NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - GENERAL
Organization and Nature of Operations
Magnum Hunter Resources Corporation, a Delaware corporation, operating directly and indirectly through its subsidiaries (together with its subsidiaries, the "Company" or "Magnum Hunter"), is a Houston, Texas based independent exploration and production company engaged in the United States in the acquisition and development of producing properties and undeveloped acreage and the production of oil and natural gas, along with certain midstream and oilfield services activities.
Presentation of Consolidated Financial Statements
The accompanying unaudited interim consolidated financial statements of Magnum Hunter are presented in U.S. Dollars and have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during reporting periods. Actual results could differ materially from those estimates.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The year-end balance sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP.
Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with GAAP that would substantially duplicate the disclosures contained in the audited consolidated financial statements as reported in the Company's Annual Report on Form 10-K have been condensed or omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2013
, as amended.
Non-Controlling Interest in Consolidated Subsidiaries
The Company has consolidated Eureka Hunter Holdings, LLC ("Eureka Hunter Holdings") in which it owned
56.5%
as of
June 30, 2014
and
56.4%
as of
December 31, 2013
. Eureka Hunter Holdings owns, directly or indirectly,
100%
of the equity interests of Eureka Hunter Pipeline, LLC ("Eureka Hunter Pipeline"), TransTex Hunter, LLC ("TransTex Hunter"), and Eureka Hunter Land, LLC. On December 30, 2013, the Company's majority-owned subsidiary, PRC Williston, LLC ("PRC Williston"), in which the Company owned
87.5%
as of
June 30, 2014
and
December 31, 2013
, sold substantially all of its assets. The consolidated financial statements also reflect the interests of Magnum Hunter Production, Inc. ("MHP") in various managed drilling partnerships. The Company accounts for the interests in these managed drilling partnerships using the proportionate consolidation method.
Reclassification of Prior-Year Balances
Certain prior period balances have been reclassified to correspond with current-year presentation. As a result of the Company's adoption of a plan in September 2013 to dispose of certain of its U.S. and Canadian properties, operating income and expenses related to these operations have been classified as discontinued operations for all periods presented. See
"Note 2 - Divestitures and Discontinued Operations"
.
Regulated Activities
Energy Hunter Securities, Inc. is a
100%
-owned subsidiary and is a registered broker-dealer and member of the Financial Industry Regulatory Authority. Among other regulatory requirements, it is subject to the net capital provisions of Rule 15c3-1 under the Securities Exchange Act of 1934, as amended. Because it does not hold customer funds or securities or owe money or securities to customers, Energy Hunter Securities, Inc. is required to maintain minimum net capital equal to the greater of
$5,000
or
6.67%
of its aggregate indebtedness. As of
June 30, 2014
and
December 31, 2013
, Energy Hunter Securities, Inc. had net capital of
$84,919
and
$77,953
, respectively, and aggregate indebtedness of
$7,289
and
$16,657
, respectively.
Sentra Corporation, a
100%
-owned subsidiary, owns and operates distribution systems for retail sales of natural gas in south central Kentucky. Sentra Corporation's gas distribution billing rates are regulated by the Kentucky Public Service Commission based on recovery of purchased gas costs. The Company accounts for its operations based on the provisions of ASC 980-605,
Regulated Operations-Revenue Recognition
, which requires covered entities to record regulatory assets and liabilities resulting from actions of regulators. During the
three and six months ended June 30, 2014
, the Company had gas transmission, compression and processing revenue, reported in income from discontinued operations, which included gas utility sales from Sentra Corporation's regulated operations aggregating
$274,827
and
$445,899
, respectively. During the
three and six months ended June 30, 2013
, the Company had no revenues related to Sentra Corporation's regulated operations.
Energy Hunter Securities, Inc. and Sentra Corporation are included in discontinued operations.
Recently Issued Accounting Standards
Accounting standards-setting organizations frequently issue new or revised accounting rules. The Company regularly reviews all new pronouncements to determine their impact, if any, on its financial statements.
In March 2013, the FASB issued ASU 2013-05,
Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity
, to provide guidance on whether to release cumulative translation adjustments ("CTA") upon certain derecognition events. ASU 2013-05 requires a parent company to apply the guidance in ASC Subtopic 830-30 when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Consequently, the CTA related to a foreign entity is released into net income only if the transaction results in complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resided; otherwise, no portion of the CTA is released. The Company adopted this pronouncement prospectively on January 1, 2014. The adoption of this updated standard did not have a material impact on the Company’s consolidated financial statements.
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11,
Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, an amendment to FASB Accounting Standards Codification ("ASC") Topic 740, Income Taxes ("FASB ASC Topic 740")
. This update clarified that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company adopted this ASU prospectively on January 1, 2014. The adoption of this accounting standard update did not have a material impact on the Company's consolidated financial statements or its financial statement disclosures.
In April 2014, the FASB issued ASU 2014-08 ,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
. ASU 2014-08 updates the requirements for reporting discontinued operations in ASC Subtopic 205-20,
Presentation of Financial Statements - Discontinued Operations
, by requiring classification as discontinued operations of a component of an entity or a group of components of an entity if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when either 1) the component or group of components of an entity meet the criteria to be classified as held for sale, 2) are disposed of by sale, or 3) are disposed of other than by sale (e.g. abandonment or a distribution to owners in a spinoff). The amendments in this update expand the disclosure requirements related to discontinued operations and disposals of individually significant components that do not qualify for discontinued operations presentation in the financial statements. This ASU is effective prospectively for all disposals (or classification as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605,
Revenue Recognition
, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the revised standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from
contracts with customers. This amendment is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.
In June 2014, the FASB issued ASU 2014-12,
Compensation - Stock Compensation: Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
. ASU 2014-12 clarifies that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. An entity should apply existing guidance in ASC Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. This amendment is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.
NOTE 2 - DIVESTITURES AND DISCONTINUED OPERATIONS
Discontinued Operations
In September 2013, the Company adopted a plan to divest all of its interests in (i) MHP, a wholly-owned subsidiary of the Company whose oil and natural gas operations are located primarily in the Southern Appalachian Basin in Kentucky and Tennessee, and (ii) the Canadian operations of Williston Hunter Canada, Inc. ("WHI Canada"), a wholly-owned subsidiary of the Company.
Planned Divestiture of Magnum Hunter Production
The Company is marketing its interests in MHP and its subsidiaries, and anticipates entering into a purchase and sale agreement for MHP by the end of 2014. The Company has classified the associated assets and liabilities of MHP to assets and liabilities held for sale and the operations are reflected as discontinued operations for all periods presented.
During the year ended December 31, 2013, the Company recorded an impairment expense of
$18.5 million
to record MHP at the estimated selling price less costs to sell. Based upon additional information on estimated selling prices obtained through active marketing of the assets, the Company recorded an additional impairment expense as of March 31, 2014 of
$18.6 million
to reflect the net assets at their estimated selling prices, less costs to sell, which is recorded in gain (loss) on disposal of discontinued operations for the
six months ended June 30, 2014
.
Williston Hunter Canada Asset Sale
On April 10, 2014, WHI Canada closed on the sale of certain oil and natural gas properties and assets located in Alberta, Canada for cash consideration of CAD
$9.5 million
in cash (approximately U.S.
$8.7 million
at the exchange rate as of the close of business on April 10, 2014). The effective date of the sale was January 1, 2014. The Company recognized a gain of
$6.1 million
which is recorded in gain (loss) on disposal of discontinued operations.
Sale of Williston Hunter Canada
On May 12, 2014, the Company closed on the sale of
100%
of its ownership interest in the Company's Canadian subsidiary, WHI Canada, whose assets consisted primarily of oil and natural gas properties located in the Tableland Field in Saskatchewan, Canada, for a purchase price of CAD
$75.0 million
(approximately U.S.
$68.8 million
at the exchange rate as of the close of business on May 12, 2014), prior to customary purchase price adjustments, with an effective date of March 1, 2014, of which CAD
$18.4 million
was placed in escrow pending final approval from the Canadian Revenue Authority and included in accounts receivable- joint interests and other as of June 30, 2014. The Company subsequently received the cash held in escrow in early July 2014. The Company recognized a loss of
$12.8 million
which is recorded in gain (loss) on disposal of discontinued operations. The loss on disposal of WHI Canada for the three and six months ended June 30, 2014 includes
$20.7 million
in foreign currency translation adjustment which was reclassified out of accumulated other comprehensive income upon closing on the sale of our foreign operation.
The following shows the Company's assets and liabilities held for sale at
June 30, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
|
(in thousands)
|
Accounts receivable
|
|
$
|
927
|
|
|
$
|
4,362
|
|
Other current assets
|
|
711
|
|
|
1,004
|
|
Oil and natural gas properties, net
|
|
71,935
|
|
|
150,770
|
|
Gas transportation, gathering, and processing equipment and other, net
|
|
12,972
|
|
|
11,721
|
|
Other long-term assets
|
|
28
|
|
|
196
|
|
Total assets held for sale
|
|
$
|
86,573
|
|
|
$
|
168,053
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,659
|
|
|
$
|
7,292
|
|
Accrued liabilities and other liabilities
|
|
10,302
|
|
|
5,573
|
|
Asset retirement obligations
|
|
6,975
|
|
|
8,678
|
|
Other long-term liabilities
|
|
4,335
|
|
|
5,845
|
|
Total liabilities held for sale
|
|
$
|
29,271
|
|
|
$
|
27,388
|
|
Sale of Eagle Ford Hunter
On April 24, 2013, the Company closed on the sale of all of its ownership interest in its wholly-owned subsidiary, Eagle Ford Hunter, Inc. ("Eagle Ford Hunter") to an affiliate of Penn Virginia Corporation for a total purchase price of approximately
$422.1 million
paid to the Company in the form of
$379.8 million
in cash (after estimated customary initial purchase price adjustments) and
10.0 million
shares of common stock of Penn Virginia valued at approximately
$42.3 million
(based on the closing market price of the stock of
$4.23
as of April 24, 2013). The effective date of the sale was January 1, 2013. At the date of closing, the Company initially recognized a preliminary gain on the sale of
$172.5 million
, net of tax, pending final working capital adjustments.
