

Gas

 

- M$

 

622,051.8

 

278,897.5

 

900,949.3

 

456,955.5

 

1,357,904.8

 

NGL

 

- M$

 

288,604.9

 

125,154.1

 

413,759.1

 

221,402.3

 

635,161.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance Taxes

 

- M$

 

123,127.5

 

24,110.1

 

147,237.6

 

112,372.1

 

259,609.7

 

Ad Valorem Taxes

 

- M$

 

21,476.1

 

9,758.6

 

31,234.8

 

16,878.2

 

48,113.0

 

Operating Expenses

 

- M$

 

385,537.0

 

50,111.0

 

435,648.0

 

222,851.2

 

658,499.2

 

Other Deductions

 

- M$

 

263,524.0

 

70,762.6

 

334,286.6

 

155,868.5

 

490,155.0

 

Investments

 

- M$

 

390.0

 

16,370.6

 

16,760.6

 

353,215.6

 

369,976.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Flows

 

- M$

 

935,395.0

 

272,110.1

 

1,207,505.2

 

595,292.9

 

1,802,798.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted @ 10%

 

- M$

 

548,445.8

 

150,300.4

 

698,746.3

 

217,506.6

 

916,252.9

 

(Present Worth)

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Future revenue is prior to deducting state production taxes and ad valorem taxes. Future net cash flow is after deducting these taxes, future capital costs and operating expenses, but before consideration of federal income taxes.  In accordance with SEC guidelines, the future net cash flow has been discounted at an annual rate of ten percent to determine its “present worth”.  The present worth is shown to indicate the effect of time on the value of money and should not be construed as being the fair market value of the properties.

 

The oil reserves include oil and condensate.  Oil volumes are expressed in barrels (42 U.S. gallons).  Gas volumes are expressed in thousands of standard cubic feet (Mcf) at contract temperature and pressure base.

 

Our estimates are for proved reserves only and do not include any probable or possible reserves nor have any values been attributed to interest in acreage beyond the location for which undeveloped reserves have been estimated. The Proved Developed category is the summation of the Proved Developed Producing and Proved Developed Non-Producing estimates.

 

Presentation

 

This report presents two different pricing scenarios, which include the SEC Pricing case and a Strip Pricing case. The SEC Pricing case is divided into four main sections: Within each main section, the reserves are categorized further by the following reserve categories as applicable: Total Proved (“TP”), Proved Developed (“PD”), Proved Developed Producing (“PDP”), Proved Developed Non-Producing (“PDNP”) and Proved Undeveloped (“PUD”).  Within each reserve category section are Tables I and Summary Plots. Tables II are also included in all cases except for summary sections.  The Tables I present composite reserve estimates and economic forecasts for the particular reserve category or property grouping. The Summary Plots are composite rate-time history-forecast curves for the corresponding Table I. Following certain Summary Plots are Table II “oneline” summaries that present estimates of ultimate recovery, gross and net reserves, ownership, revenue, expenses, investments, net income and discounted cash flow for the individual properties that make up the corresponding Table I.

 

The Strip Pricing sensitivity case is presented in the Appendix, with the price deck described in more detail below. For a more detailed explanation of the report layout, please refer to the Table of Contents following this letter. The data presented in the composite Tables I are explained in page 1 of the Appendix.

 

Hydrocarbon Pricing

 

The base SEC oil and gas prices calculated for June 30, 2013 were $100.27/bbl and $4.104/MMBTU, respectively. As specified by the SEC, a company must use a 12-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period. The base oil price is based upon WTI-Cushing spot prices (Bloomberg) from July 2013 - June 2014 and the base gas price is based upon Henry Hub spot prices (Bloomberg) from July 2013 — June 2014. As requested by MHR, an additional Strip Pricing case was prepared and is presented in the Appendix. The Strip Pricing case oil and gas prices were applied based on a NYMEX futures strip price deck as quoted on June 30, 2014 and is provided below.

 

2



 

 

 

SEC Pricing

 

Strip Pricing

 

 

 

WTI Cushing

 

Henry Hub

 

WTI Cushing

 

Henry Hub

 

 

 

Oil Price

 

Gas Price

 

Oil Price

 

Gas Price

 

Year

 

$/STB

 

$/MMBTU

 

$/STB

 

$/MMBTU

 

2014

 

100.27

 

4.104

 

100.04

 

4.42

 

2015

 

 

 

97.71

 

4.20

 

2016

 

 

 

91.81

 

4.22

 

2017

 

 

 

89.10

 

4.38

 

2018

 

 

 

88.11

 

4.56

 

Thereafter

 

100.27

 

4.104

 

88.11

 

4.56

 

 

The base prices shown above were adjusted for differentials on a per-property basis, which may include local basis differentials, transportation, gas shrinkage, gas heating value (BTU content) and/or crude quality and gravity corrections. Natural gas liquid (NGL) prices were applied as a percentage of WTI. After these adjustments, the net realized prices for the SEC price case over the life of the proved properties was estimated to be $91.701 per barrel for oil, $4.555 per MCF for gas and $51.586 per barrel for NGL’s. All economic factors were held constant in accordance with SEC guidelines.

 

Economic Parameters

 

Ownership was accepted as furnished and has not been independently confirmed. Oil and gas price differentials, gas shrinkage, ad valorem taxes, severance taxes, lease operating expenses and investments were calculated and prepared by MHR and were reviewed by us for accuracy and completeness where available.  In some cases, data was accepted as provided.  Lease operating expenses were either determined at the field or individual well level using averages calculated from historical lease operating statements. All economic parameters, including lease operating expenses and investments, were held constant (not escalated) throughout the life of these properties.