In the months that followed closing, the Company and Penn Virginia were unable to agree upon the final settlement of the working capital adjustments as called for in the purchase and sale agreement and the disagreement was subsequently submitted to arbitration. The determination by the arbitrator was received by the Company on July 25, 2014 and resulted in a downward adjustment of the cash portion of the purchase price of
$33.7 million
plus accrued interest of
$1.3 million
. The Company had previously reserved and recognized substantially all of this obligation in its financial statements as of December 31, 2013. For the
three and six
months ended
June 30, 2014
, the Company recorded a downward adjustment to the gain on sale of Eagle Ford Hunter of
$2.7 million
and
$7.0 million
, respectively.
See "Note 20 - Subsequent Events" for additional information.
The Company included the results of operations of MHP for all periods presented, WHI Canada through May 12, 2014, and Eagle Ford Hunter through April 24, 2013, in discontinued operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
(in thousands)
|
Revenues
|
|
$
|
8,234
|
|
|
$
|
24,623
|
|
|
$
|
20,517
|
|
|
$
|
68,413
|
|
Expenses
|
|
(4,345
|
)
|
|
(30,013
|
)
|
|
(13,178
|
)
|
|
(58,238
|
)
|
Other income (expense)
|
|
—
|
|
|
1,893
|
|
|
(88
|
)
|
|
3,136
|
|
Income tax expense
|
|
—
|
|
|
(4,187
|
)
|
|
—
|
|
|
(4,232
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
3,889
|
|
|
(7,684
|
)
|
|
7,251
|
|
|
9,079
|
|
Income (loss) on sale of discontinued operations, net of taxes
|
|
(5,212
|
)
|
|
172,452
|
|
|
(32,374
|
)
|
|
172,452
|
|
Income (loss) from discontinued operations, net of taxes
|
|
$
|
(1,323
|
)
|
|
$
|
164,768
|
|
|
$
|
(25,123
|
)
|
|
$
|
181,531
|
|
Other Divestitures
Sale of Certain Other Eagle Ford Shale Assets
On January 28, 2014, the Company, through its wholly-owned subsidiary Shale Hunter LLC ("Shale Hunter") and certain other affiliates, closed on the sale of certain of its oil and natural gas properties and related assets located in the Eagle Ford Shale in South Texas to New Standard Energy Texas LLC ("NSE Texas"), a subsidiary of New Standard Energy Limited ("NSE"), an Australian Securities Exchange-listed Australian company.
The assets sold consisted primarily of interests in leasehold acreage located in Atascosa County, Texas and working interests in
five
horizontal wells, of which
four
were operated by the Company. The effective date of the sale was December 1, 2013. As consideration for the assets sold, the Company received aggregate purchase price consideration of
$15.5 million
in cash, after customary purchase price adjustments, and
65,650,000
ordinary shares of NSE with a fair value of approximately
$9.4 million
at January 28, 2014 (based on the closing market price of
$0.14
per share on January 28, 2014). These investment holdings represent approximately
17%
of the total shares outstanding of NSE at January 28, 2014, and have been designated as available-for-sale securities, which are carried at fair value. The Company recognized a loss on the sale of the Shale Hunter assets of
$4.5 million
.
In connection with the closing of the sale, Shale Hunter and NSE Texas entered into a transition services agreement which provides that, during a specified transition period ending on July 28, 2015 unless otherwise extended or modified, Shale Hunter will provide NSE Texas with certain transitional services relating to the assets sold for which it is receiving a monthly fee.
Upon, and as a result of, the closing of the sale on January 28, 2014, the borrowing base under the Company’s asset-based, senior secured revolving credit facility was automatically reduced by
$10.0 million
to
$232.5 million
as of the closing date, but prior to the increase in the borrowing base discussed in
"Note 10 - Debt"
.
NOTE 3 - OIL & NATURAL GAS SALES
During the
three and six months ended June 30, 2014
and
2013
, the Company recognized sales from oil, natural gas, and natural gas liquids ("NGLs") as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
(in thousands)
|
Oil
|
$
|
39,839
|
|
|
$
|
33,122
|
|
|
$
|
74,111
|
|
|
$
|
58,694
|
|
Natural gas
|
25,453
|
|
|
12,810
|
|
|
49,583
|
|
|
21,263
|
|
NGLs
|
12,898
|
|
|
3,651
|
|
|
24,668
|
|
|
4,267
|
|
Total oil and natural gas sales
|
$
|
78,190
|
|
|
$
|
49,583
|
|
|
$
|
148,362
|
|
|
$
|
84,224
|
|
NOTE 4 - PROPERTY, PLANT, & EQUIPMENT
Oil and Natural Gas Properties
The following sets forth the net capitalized costs under the successful efforts method for oil and natural gas properties as of:
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
(in thousands)
|
Mineral interests in properties:
|
|
|
|
Unproved leasehold costs
|
$
|
538,872
|
|
|
$
|
469,337
|
|
Proved leasehold costs
|
334,918
|
|
|
336,357
|
|
Wells and related equipment and facilities
|
615,998
|
|
|
536,023
|
|
Advances to operators for wells in progress
|
20,740
|
|
|
13,571
|
|
Total costs
|
1,510,528
|
|
|
1,355,288
|
|
Less accumulated depletion, depreciation, and amortization
|
(181,827
|
)
|
|
(130,629
|
)
|
Net capitalized costs
|
$
|
1,328,701
|
|
|
$
|
1,224,659
|
|
Proved oil and natural gas properties are reviewed for impairment on a field-by-field basis bi-annually or when events and circumstances indicate a possible decline in the recoverability of the carrying amount of such property. Impairments of proved property of
$0.2 million
and
$10.0 million
were recorded during each of the three and
six months ended June 30, 2014
and
2013
, respectively.
Depletion, depreciation, and amortization expense for proved oil and natural gas properties was
$30.1 million
and
$53.9 million
for the
three and six months ended June 30, 2014
and
$21.5 million
and
$34.4 million
for the
three and six months ended June 30, 2013
, respectively.
Exploration
Exploration expense consists primarily of abandonment charges and impairment expense for capitalized leasehold costs associated with unproved properties for which the Company has no further exploration or development plans, exploratory dry holes, and geological and geophysical costs.
During the
three and six months ended June 30, 2014
and
2013
, the Company recognized exploration expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
(in thousands)
|
Leasehold impairments
|
$
|
8,834
|
|
|
$
|
3,272
|
|
|
$
|
22,489
|
|
|
$
|
32,625
|
|
Geological and geophysical
|
353
|
|
|
274
|
|
|
727
|
|
|
654
|
|
Total exploration expense
|
$
|
9,187
|
|
|
$
|
3,546
|
|
|
$
|
23,216
|
|
|
$
|
33,279
|
|
Leasehold impairment expense recorded by the Company during the
three and six months ended June 30, 2014
consisted of
$8.8 million
and
$19.9 million
, respectively, in the U.S. upstream segment related to leases in the Williston Basin and
$2.6 million
during the
six months ended June 30, 2014
in the U.S. upstream segment related to leases in the Appalachian Basin. Leasehold impairment expense of
$3.3 million
and
$32.6 million
during the
three and six months ended June 30, 2013
primarily related to leases in the Williston Basin. Impairments of leases in the Williston and Appalachian Basins for all periods presented related to leases that expired undrilled during the period or are expected to expire and that the Company does not plan to develop or extend.
Capitalized Costs Greater Than a Year
As of
June 30, 2014
, the Company had suspended exploratory well costs capitalized for periods greater than one year related to the Farley pad in Washington County, Ohio and the Farley #1305 H well. The Farley pad was constructed to drill multiple horizontal wells into a previously untested zone in the Utica formation. The Company spud the Farley #1305 H in April of 2013, and experienced well pressure instability during the fracture stimulation stage of completion. Further fracture stimulation and evaluation of this well will depend on the outcome of the drilling and completion of the Farley #1306 H and #1304 H wells, which were drilled in 2014 and are expected to be fracture stimulated and tested in early 2015 upon completion of a new natural gas pipeline. Aggregate cost incurred through
June 30, 2014
for the Farley pad and the Farley #1305 H well were
$1.1 million
and
$13.8 million
, respectively.
Gas Transportation, Gathering, and Processing Equipment and Other
The historical cost of gas transportation, gathering, and processing equipment and other property, presented on a gross basis with accumulated depreciation, as of
June 30, 2014
and
December 31, 2013
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
(in thousands)
|
Gas transportation, gathering and processing equipment and other
|
$
|
405,320
|
|
|
$
|
315,642
|
|
Less accumulated depreciation
|
(35,996
|
)
|
|
(26,222
|
)
|
Net capitalized costs
|
$
|
369,324
|
|
|
$
|
289,420
|
|
Depreciation expense for gas transportation, gathering, and processing equipment and other property was
$5.0 million
and
$9.6 million
for the
three and six months ended June 30, 2014
, respectively, and
$3.6 million
and
$6.8 million
for the
three and six months ended June 30, 2013
, respectively.
The Company sells and leases gas treating and processing equipment, classified as gas transportation, gathering, and processing equipment and other property and included in the table above, much of which is leased to third party operators for treating gas at the wellhead. The leases generally have a term of
three
years or less. The equipment under leases in place as of
June 30, 2014
had a net carrying value of
$11.9 million
, and the terms of such leases provide for future lease payments to the Company extending up to August 2016. As of
June 30, 2014
, primarily all the leases to third parties were non-cancelable, with future minimum aggregate base rentals payable to the Company of
$3.4 million
over the twelve months ending
June 30,
2015
and
$0.7 million
, in the aggregate, thereafter.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist primarily of gas gathering and processing contracts and customer relationships. The following table summarizes the Company's net intangible assets as of
June 30, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2014
|
|
2013
|
|
|
(in thousands)
|
Customer relationships
|
|
$
|
5,434
|
|
|
$
|
5,434
|
|
Trademark
|
|
859
|
|
|
859
|
|
Existing contracts
|
|
4,199
|
|
|
4,199
|
|
Total intangible assets
|
|
10,492
|
|
|
10,492
|
|
Less: accumulated amortization
|
|
(4,965
|
)
|
|
(3,962
|
)
|
Intangible assets, net of accumulated amortization
|
|
$
|
5,527
|
|
|
$
|
6,530
|
|
Amortization expense for intangible assets was
$502,000
and
$1.0 million
for the
three and six months ended June 30, 2014
and
$200,000
and
$1.4 million
for the
three and six months ended June 30, 2013
, respectively.
The Company performed its annual impairment test of goodwill as of April 1, 2014. As a result of the Company's analysis no impairment of goodwill was indicated.
NOTE 6 - INVENTORY
The Company’s materials and supplies inventory is primarily comprised of frac sand used in the completion process of hydraulic fracturing. As of
June 30, 2014
and
December 31, 2013
, the frac sand inventory is anticipated to be used in its entirety within the coming year, and is classified in current assets along with other inventory.
The following table shows the composition of the Company's inventory as of:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
|
(in thousands)
|
Materials and supplies
|
|
$
|
3,440
|
|
|
$
|
6,790
|
|
Commodities
|
|
390
|
|
|
368
|
|
Inventory
|
|
$
|
3,830
|
|
|
$
|
7,158
|
|
NOTE 7 - ASSET RETIREMENT OBLIGATIONS
The following table summarizes the Company’s asset retirement obligation ("ARO") activities during the
six
-month period ended
June 30, 2014
and for the year ended
December 31, 2013
:
|
|
|
|
|
|
|
|
|
June 30, 2014
|
December 31, 2013
|
|
(in thousands)
|
Asset retirement obligation at beginning of period
|
$
|
16,216
|
|
$
|
30,680
|
|
Assumed in acquisitions
|
—
|
|
17
|
|
Liabilities incurred
|
216
|
|
253
|
|
Liabilities settled
|
(21
|
)
|
(98
|
)
|
Liabilities sold
|
(523
|
)
|
(7,614
|
)
|
Accretion expense
|
751
|
|
2,264
|
|
Revisions in estimated liabilities
(1)
|
—
|
|
1,935
|
|
Reclassified as liabilities associated with assets held for sale
|
—
|
|
(11,148
|
)
|
Effect of foreign currency translation
|
—
|
|
(73
|
)
|
Asset retirement obligation at end of period
|
16,639
|
|
16,216
|
|
Less: current portion (included in other liabilities)
|
(71
|
)
|
(53
|
)
|
Asset retirement obligation at end of period
|
$
|
16,568
|
|
$
|
16,163
|
|
________________________________
(1)
$1.5 million
of the revisions in estimated liabilities is related to change in assumptions used with respect to certain wells in the Williston Basin in North Dakota during 2013.
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standards also establish a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy contains three levels:
|
|
•
|
Level 1
— Quoted prices (unadjusted) for identical assets or liabilities in active markets
|
|
|
•
|
Level 2 —
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable
|
|
|
•
|
Level 3 —
Significant inputs to the valuation model are unobservable
|
Transfers between Levels 1 and 2 occur at the end of the reporting period in which it is determined that the observability of significant inputs has increased or decreased. There were no transfers between levels of the fair value hierarchy during 2014 and 2013. In January 2014, the Company acquired common shares of NSE in partial consideration of an asset sale. The significant inputs used in valuing the NSE common shares, which have a quoted market price in an active market, were designated as Level 1 as of
June 30, 2014
.
The Company used the following fair value measurements for certain of the Company's assets and liabilities at
June 30, 2014
and
December 31, 2013
:
Level 1 Classification:
Available for Sale Securities
At
June 30, 2014
and
December 31, 2013
, the Company held common and preferred stock of publicly traded companies with quoted prices in an active market. Accordingly, the fair market value measurements of these securities have been classified as Level 1.
Level 2 Classification:
Commodity Derivative Instruments
The Company does not designate its derivative instruments as hedges and therefore does not apply hedge accounting. The estimated fair value amounts of the Company’s commodity derivative instruments have been determined at discrete points in time based on relevant market information which resulted in the Company classifying such derivatives as Level 2. Although the Company’s commodity derivative instruments are valued using public indices, the instruments themselves are traded with unrelated counterparties and are not openly traded on an exchange. Although the Company is exposed to credit risk to the extent of nonperformance by the counterparties to these derivative contracts, the Company does not anticipate such nonperformance and monitors the credit worthiness of its counterparties on an ongoing basis.
Level 3 Classification:
Preferred Stock Embedded Derivative
At
June 30, 2014
and
December 31, 2013
, the Company had a preferred stock embedded derivative liability resulting from its Eureka Hunter Holdings Series A Preferred Units, which contain certain conversion features, redemption options, and other features.
The fair value of the bifurcated conversion feature was valued using the "with and without" analysis in a simulation model based upon management's estimate of the expected life of the conversion feature. The key assumptions used in the model to determine fair value at
June 30, 2014
were as follows:
|
|
|
|
|
|
June 30, 2014
|
Volatility
|
24
|
%
|
Credit spread
|
10.5
|
%
|
Expected term
|
1-2 years
|
|
Total enterprise value (in millions)
|
$
|
608.0
|
|
The selection of assumptions for expected term and total enterprise value were made based on a weighting of possible outcomes. The term of the conversion feature, which is linked to the terms of the Eureka Hunter Holdings Amended and Restated Limited Liability Company Agreement ("the Eureka Hunter Holdings LLC Agreement"), could range from
zero
to
6
years. The total enterprise value of Eureka Hunter Holdings is based upon a weighting of valuations ranging from
$406 million
to
$1 billion
based upon multiples of earnings before interest, taxes, depreciation, and amortization of comparable companies and precedent market transactions.
The fair value calculation is sensitive to movements in volatility, estimated remaining term, and the total enterprise value of Eureka Hunter Holdings. A decrease in the estimated term of the conversion feature results in a higher fair value of the conversion feature. During the three-month period ended June 30, 2014, the Company changed the estimated term to
1-2 years
due to changes in the Company's intention with respect to the Eureka Hunter Holdings Series A Preferred Units. As the implied volatility of the instruments increases so too does the fair value of the derivative liability arising from the conversion and redemption features. Similarly, as the total enterprise value of Eureka Hunter Holdings increases, the fair value of the derivative liability increases. Decreases in volatility and total enterprise value would result in a reduction to the fair value of the derivative liability associated with these instruments.
Convertible Security Embedded Derivative
The Company recognized an embedded derivative asset resulting from the fair value of the bifurcated conversion feature associated with the convertible note it received in February 2012 as partial consideration upon the sale of Hunter Disposal, LLC ("Hunter Disposal") to GreenHunter Resources, Inc. ("GreenHunter"), a related party. The embedded derivative was valued using a Black-Scholes model valuation of the conversion option.
The key inputs used in the Black-Scholes option pricing model were as follows:
|
|
|
|
|
|
June 30, 2014
|
Life
|
2.6 years
|
|
Risk-free interest rate
|
0.85
|
%
|
Estimated volatility
|
40
|
%
|
Dividend
|
—
|
|
GreenHunter stock price at end of period
|
$
|
1.99
|
|
The sensitivity of the estimate of volatility used in determining the fair value of the convertible security embedded derivative would not have a significant impact to the Company's financial statements based on the value of the assets as compared to the financial statements as a whole.
The following tables present the fair value hierarchy levels of the Company's financial assets and liabilities which are measured and carried at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
June 30, 2014
|
|
(in thousands)
|
Assets
|
Level 1
|
|
Level 2
|
|
Level 3
|
Available for sale securities
|
$
|
10,661
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivative assets
|
—
|
|
|
123
|
|
|
—
|
|
Convertible security derivative assets
|
—
|
|
|
—
|
|
|
317
|
|
Total assets at fair value
|
$
|
10,661
|
|
|
$
|
123
|
|
|
$
|
317
|
|
Liabilities
|
|
|
|
|
|
Commodity derivative liabilities
|
$
|
—
|
|
|
$
|
6,129
|
|
|
$
|
—
|
|
Convertible preferred stock derivative liabilities
|
—
|
|
|
—
|
|
|
115,307
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
6,129
|
|
|
$
|
115,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
December 31, 2013
|
|
(in thousands)
|
Assets
|
Level 1
|
|
Level 2
|
|
Level 3
|
Available for sale securities
|
$
|
1,819
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivative assets
|
—
|
|
|
554
|
|
|
—
|
|
Convertible security derivative assets
|
—
|
|
|
—
|
|
|
79
|
|
Total assets at fair value
|
$
|
1,819
|
|
|
$
|
554
|
|
|
$
|
79
|
|
Liabilities
|
|
|
|
|
|
Commodity derivative liabilities
|
$
|
—
|
|
|
$
|
2,279
|
|
|
$
|
—
|
|
Convertible preferred stock derivative liabilities
|
—
|
|
|
—
|
|
|
75,934
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
2,279
|
|
|
$
|
75,934
|
|
The following table presents a reconciliation of the financial derivative asset and liability measured at fair value using significant unobservable inputs (Level 3 inputs) for the
six
-month period ended
June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
Preferred Stock Embedded
Derivative Liability
|
|
Convertible Security Embedded
Derivative Asset
|
|
(in thousands)
|
Fair value as of December 31, 2013
|
$
|
(75,934
|
)
|
|
$
|
79
|
|
Issuance of redeemable preferred stock
|
(5,479
|
)
|
|
—
|
|
Increase in fair value recognized in gain (loss) on derivative contracts, net
|
(33,894
|
)
|
|
238
|
|
Fair value as of June 30, 2014
|
$
|
(115,307
|
)
|
|
$
|
317
|
|
As of June 30, 2014, the valuation of the conversion feature embedded in the Eureka Hunter Holdings Series A Preferred Units increased the fair value of the embedded derivative liability by approximately
$33.9 million
as a result of changes in the total enterprise value of Eureka Hunter Holdings and the Company's estimate of the expected remaining term of the conversion feature. Management's estimate of the expected remaining term of the conversion option as of June 30, 2014 shortened the time horizon previously estimated by management, resulting in higher fair value of the conversion feature. Management's estimates are based upon several factors, including an estimate of the likelihood of each of the possible settlement options, which include redemption through a call or put option, or a liquidity event that triggers conversion to Class A Common Units of Eureka Hunter Holdings.