 

SEC Conformance and Regulations

 

The reserve classifications and the economic considerations used herein conform to the criteria of the SEC as defined in pages 3 and 4 of the Appendix.  The reserves and economics are predicated on regulatory agency classifications, rules, policies, laws, taxes and royalties currently in effect except as noted herein.  The possible effects of changes in legislation or other Federal or State restrictive actions which could affect the reserves and economics have not been considered.  However, we do not anticipate nor are we aware of any legislative changes or restrictive regulatory actions that may impact the recovery of reserves.

 

This evaluation includes 324 proved undeveloped locations, which includes one (1) location in the MHR Production asset group (Arkansas), 151 locations in the Triad Hunter asset group (West Virginia/Kentucky/Ohio) and 172 locations in the Williston Hunter US asset group (North Dakota). Each of these drilling locations proposed as part of MHR’s development plans conforms to the proved undeveloped standards as set forth by the SEC. In our opinion, MHR has indicated they have every intent to complete this development plan within the next five years. Furthermore, MHR has demonstrated that they have the proper company staffing, financial backing and prior development success to ensure this five year development plan will be fully executed.

 

Reserve Estimation Methods

 

The methods employed in estimating reserves are described in page 2 of the Appendix. Reserves for proved developed producing wells were estimated using production performance methods for the vast majority of properties. Certain new producing properties with very little production history were forecast using a

 

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combination of production performance and analogy to similar production, both of which are considered to provide a relatively high degree of accuracy.

 

Non-producing reserve estimates, for both developed and undeveloped properties, were forecast using either volumetric or analogy methods, or a combination of both. These methods provide a relatively high degree of accuracy for predicting proved developed non-producing and proved undeveloped reserves for MHR properties, due to the mature nature of their properties targeted for development and an abundance of subsurface control data. The assumptions, data, methods and procedures used herein are appropriate for the purpose served by this report.

 

General Discussion

 

The estimates and forecasts were based upon interpretations of data furnished by your office and available from our files. To some extent information from public records has been used to check and/or supplement these data. The basic engineering and geological data were subject to third party reservations and qualifications. Nothing has come to our attention, however, that would cause us to believe that we are not justified in relying on such data. All estimates represent our best judgment based on the data available at the time of preparation. Due to inherent uncertainties in future production rates, commodity prices and geologic conditions, it should be realized that the reserve estimates, the reserves actually recovered, the revenue derived therefrom and the actual cost incurred could be more or less than the estimated amounts.

 

An on-site field inspection of the properties has not been performed. The mechanical operation or condition of the wells and their related facilities have not been examined nor have the wells been tested by Cawley, Gillespie & Associates, Inc. Possible environmental liability related to the properties has not been investigated nor considered. The cost of plugging and the salvage value of equipment at abandonment have not been included.

 

Cawley, Gillespie & Associates, Inc. is a Texas Registered Engineering Firm (F-693), made up of independent registered professional engineers and geologists that have provided petroleum consulting services to the oil and gas industry for over 50 years. This evaluation was supervised by W. Todd Brooker, Senior Vice President at Cawley, Gillespie & Associates, Inc. and a State of Texas Licensed Professional Engineer (License #83462). We do not own an interest in the properties or Magnum Hunter Resources Corporation and are not employed on a contingent basis. We have used all methods and procedures that we consider necessary under the circumstances to prepare this report. Our work-papers and related data utilized in the preparation of these estimates are available in our office.

 

 

 

Yours very truly,

 

 

 

CAWLEY, GILLESPIE & ASSOCIATES, INC.

 

TEXAS REGISTERED ENGINEERING FIRM F-693

 

 


W. Todd Brooker, P. E.
Senior Vice President

 

 

 

GRAPHIC

 

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CAWLEY, GILLESPIE & ASSOCIATES, INC.

 

PETROLEUM CONSULTANTS

 

13640 BRIARWICK DRIVE, SUITE 100

306 WEST SEVENTH STREET, SUITE 302

1000 LOUISIANA STREET, SUITE 625

AUSTIN, TEXAS 78729-1107

FORT WORTH, TEXAS 76102-4987

HOUSTON, TEXAS 77002-5008

512-249-7000

817- 336-2461

713-651-9944

 

www.cgaus.com

 

 

Professional Qualifications of Primary Technical Person

 

The evaluation summarized by this report was conducted by a proficient team of geologists and reservoir engineers who integrate geological, geophysical, engineering and economic data to produce high quality reserve estimates and economic forecasts. This report was supervised by Todd Brooker, Senior Vice President of Cawley, Gillespie & Associates (CG&A).

 

Prior to joining CG&A, Mr. Brooker worked in Gulf of Mexico drilling and production engineering at Chevron. Mr. Brooker has been an employee of CG&A since 1992. His responsibilities include reserve and economic evaluations, fair market valuations, field studies, pipeline resource studies and acquisition/divestiture analysis. His reserve reports are routinely used for public company SEC disclosures. His experience includes significant projects in both conventional and unconventional resources in every major U.S. producing basin and abroad, including oil and gas shale plays, coalbed methane fields, waterfloods and complex, faulted structures.

 

Mr. Brooker graduated with honors from the University of Texas at Austin in 1989 with a Bachelor of Science degree in Petroleum Engineering, and is a registered Professional Engineer in the State of Texas. He is also a member of the Society of Petroleum Engineers.

 

Based on his educational background, professional training and more than 20 years of experience, Mr. Brooker and CG&A continue to deliver professional, ethical and reliable engineering and geological services to the petroleum industry.

 

 

 

CAWLEY, GILLESPIE & ASSOCIATES, INC.

 

TEXAS REGISTERED ENGINEERING FIRM F-693