Other Fair Value Measurements
The following table presents the carrying amounts and fair values categorized by fair value hierarchy level of the Company's financial instruments not carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
|
Fair Value Hierarchy
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
|
|
|
(in thousands)
|
Senior Notes
|
|
Level 2
|
|
$
|
597,279
|
|
|
$
|
666,000
|
|
|
$
|
597,230
|
|
|
$
|
651,300
|
|
MHR Senior Revolving Credit Facility
|
|
Level 3
|
|
$
|
164,500
|
|
|
$
|
164,500
|
|
|
$
|
218,000
|
|
|
$
|
218,000
|
|
Eureka Hunter Pipeline second lien term loan
|
|
Level 3
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,000
|
|
|
$
|
58,921
|
|
Eureka Hunter Pipeline Credit Agreement
|
|
Level 3
|
|
$
|
65,000
|
|
|
$
|
65,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equipment Notes Payable
|
|
Level 3
|
|
$
|
24,395
|
|
|
$
|
24,303
|
|
|
$
|
18,615
|
|
|
$
|
17,676
|
|
The fair value of the Company's Senior Notes is based on quoted market prices available for Magnum Hunter's Senior Notes. The fair value hierarchy for the Company's Senior Notes is Level 2 (quoted prices for similar assets in active markets).
The carrying values of the Company's senior revolving credit facility (the "MHR Senior Revolving Credit Facility") and the outstanding borrowings under the Eureka Hunter Pipeline Credit Agreement approximate fair value as they are subject to short-term floating interest rates that approximate the rates available to the Company for those periods. The fair value hierarchy for the MHR Senior Revolving Credit Facility and the Eureka Hunter Pipeline Credit Agreement is Level 3.
The fair value of Eureka Hunter Pipeline's second lien term loan as of December 31, 2013 is the estimated cost to acquire the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is the Company’s default or repayment risk. The credit spread (premium or discount) is determined by comparing the Company’s fixed-rate notes and credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt.
The fair value of all fixed-rate notes and the credit facility is based on interest rates currently available to the Company.
Fair Value on a Non-Recurring Basis
The Company follows the provisions of ASC Topic 820,
Fair Value Measurement
, for non-financial assets and liabilities measured at fair value on a non-recurring basis. As it relates to the Company, ASC Topic 820 applies to certain non-financial assets and liabilities as may be acquired in a business combination and thereby measured at fair value, measurements of impairments, and the initial recognition of asset retirement obligations, for which fair value is used. These ARO estimates are derived from historical costs as well as management's expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, the Company has designated these measurements as Level 3.
NOTE 9 - FINANCIAL INSTRUMENTS AND DERIVATIVES
Investment Holdings
Below is a summary of changes in investments for the
six months ended
June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
Available for Sale Securities
(1)
|
|
Equity Method Investments
(2)
|
|
(in thousands)
|
Carrying value as of December 31, 2013
|
$
|
1,819
|
|
|
$
|
940
|
|
Securities received as consideration for assets sold
|
9,447
|
|
|
—
|
|
Equity in net loss recognized in other income (expense)
|
—
|
|
|
(403
|
)
|
Change in fair value recognized in other comprehensive loss
|
(605
|
)
|
|
—
|
|
Carrying value as of June 30, 2014
|
$
|
10,661
|
|
|
$
|
537
|
|
|
|
(1)
|
Available for sale securities includes
$123,000
that has been classified as held for sale associated with the classification of MHP as a discontinued operation.
|
(2)
Equity method investments includes
$304,000
classified as long-term other assets.
The Company's investments have been presented in the consolidated balance sheet as of
June 30, 2014
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale Securities
|
Equity Method Investments
|
Total
|
Investments - Current
|
$
|
10,538
|
|
$
|
233
|
|
$
|
10,771
|
|
Investments - Long-Term
|
—
|
|
304
|
|
304
|
|
Investments - Held for Sale
|
123
|
|
—
|
|
123
|
|
Carrying value as of June 30,2014
|
$
|
10,661
|
|
$
|
537
|
|
$
|
11,198
|
|
The cost for equity securities and their respective fair values as of
June 30, 2014
and
December 31, 2013
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
(in thousands)
|
|
|
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Securities available for sale, carried at fair value:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
9,875
|
|
|
$
|
—
|
|
|
$
|
(1,404
|
)
|
|
$
|
8,471
|
|
Equity securities - related party (see "Note 15 - Related Party Transactions")
|
|
2,200
|
|
|
—
|
|
|
(10
|
)
|
|
2,190
|
|
Total Securities available for sale
|
|
$
|
12,075
|
|
|
$
|
—
|
|
|
$
|
(1,414
|
)
|
|
$
|
10,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
(in thousands)
|
|
|
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Securities available for sale, carried at fair value:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
428
|
|
|
$
|
—
|
|
|
$
|
(281
|
)
|
|
$
|
147
|
|
Equity securities - related party (see "Note 15 - Related Party Transactions")
|
|
2,200
|
|
|
—
|
|
|
(528
|
)
|
|
1,672
|
|
Total Securities available for sale
|
|
$
|
2,628
|
|
|
$
|
—
|
|
|
$
|
(809
|
)
|
|
$
|
1,819
|
|
The methods of determining the fair values of Magnum Hunter's investments in equity securities are described in
"Note 8 - Fair Value of Financial Instruments"
.
The Company's investment holdings are concentrated in three issuers whose business activities are related to the oil and natural gas or minerals mining industries. These investments are ancillary to the Company's overall operating strategy and such concentrations of risk related to investment holdings do not pose a substantial risk to the Company's operational performance. The Company evaluates factors that it believes could influence the fair value of the issuers' securities such as management, assets, earnings, cash generation, and capital needs.
The fair values of equity securities fluctuate based upon changes in market prices. Gross unrealized losses on investments are considered for other-than-temporary impairment when such losses have continued for more than a 12-month period. However, security specific circumstances may arise where an investment is considered impaired when gross unrealized losses have been observed for less than twelve months. As of
June 30, 2014
and
December 31, 2013
, the Company did not hold any equity securities which were in a gross unrealized loss position for greater than a year, and no impairments were recognized for the periods then ended.
Commodity and Financial Derivative Instruments
The Company periodically enters into certain commodity derivative instruments such as futures contracts, swaps, collars, and basis swap contracts, to mitigate commodity price risk associated with a portion of the Company's future monthly natural gas and crude oil production and related cash flows. The Company has not designated any commodity derivative instruments as hedges.
In a commodities swap agreement, the Company trades the fluctuating market prices of oil or natural gas at specific delivery points over a specified period, for fixed prices. As a producer of oil and natural gas, the Company holds these commodity derivatives to protect the operating revenues and cash flows related to a portion of its future natural gas and crude oil sales from the risk of significant declines in commodity prices, which is intended to help reduce exposure to price risk and improve the likelihood of funding its capital budget. If the price of a commodity rises above what the Company has agreed to receive in the swap agreement, the amount that it agrees to pay the counterparty would theoretically be offset by the increased amount it received for its production.
As of
June 30, 2014
, the Company had the following commodity derivative instruments:
|
|
|
|
|
|
|
|
|
Weighted Average
|
Natural Gas
|
Period
|
MMBtu/day
|
Price per MMBtu
|
Collars
(1)
|
July 2014- Dec 2014
|
15,000
|
|
$4.27 - $5.23
|
Swaps
|
July 2014 - Dec 2014
|
31,000
|
|
$4.23
|
|
Jan 2015 - Dec 2015
|
20,000
|
|
$4.18
|
Ceilings purchased (call)
|
July 2014 - Dec 2014
|
16,000
|
|
$5.91
|
Ceilings sold (call)
|
July 2014 - Dec 2014
|
16,000
|
|
$5.91
|
|
|
|
Weighted Average
|
Crude Oil
|
Period
|
Bbl/day
|
Price per Bbl
|
Collars
(1)
|
July 2014 - Dec 2014
|
663
|
|
$85.00 - $91.25
|
|
Jan 2015 - Dec 2015
|
259
|
|
$85.00 - $91.25
|
Traditional three-way collars
(2)
|
July 2014 - Dec 2014
|
4,000
|
|
$64.94 - $85.00 - $102.50
|
Ceilings sold (call)
|
Jan 2015 - Dec 2015
|
1,570
|
|
$120.00
|
Floors sold (put)
|
July 2014 - Dec 2014
|
663
|
|
$65.00
|
|
Jan 2015 - Dec 2015
|
259
|
|
$70.00
|
________________________________
(1) A collar is a sold call and a purchased put. Some collars are "costless" collars with the premiums netting to approximately zero.
(2) These three-way collars are a combination of three options: a sold call, a purchased put and a sold put.
Currently, Bank of America, Bank of Montreal, KeyBank National Association, Credit Suisse Energy, LLC, Citibank, N.A., ABN AMRO, the Royal Bank of Canada, and J. Aron & Company are the only counterparties to the Company's commodity derivatives positions. The Company is exposed to credit losses in the event of nonperformance by the counterparties; however, it does not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions. All counterparties, or their affiliates, are participants in the MHR Senior Revolving Credit Facility, and the collateral for the outstanding borrowings under the MHR Senior Revolving Credit Facility is used as collateral for its commodity derivatives with those counterparties.
At
June 30, 2014
, the Company had preferred stock derivative liabilities resulting from certain conversion features, redemption options, and other features of its Eureka Hunter Holdings Series A Preferred Units. See
"Note 8 - Fair Value of Financial Instruments"
and "
Note 13 - Redeemable Preferred Stock
".
At
June 30, 2014
, the Company also had a convertible security embedded derivative asset primarily due to the conversion feature of the promissory note received as partial consideration for the sale of Hunter Disposal. See "
Note 8 - Fair Value of Financial Instruments
," "
Note 2 - Divestitures and Discontinued Operations
," and "
Note 15 - Related Party Transactions
".
The following table summarizes the fair value of the Company's commodity and financial derivative contracts as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
Derivatives not designated as hedging instruments
|
|
Balance Sheet Classification
|
|
June 30, 2014
|
|
December 31, 2013
|
|
June 30, 2014
|
|
December 31, 2013
|
|
|
|
|
(in thousands)
|
Commodity
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
—
|
|
|
$
|
529
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Derivative assets - long-term
|
|
123
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
|
Derivative liabilities
|
|
—
|
|
|
—
|
|
|
(5,709
|
)
|
|
(1,903
|
)
|
|
|
Derivative liabilities - long-term
|
|
—
|
|
|
—
|
|
|
(420
|
)
|
|
(376
|
)
|
Total commodity
|
|
|
|
$
|
123
|
|
|
$
|
554
|
|
|
$
|
(6,129
|
)
|
|
$
|
(2,279
|
)
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
317
|
|
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Derivative liabilities - long-term
|
|
—
|
|
|
—
|
|
|
(115,307
|
)
|
|
(75,934
|
)
|
Total financial
|
|
|
|
$
|
317
|
|
|
$
|
79
|
|
|
$
|
(115,307
|
)
|
|
$
|
(75,934
|
)
|
Total derivatives
|
|
|
|
$
|
440
|
|
|
$
|
633
|
|
|
$
|
(121,436
|
)
|
|
$
|
(78,213
|
)
|
Certain of the Company's derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Company and a counterparty in the event of default or upon the occurrence of certain termination events. The tables below summarize the Company's commodity derivatives and the effect of master netting arrangements on the presentation in the Company's consolidated balance sheets as of:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
Gross Amounts of Recognized Assets and Liabilities
|
Gross Amounts Offset on the Consolidated Balance Sheet
|
Net Amount
|
|
(in thousands)
|
Current assets: Fair value of derivative contracts
|
$
|
565
|
|
565
|
|
$
|
—
|
|
Long-term assets: Fair value of derivative contracts
|
239
|
|
116
|
|
123
|
|
Current liabilities: Fair value of derivative contracts
|
(6,274
|
)
|
(565
|
)
|
(5,709
|
)
|
Long-term liabilities: Fair value of derivative contracts
|
(536
|
)
|
(116
|
)
|
(420
|
)
|
|
$
|
(6,006
|
)
|
—
|
|
$
|
(6,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Gross Amounts of Assets and Liabilities
|
Gross Amounts Offset on the Consolidated Balance Sheet
|
Net Amount
|
|
(in thousands)
|
Current assets: Fair value of derivative contracts
|
$
|
4,034
|
|
3,505
|
|
$
|
529
|
|
Long-term assets: Fair value of derivative contracts
|
516
|
|
491
|
|
25
|
|
Current liabilities: Fair value of derivative contracts
|
(5,408
|
)
|
(3,505
|
)
|
(1,903
|
)
|
Long-term liabilities: Fair value of derivative contracts
|
(867
|
)
|
(491
|
)
|
(376
|
)
|
|
$
|
(1,725
|
)
|
—
|
|
$
|
(1,725
|
)
|
The following table summarizes the net gain (loss) on all derivative contracts included in gain (loss) on derivative contracts, net on the consolidated statements of operations for the
three and six months ended June 30, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
(in thousands)
|
Gain (loss) on settled transactions
|
$
|
(2,267
|
)
|
|
$
|
(1,261
|
)
|
|
$
|
(4,551
|
)
|
|
$
|
(305
|
)
|
Gain (loss) on open contracts
|
(40,569
|
)
|
|
7,661
|
|
|
(37,938
|
)
|
|
(786
|
)
|
Total gain (loss)
|
$
|
(42,836
|
)
|
|
$
|
6,400
|
|
|
$
|
(42,489
|
)
|
|
$
|
(1,091
|
)
|
NOTE 10 - DEBT
Long-term debt at
June 30, 2014
and
December 31, 2013
consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
(in thousands)
|
Senior Notes payable due May 15, 2020, interest rate of 9.75%, net of unamortized net discount of $2.7 million at June 30, 2014 and December 31, 2013
|
$
|
597,279
|
|
|
$
|
597,230
|
|
Various equipment and real estate notes payable with maturity dates January 2015 - April 2021, interest rates of 4.25% - 7.94%
(1)
|
24,395
|
|
|
18,615
|
|
Eureka Hunter Pipeline Credit Agreement due March 28, 2018, interest rate of 3.66%
|
65,000
|
|
|
—
|
|
Eureka Hunter Pipeline second lien term loan due August 16, 2018, interest rate of 12.5%
|
—
|
|
|
50,000
|
|
MHR Senior Revolving Credit Facility due April 13, 2016, interest rate of 3.57% at June 30, 2014 and 3.56% at December 31, 2013
|
164,500
|
|
|
218,000
|
|
|
851,174
|
|
|
883,845
|
|
Less: current portion
|
(10,005
|
)
|
|
(3,967
|
)
|
Total long-term debt obligations, net of current portion
|
$
|
841,169
|
|
|
$
|
879,878
|
|
_________________________________
|
|
(1)
|
Includes notes classified as liabilities associated with assets held for sale of which
$4.6 million
is current and
$2.2 million
is long-term at
June 30, 2014
, and
$0.2 million
is current and
$3.8 million
is long-term at
December 31, 2013
.
|
The following table presents the scheduled or expected approximate annual maturities of debt, gross of unamortized discount of
$2.7 million
:
|
|
|
|
|
|
(in thousands)
|
2014
|
$
|
3,142
|
|
2015
|
9,989
|
|
2016
|
173,047
|
|
2017
|
2,358
|
|
2018
|
65,360
|
|
Thereafter
|
600,000
|
|
Total
|
$
|
853,896
|
|
MHR Senior Revolving Credit Facility
On December 13, 2013, the Company entered into a Third Amended and Restated Credit Agreement (the "Credit Agreement") by and among the Company, Bank of Montreal, as Administrative Agent, the lenders party thereto and the agents party thereto. The Credit Agreement amended and restated that certain Second Amended and Restated Credit Agreement, dated as of April 13, 2011, by and among such parties, as amended (the "Prior Credit Agreement"). The terms of the Credit Agreement are substantially similar to the Prior Credit Agreement.
On May 6, 2014, the Company and the other parties to the Credit Agreement entered into the First Amendment to Third Amended and Restated Credit Agreement (the "Amendment"). The Amendment increased the borrowing base from
$232.5 million
to
$325.0 million
in connection with the regular semi-annual redetermination of the Company's borrowing base derived from the Company's proved crude oil and natural gas reserves. The borrowing base may be increased or decreased in connection with such redeterminations up to a maximum commitment level of
$750.0 million
. The Amendment provides that such increased borrowing base shall be reduced (i) by the lesser of
$25.0 million
or
50%
of the net proceeds from issuances by the Company of common equity on or before July 1, 2014 (other than common equity issued pursuant to any stock incentive or stock option plan or any other compensatory arrangements); (ii) by certain specified reductions in connection with certain proposed asset dispositions; (iii) on July 1, 2014 by
$25.0 million
less any prior adjustment of the borrowing base due to an equity issuance as contemplated by clause (i); and (iv) by
$0.25
for each
$1.00
of any additional Senior Notes issued by the Company. The Amendment further provides that from May 6, 2014 through July 1, 2014 the Applicable Margin (as defined in the Credit Agreement) component of the interest charged on revolving borrowings under the Credit Agreement shall be
2.75%
for ABR Loans (as defined in the Credit Agreement) and
3.75%
for Eurodollar Loans (as defined in the Credit Agreement). From and after July 1, 2014 through the date of the Company’s delivery of a certificate for the quarter ended June 30, 2014, with respect to, among other things, the Company’s compliance with the covenants in the Credit Agreement (the "Compliance Certificate"), the Applicable Margin component of interest charged on revolving borrowings under the Credit Agreement will range from
1.50%
to
2.25%
for ABR Loans and from
2.50%
to
3.25%
for Eurodollar Loans. From and after the Company’s delivery of the Compliance Certificate, the Applicable Margin component of interest charged on revolving borrowings under the Credit Agreement will range from
1.00%
to
1.75%
for ABR Loans and from
2.00%
to
2.75%
for Eurodollar Loans.
In addition, the Amendment modified certain of the Credit Agreement’s financial covenants, including:
|
|
(i)
|
permitting the Company to take into account the borrowing base increase as though it occurred on March 31, 2014 for purposes of maintaining a ratio of consolidated current assets to consolidated current liabilities of not less than
1.0
to
1.0
;
|
|
|
(ii)
|
providing for a ratio of EBITDAX to Interest Expense of not less than (A)
2.00
to
1.0
for the fiscal quarter ended March 31, 2014, (B)
2.25
to
1.0
for the fiscal quarters ending June 30, 2014 and September 30, 2014, and (C)
2.50
to
1.0
for the fiscal quarter ending December 31, 2014 and for each fiscal quarter ending thereafter; and
|
|
|
(iii)
|
beginning with the fiscal quarter ended June 30, 2014, providing for a ratio of total Debt to EBITDAX of not more than (A)
4.75
to
1.0
for the fiscal quarters ending June 30, 2014 and September 30, 2014, (B)
4.50
to
1.0
for the fiscal quarter ending December 31, 2014, and (C)
4.25
to
1.0
for the fiscal quarter ending March 31, 2015 and for each fiscal quarter ending thereafter.
|
The Amendment also (i) amends the definition of EBITDAX and provides that certain acquisitions and dispositions be given pro forma effect in the calculation of EBITDAX; (ii) increases the letter of credit commitment from
$10.0 million
to
$50.0 million
and provides that outstanding letter of credit exposure not be included in certain determinations of Debt; (iii) requires the total value of the Company’s oil and gas properties included in the reserve reports for the borrowing base determinations in which the lenders under the Credit Agreement have perfected liens be increased from
80%
to
90%
; and (iv) modifies certain covenants in the Credit Agreement with respect to permitted investments by the Company to increase flexibility.
The Company incurred direct financing costs associated with entering into the Amendment to the Credit Agreement in the amount of
$3.1 million
, which will be deferred and amortized over the remaining term of the Credit Agreement.
As of
June 30, 2014
, the borrowing base under this facility was
$272.5 million
, and
$164.5 million
of borrowings were outstanding (
$218.0 million
outstanding as of
December 31, 2013
). The borrowing base as of June 30, 2014 reflects reductions in the borrowing base of
$25 million
and
$27.5 million
related to the issuance of equity and the sale of our 100% equity interest in WHI Canada, respectively, both of which closed in May 2014. The borrowing base is subject to further automatic reductions upon the issuance of additional Senior Notes and in certain other circumstances.
At
June 30, 2014
, the Company was in compliance with all of its covenants, as amended, contained in the MHR Senior Revolving Credit Facility.
Eureka Hunter Pipeline Credit Agreement
On March 28, 2014, Eureka Hunter Pipeline entered into a credit agreement (the "Eureka Hunter Pipeline Credit Agreement"), by and among Eureka Hunter Pipeline, as borrower, ABN AMRO Capital USA, LLC, as a lender and as administrative agent, and the other lenders party thereto.
The credit agreement, which has a maturity date of March 28, 2018, provides for a revolving credit facility in an aggregate principal amount of up to
$117.0 million
(with the potential to increase the aggregate commitment under the credit agreement to an aggregate principal amount of up to
$150.0 million
, subject to the consent of the lender parties and the satisfaction of certain conditions), secured by a first lien on substantially all of the assets of Eureka Hunter Pipeline and its subsidiaries, which include TransTex Hunter, LLC, as well as by Eureka Hunter Pipeline’s pledge of the equity in its subsidiaries. The subsidiaries of Eureka Hunter Pipeline also guarantee Eureka Hunter Pipeline’s obligations under the credit agreement. The credit agreement is non-recourse to Magnum Hunter. The Company incurred deferred financing costs directly associated with entering into the Eureka Hunter Pipeline Credit Agreement in the amount of
$1.2 million
which will be amortized straight-line over the term of the revolving credit facility. The straight-line method of amortization results in substantially the same periodic amortization as the effective interest method.
The terms of the credit agreement provide that the borrowings thereunder may be used, among other specified purposes, (1) to refinance existing indebtedness of Eureka Hunter Pipeline outstanding on the credit agreement closing date, including the term loan of
$50.0 million
in principal amount owed under the Second Lien Term Loan Agreement, dated August 16, 2011, by and among Eureka Hunter Pipeline and Pennant Park Investment Corporation, as a lender, the other lenders party thereto and U.S. Bank National Association, as collateral agent, (2) to finance future expansion activities related to Eureka Hunter Pipeline’s gathering system in West Virginia and Ohio, (3) to finance acquisitions by Eureka Hunter Pipeline and its subsidiaries permitted under the terms of the credit agreement, (4) to refinance from time to time certain letters of credit of Eureka Hunter Pipeline and its subsidiaries, (5) to provide working capital for their operations, and (6) for their other general business purposes.
The Eureka Hunter Pipeline Credit Agreement provides for a commitment fee based on the unused portion of the commitment under the credit agreement of
0.50%
per annum when the consolidated leverage ratio is greater than or equal to
3.0
to
1.0
and a commitment fee of
0.375%
when the consolidated leverage ratio is less than
3.0
to
1.0
.
In general terms, borrowings under the credit agreement will, at Eureka Hunter Pipeline’s election, bear interest:
|
|
•
|
on base rate loans, at the per annum rate equal to the sum of (A) the base rate (defined as the highest of (i) the per annum rate of interest established by JPMorgan Chase Bank, N.A. as its prime rate for U.S. dollar loans, (ii) the Adjusted Eurodollar Rate (as defined in the credit agreement) for an interest period of one-month, plus
1.0%
, or (iii) the federal funds rate, plus
0.50%
per annum), and (B) a margin of
1.0%
to
2.50%
per annum; or
|
|
|
•
|
on Eurodollar Loans, at the per annum rate equal to the sum of (A) the Eurodollar Rate (as defined in the credit agreement) adjusted for certain statutory reserve requirements for Eurocurrency liabilities, and (B) a margin of
2.0%
to
3.50%
per annum.
|
If an event of default occurs under the credit agreement, generally, the applicable lenders may increase the interest rate then in effect by an additional
2.0%
per annum for the period that the default exists.
The credit agreement contains customary affirmative covenants and negative covenants that, among other things, restrict the ability of each of Eureka Hunter Pipeline and its subsidiaries to, with certain exceptions: (1) incur indebtedness; (2) grant liens; (3) enter into hedging transactions; (4) enter into a merger or consolidation or sell, lease, transfer or otherwise dispose of all or substantially all of its assets or the stock of any of its subsidiaries; (5) issue equity; (6) dispose of any material assets or properties; (7) pay or declare dividends or make certain distributions; (8) invest in, extend credit to or make advances or loans to any person or entity; (9) engage in material transactions with any affiliate; (10) enter into any agreement that restricts or imposes any condition upon the ability of (a) any of Eureka Hunter Pipeline or its subsidiaries to create, incur or permit any lien upon any of its assets or properties, or (b) any such subsidiary to pay dividends or other distributions, to make or repay loans or advances, to guarantee indebtedness or to transfer any of its property or assets to Eureka Hunter Pipeline or its subsidiaries; (11) change the nature of its business; (12) amend its organizational documents or material agreements; (13) change its fiscal year; (14) enter into sale and leaseback transactions; (15) make acquisitions; (16) make certain capital expenditures; or (17) take any action that could result in regulation as a utility.
The credit agreement requires Eureka Hunter Pipeline to satisfy certain financial covenants, including maintaining:
|
|
•
|
a maximum leverage ratio (defined as the ratio of (i) consolidated funded debt to (ii) annualized consolidated EBITDA), as of the end of each fiscal quarter, not greater than (A)
4.75
to
1.00
for the fiscal quarters ending March 31, 2014 through September 30, 2014, and (B)
4.50
to
1.00
for the fiscal quarter ending December 31, 2014 and each fiscal quarter ending thereafter; and
|
|
|
•
|
a minimum interest coverage ratio (defined as the ratio of (i) annualized consolidated EBITDA to (ii) annualized consolidated interest charges for such period), as of the end of each fiscal quarter, not less than (A)
2.75
to
1.00
for the fiscal quarters ending March 31, 2014 through September 30, 2014, and (B)
2.50
to
1.00
for the fiscal quarter ending December 31, 2014 and each fiscal quarter ending thereafter.
|
The obligations of Eureka Hunter Pipeline under the credit agreement may be accelerated upon the occurrence of an event of default. Events of default include customary events for these types of financings, including, among other things, payment defaults, defaults in the performance of affirmative or negative covenants, the inaccuracy of representations or warranties, material defaults under or termination of certain material contracts, defaults relating to judgments, certain bankruptcy proceedings, a change in control and any material adverse change.
As of
June 30, 2014
the maximum amount available under the credit agreement was
$72.2 million
, and the Company had
$65.0 million
in borrowings outstanding. The borrowing capacity is subject to certain upward or downward reductions during the term of the credit agreement.
As of
June 30, 2014
, Eureka Hunter Pipeline was in compliance with all of its covenants contained in the Eureka Hunter Pipeline Credit Agreement.
Eureka Hunter Pipeline Credit Facilities
Upon executing the new Eureka Hunter Pipeline Credit Agreement on March 28, 2014, Eureka Hunter Pipeline terminated its revolving credit agreement with SunTrust Bank and the term loan agreement with Pennant Park (the "Original Eureka Hunter Credit Facilities"). Eureka Hunter Pipeline used proceeds from the Eureka Hunter Pipeline Credit Agreement to pay in full all outstanding obligations related to the termination of the Original Eureka Hunter Credit Facilities, which included the principal outstanding amount of
$50.0 million
, a prepayment penalty of
$2.2 million
, and accrued, unpaid interest of
$1.5 million
.
Equipment Note Payable
On January 21, 2014, the Company's wholly owned subsidiary, Alpha Hunter Drilling, LLC, entered into a master loan and security agreement with CIT Finance LLC to borrow
$5.6 million
at an interest rate of
7.94%
over a term of
forty-eight
months. The note is collateralized by field equipment, and the Company is a guarantor on the note.
Interest Expense
The following table sets forth interest expense for the
three and six
month periods ended
June 30, 2014
and
2013
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
(in thousands)
|
Interest expense incurred on debt, net of amounts capitalized
|
$
|
16,412
|
|
|
$
|
17,100
|
|
|
$
|
36,640
|
|
|
$
|
34,944
|
|
Amortization and write-off of deferred financing costs
|
4,022
|
|
|
1,693
|
|
|
7,643
|
|
|
2,550
|
|
Total Interest Expense
|
$
|
20,434
|
|
|
$
|
18,793
|
|
|
$
|
44,283
|
|
|
$
|
37,494
|
|
The Company capitalizes interest on expenditures for significant construction projects that last more than six months while activities are in progress to bring the assets to their intended use. The Company capitalized interest on its Eureka Hunter Gas Gathering System of
$219,000
and
$830,000
during the
three and six
months ended
June 30, 2014
, respectively, and
$573,000
and
$1.4 million
during the
three and six
months ended
June 30, 2013
, respectively.
For the
six
-month period ended
June 30, 2014
, interest expense incurred on debt includes a
$2.2 million
prepayment penalty incurred by Eureka Hunter Pipeline as a result of its early termination of the Original Eureka Hunter Credit Facilities on March 28, 2014, which penalty represents an additional cost of borrowing for a period shorter than contractual maturity. In addition, amortization and write-off of deferred financing costs for the
six
-month period ended
June 30, 2014
includes the write-off of
$2.7 million
in unamortized deferred financing costs related to those terminated agreements, which costs were expensed at the time of early extinguishment and
$1.7 million
in unamortized deferred financing costs related to the Amendment of the MHR Senior Revolving Credit Facility.
NOTE 11 - SHARE-BASED COMPENSATION
Under the Company's Amended and Restated Stock Incentive Plan, the Company may grant unrestricted common stock, restricted common stock, common stock options, and stock appreciation rights to directors, officers, employees and other persons who contribute to the success of Magnum Hunter. Currently,
27,500,000
shares of the Company's common stock are authorized to be issued under the plan, and
9,610,873
shares had been issued under the plan as of
June 30, 2014
.
The Company recognized share-based compensation expense of
$2.3 million
and
$3.4 million
for the
three and six
months ended
June 30, 2014
, respectively, and
$2.4 million
and
$8.7 million
for the
three and six
months ended
June 30, 2013
, respectively.
A summary of common stock option activity for the
six
months ended
June 30, 2014
and
2013
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
(in thousands of shares)
|
|
Weighted Average Exercise Price per Share
|
Outstanding at beginning of period
|
16,891
|
|
|
14,847
|
|
|
$
|
5.69
|
|
|
$
|
6.01
|
|
Granted
|
—
|
|
|
4,363
|
|
|
$
|
—
|
|
|
$
|
4.16
|
|
Exercised
|
(2,115
|
)
|
|
—
|
|
|
$
|
4.14
|
|
|
$
|
—
|
|
Forfeited
|
(932
|
)
|
|
(413
|
)
|
|
$
|
6.32
|
|
|
$
|
6.61
|
|
Outstanding at end of period
|
13,844
|
|
|
18,797
|
|
|
$
|
5.88
|
|
|
$
|
5.56
|
|
Exercisable at end of period
|
9,478
|
|
|
11,139
|
|
|
$
|
6.20
|
|
|
$
|
5.72
|
|
A summary of the Company’s non-vested common stock options and stock appreciation rights for the
six
months ended
June 30, 2014
and
2013
is presented below:
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
(in thousands of shares)
|
Non-vested at beginning of period
|
6,908
|
|
|
6,163
|
|
Granted
|
—
|
|
|
4,363
|
|
Vested
|
(1,801
|
)
|
|
(2,677
|
)
|
Forfeited
|
(741
|
)
|
|
(191
|
)
|
Non-vested at end of period
|
4,366
|
|
|
7,658
|
|
Total unrecognized compensation cost related to the non-vested common stock options was
$6.3 million
and
$14.3 million
as of
June 30, 2014
and
2013
, respectively. The unrecognized compensation cost at
June 30, 2014
is expected to be recognized over a weighted-average period of
1.3
years. At
June 30, 2014
, the weighted average remaining contract life of outstanding options was
5.8
years.
During the
six
months ended
June 30, 2014
, the Company granted
1,352,575
restricted shares of common stock to officers, executives, and employees of the Company which vest over a
3
-year period with
33%
of the restricted shares vesting
one year
from the date of the grant. The Company also granted
123,798
restricted shares to the directors of the Company which vest
100%
one year
from the date of the grant. The shares had a fair value at the time of grant of
$10.8 million
based on the stock price on grant date and estimated forfeiture rate of
3.4%
.
Total unrecognized compensation cost related to non-vested, restricted shares amounted to
$8.3 million
and
$165,000
as of
June 30, 2014
and
2013
, respectively. The unrecognized cost at
June 30, 2014
, is expected to be recognized over a weighted-average period of
2.4
years.
Eureka Hunter Holdings, LLC Management Incentive Compensation Plan
On May 12, 2014, the Board of Directors of Eureka Hunter Holdings approved the Eureka Hunter Holdings, LLC Management Incentive Compensation Plan ("Eureka Hunter Holdings Plan") to provide long-term incentive compensation to attract and retain officers and employees of Eureka Hunter Holdings and its subsidiaries and allow such individuals to participate in the economic success of Eureka Hunter Holdings and its subsidiaries.
The Eureka Hunter Holdings Plan consists of (i)
2,336,905
Class B Common Units representing membership interests in Eureka Hunter Holdings ("Class B Common Units"), and (ii)
2,336,905
Incentive Plan Units issuable pursuant to a management incentive compensation plan, which represent the right to receive a dollar value up to the baseline value of a corresponding Class B Common Unit ("Incentive Plan Units"). The Eureka Hunter Holdings Plan is administered by the Board of Directors of Eureka Hunter Holdings, and, as administrator of the Eureka Hunter Holdings Plan, the board will from time to time make awards under the Eureka Hunter Holdings Plan to selected officers and employees of Eureka Hunter Holdings or its affiliates ("Award Recipients").
The Class B Common Units are profits interest awards that carry the right to share in the appreciation in the value of the aggregate common equity in Eureka Hunter Holdings over and above a baseline value that is determined on the date of grant of the Class B Common Units. The Class B Common Units vest in
five
substantially equal annual installments on each of the first
five
anniversaries of the date of grant, subject to the Award Recipient's continued employment, and automatically vest in full upon the occurrence of a liquidity event (as defined in the Eureka Hunter Holdings Plan) (including if the Award Recipient's employment is terminated by Eureka Hunter Holdings or an affiliate without cause or due to the Award Recipient's death or disability, in each case, within six months prior to the occurrence of a liquidity event). Subject to the Award Recipient's continued employment, the Incentive Plan Units become fully vested upon the occurrence of a liquidity event (including if the Award Recipient's employment is terminated by Eureka Hunter Holdings or an affiliate without cause or due to the Award Recipient's death or disability, in each case, within six months prior to the occurrence of a liquidity event).
If an Award Recipient’s employment is terminated under any other circumstances, all unvested Class B Common Units and Incentive Plan Units will be forfeited immediately upon the Award Recipient’s termination of employment. In addition, vested Class B Common Units will be forfeited if an Award Recipient’s employment is terminated prior to the occurrence of a liquidity event by Eureka Hunter Holdings or an affiliate for cause or due to the Award Recipient’s resignation. If, following a termination of his or her employment by Eureka Hunter Holdings or an affiliate without cause or due to the Award Recipient’s death or disability, an
Award Recipient retains vested Class B Common Units, Eureka Hunter Holdings will have the right, but not the obligation, to repurchase such vested Class B Common Units at fair market value.
Distributions, if any, with respect to the Class B Common Units issued pursuant to the Class B Common Unit Agreement will be made in accordance with, and subject to, the Eureka Hunter Holdings LLC Agreement, provided, that, no distributions shall be made with respect to any vested or unvested Class B Common Units unless and until a liquidity event has occurred (other than tax distributions that may be made in accordance with the Eureka Hunter Holdings LLC Agreement). Payment in respect of vested Class B Common Units and Incentive Plan Units will become due upon the occurrence of a liquidity event and are expected to be settled in cash upon the occurrence of a liquidity event, except in the case of a qualified public offering (as defined in the Eureka Hunter Holdings Plan), in which case settlement will occur partially in cash and partially in shares of the resulting public entity, with the cash portion not to exceed the amount necessary to cover minimum statutory tax withholdings.
Upon approval of the plan on May 12, 2014, the Board of Directors of Eureka Hunter Holdings granted
894,102
Class B Common Units and
894,102
Incentive Plan Units to key employees of Eureka Hunter Holdings and its subsidiaries. The Class B Common Units and Incentive Plan Units are accounted for in accordance with ASC 718,
Compensation - Stock Compensation
. In accordance with ASC 718, compensation cost is accrued when the performance condition (i.e. the liquidity event) is probable of being achieved. As of June 30, 2014, a liquidity event, as defined, was not probable, and therefore, no compensation cost had been recognized.
NOTE 12 - SHAREHOLDERS' EQUITY
Common Stock
During the
six
months ended
June 30, 2014
, the Company:
|
|
i)
|
issued
47,426
shares of the Company’s common stock in connection with share-based compensation which had fully vested to senior management and directors of the Company;
|
|
|
ii)
|
issued
2,115,000
shares of the Company’s common stock upon exercise of fully vested stock options.
|
|
|
iii)
|
issued
4,300,000
shares of the Company's common stock in March 2014 in a private placement at a price of
$7.00
per share, with net proceeds to the Company of
$28.9 million
after deducting sales agent commissions and other issuance costs. The Company subsequently filed a Form S-1 Registration Statement with the Securities and Exchange Commission (the "SEC") which was declared effective on July 23, 2014 to register the resale of these shares by the holders thereof to satisfy the Company's registration obligations under the private placement.
|
|
|
iv)
|
issued
21,428,580
shares of the Company's common stock in May 2014 in a private placement at a price of
$7.00
per share, with net proceeds to the Company of
$149.7 million
after deducting issuance costs. The Company subsequently filed a Form S-1 Registration Statement with the SEC to register the resale of these shares by the holders thereof to satisfy the Company's registration obligations under the private placement.
|
Common Stock Warrants
The Company issued
2,142,858
warrants to purchase common stock with an exercise price of
$8.50
per share, subject to certain anti-dilution adjustments, in conjunction with the May 2014 private placement sales of common stock. The warrants became exercisable beginning on May 29, 2014, and will expire on April 15, 2016. The warrants are subject to redemption at the option of the Company at
$0.001
per warrant upon not less than
thirty
days' notice to the holders, only if the Company also redeems the warrants it previously issued pursuant to that certain Warrants Agreement, dated October 15, 2013, by and between the Company and American Stock Transfer & Trust Company, Inc. The warrants were issued in connection with the May 2014 sale of 21,428,580 common shares, and the proceeds for the sale of the common shares and the warrants have been reflected in the Company's capital accounts as increases to common stock and additional paid in capital.
Preferred Dividends Incurred
A summary of the Company's preferred dividends for the
three and six months ended June 30, 2014
and
2013
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
(in thousands)
|
|
(in thousands)
|
Dividend on Eureka Hunter Holdings Series A Preferred Units
|
$
|
4,253
|
|
|
$
|
3,556
|
|
|
$
|
8,281
|
|
|
$
|
6,670
|
|
Accretion of the carrying value of the Eureka Hunter Holdings Series A Preferred Units
|
2,229
|
|
|
1,696
|
|
|
4,277
|
|
|
3,164
|
|
Dividend on Series C Preferred Stock
|
2,562
|
|
|
2,562
|
|
|
5,124
|
|
|
5,124
|
|
Dividend on Series D Preferred Stock
|
4,425
|
|
|
4,425
|
|
|
8,849
|
|
|
8,807
|
|
Dividend on Series E Preferred Stock
|
1,861
|
|
|
1,890
|
|
|
3,695
|
|
|
3,852
|
|
Total dividends on Preferred Stock
|
$
|
15,330
|
|
|
$
|
14,129
|
|
|
$
|
30,226
|
|
|
$
|
27,617
|
|
Net Income or Loss per Share Data
Basic income or loss per common share is computed by dividing the income or loss attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income or loss per common share considers the impact to net income and common shares for the potential dilution from stock options and stock appreciation rights, common stock purchase warrants and any outstanding convertible securities.
The Company has issued potentially dilutive instruments in the form of restricted common stock of Magnum Hunter granted and not yet issued, common stock warrants, common stock options granted to the Company's employees and directors, and the Company's Series E Preferred Stock. The Company did not include any of these instruments in its calculation of diluted loss per share during the periods presented, because to include them would be anti-dilutive due to the Company's loss from continuing operations during those periods.
The following table summarizes the types of potentially dilutive securities outstanding as of
June 30, 2014
and
2013
:
|
|
|
|
|
|
|
|
June 30,
|
|
2014
|
|
2013
|
|
(in thousands of shares)
|
Series E Preferred Stock
|
10,946
|
|
|
11,169
|
|
Warrants
|
19,214
|
|
|
13,376
|
|
Unvested restricted shares
|
1,475
|
|
|
—
|
|
Common stock options and stock appreciation rights
|
13,844
|
|
|
18,797
|
|
Total
|
45,479
|
|
|
43,342
|
|
NOTE 13 - REDEEMABLE PREFERRED STOCK
Eureka Hunter Holdings Series A Preferred Units
On March 21, 2012, Eureka Hunter Holdings entered into a Series A Convertible Preferred Unit Purchase Agreement (the "Unit Purchase Agreement") with Magnum Hunter and Ridgeline Midstream Holdings, LLC ("Ridgeline"), an affiliate of ArcLight Capital Partners, LLC ("ArcLight"). Pursuant to this Unit Purchase Agreement, Ridgeline committed, subject to certain conditions, to purchase up to
$200.0 million
of Eureka Hunter Holdings Series A Preferred Units, representing membership interests of Eureka Hunter Holdings, of which
$200.0 million
had been purchased as of
June 30, 2014
.
During the
six
months ended
June 30, 2014
, Eureka Hunter Holdings issued
610,000
Eureka Hunter Holdings Series A Preferred Units to Ridgeline for net proceeds of
$12.0 million
, net of transaction costs. The Eureka Hunter Holdings Series A Preferred
Units outstanding at
June 30, 2014
represented
41.8%
of the ownership of Eureka Hunter Holdings on a basis as converted to Class A Common Units of Eureka Hunter Holdings.
During the
six
months ended
June 30, 2014
, Eureka Hunter Holdings issued
97,492
Eureka Hunter Holdings Series A Preferred Units as payment of
$1.9 million
in distributions paid-in-kind to holders of the Series A Preferred Units. The fair value of the embedded derivative feature of the outstanding Eureka Hunter Holdings Series A Preferred Units was determined to be
$115.3 million
at
June 30, 2014
.
Dividend expense included accretion of the Eureka Hunter Holdings Series A Preferred Units of
$2.2 million
and
$4.3 million
for the
three and six
months ended
June 30, 2014
, and
$1.7 million
and
$3.2 million
for the
three and six
months ended
June 30, 2013
, respectively.
NOTE 14 - TAXES
The Company's income tax benefit from continuing operations for the
three and six months ended June 30, 2014
and
2013
was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
(in thousands)
|
Deferred
|
$
|
—
|
|
|
$
|
39,300
|
|
|
$
|
—
|
|
|
$
|
44,199
|
|
Income tax benefit
|
$
|
—
|
|
|
$
|
39,300
|
|
|
$
|
—
|
|
|
$
|
44,199
|
|
The Company recognizes deferred income taxes for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax basis and net operating loss and credit carryforwards. The Company maintains a full valuation allowance on deferred tax assets where the realization of those deferred tax assets is not more likely than not. The valuation allowance will continue to be recognized until the realization of future deferred tax benefits is more likely than not to be utilized. The Company files income tax returns in the United States, various states and Canada. As of
June 30, 2014
, no adjustments have been proposed by any tax jurisdiction that would have a significant impact on the Company's liquidity, future results of operations or financial position.
NOTE 15 - RELATED PARTY TRANSACTIONS
The following table sets forth the related party balances as of
June 30, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
(in thousands)
|
Green Hunter
(1)
|
|
|
|
Accounts payable - net
|
$
|
690
|
|
|
$
|
23
|
|
Derivative assets
(2)
|
$
|
317
|
|
|
$
|
79
|
|
Investments
(2)
|
$
|
2,423
|
|
|
$
|
2,262
|
|
Notes receivable
(2)
|
$
|
1,496
|
|
|
$
|
1,768
|
|
Prepaid expenses
|
$
|
—
|
|
|
$
|
9
|
|
The Company holds investments in a related party consisting of
1,846,722
shares of common stock of GreenHunter with a carrying value of
$232,896
as of
June 30, 2014
and
88,000
shares of Series C preferred stock of GreenHunter with a carrying value of
$2.2 million
as of
June 30, 2014
.
The following table sets forth the related party transaction activities for the
three and six
months ended
June 30, 2014
and
2013
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
(in thousands)
|
GreenHunter
|
|
|
|
|
|
|
|
|
|
|
Salt water disposal
(1)
|
$
|
613
|
|
|
$
|
590
|
|
|
$
|
935
|
|
|
$
|
1,446
|
|
|
Equipment rental
(1)
|
19
|
|
|
98
|
|
|
141
|
|
|
73
|
|
|
Gas gathering-trucking
(1)
|
400
|
|
|
—
|
|
|
400
|
|
|
—
|
|
|
MAG tank panels
(1)
|
800
|
|
|
—
|
|
|
800
|
|
|
—
|
|
|
Office space rental
|
13
|
|
|
—
|
|
|
36
|
|
|
—
|
|
|
Interest income from note receivable
(2)
|
38
|
|
|
53
|
|
|
83
|
|
|
108
|
|
|
Dividends earned from Series C shares
|
55
|
|
|
37
|
|
|
110
|
|
|
92
|
|
|
Unrealized gain/(loss) on investments
(2)
|
396
|
|
|
(151
|
)
|
|
161
|
|
|
(677
|
)
|
Pilatus Hunter, LLC
|
|
|
|
|
|
|
|
|
|
|
Airplane rental expenses
(3)
|
88
|
|
|
20
|
|
|
158
|
|
|
67
|
|
_________________________________
|
|
(1)
|
GreenHunter is an entity of which Gary C. Evans, the Company's Chairman and CEO, is the Chairman, a major shareholder and interim CEO. Eagle Ford Hunter received, and Triad Hunter and Viking International Resources Co., Inc., wholly-owned subsidiaries of the Company, receive services related to brine water and rental equipment from GreenHunter and its affiliated companies, White Top Oilfield Construction, LLC and Black Water Services, LLC. The Company believes that such services were and are provided at competitive market rates and were and are comparable to, or more attractive than, rates that could be obtained from unaffiliated third party suppliers of such services.
|
|
|
(2)
|
On February 17, 2012, the Company sold its wholly-owned subsidiary, Hunter Disposal, to GreenHunter Water, LLC ("GreenHunter Water"), a wholly-owned subsidiary of GreenHunter. The Company recognized an embedded derivative asset resulting from the conversion option under the convertible promissory note it received as partial consideration for the sale.
See "Note 8 - Fair Value of Financial Instruments" for additional information.
The Company has recorded interest income as a result of the note receivable from GreenHunter. Also as a result of this transaction, the Company has an equity method investment in GreenHunter that is included in derivatives and other long-term assets and an available for sale investment in GreenHunter included in investments.
|
|
|
(3)
|
The Company rented an airplane for business use for certain members of Company management at various times from Pilatus Hunter, LLC, an entity
100%
owned by Mr. Evans. Airplane rental expenses are recorded in general and administrative expense.
|
In connection with the sale of Hunter Disposal, Triad Hunter entered into agreements with Hunter Disposal and GreenHunter Water for wastewater hauling and disposal capacity in Kentucky, Ohio, and West Virginia and a
five
-year tank rental agreement with GreenHunter Water.
Mr. Evans, the Company's Chairman and Chief Executive Officer, holds
27,641
Class A Common Units of Eureka Hunter Holdings.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Agreement to Purchase Utica Shale Acreage
On August 12, 2013, Triad Hunter entered into an asset purchase agreement with MNW Energy, LLC ("MNW"). MNW is an Ohio limited liability company that represents an informal association of various land owners, lessees and sub-lessees of mineral acreage who own or have rights in mineral acreage located in Monroe, Noble and/or Washington Counties, Ohio. Pursuant to the purchase agreement, Triad Hunter has agreed to acquire from MNW up to
32,000
net mineral acres, including currently leased and subleased acreage, located in such counties, over a period of time, in staggered closings, subject to certain conditions. On December 30, 2013, a lawsuit was filed against the Company, Triad Hunter, MNW and others by Dux Petroleum, LLC ("Dux")asserting certain claims relating to the acreage covered by the asset purchase agreement with MNW. As a result of the litigation, no purchases were made during the first quarter of 2014. On May 28, 2014, the litigation was settled. As part of the settlement, the Company and Triad Hunter agreed to collectively pay Dux the aggregate amount of
$500,000
. Subsequent to the settlement of the lawsuit, Triad Hunter resumed closings of lease acquisitions from MNW. On June 5, 2014, Triad Hunter closed on the acquisition of
11,128
net leasehold acres for
$45.9 million
from MNW. To date, under the asset purchase agreement, Triad Hunter has now acquired a total of approximately
17,000
net leasehold acres from MNW, or approximately
53%
of the approximately 32,000 total net leasehold acres anticipated under the asset purchase agreement.
Ormet Asset Acquisition
On June 18, 2014, the Company entered into an Asset Purchase Agreement ("Ormet Asset Purchase Agreement) with Ormet Corporation for the purchase of certain mineral interests in approximately
1,700
net acres, consisting of
1,375
net acres in Monroe County, Ohio and
325
net acres in Wetzel County, West Virginia. Prior to the execution of the Ormet Asset Purchase Agreement, the Company held leasehold interests in a portion of the subject acreage, which only included leasehold rights to the Marcellus zone, and carried a
12.5%
royalty on production to Ormet Corporation. On July 24, 2014, the Company closed on the purchase of the sub-surface mineral interests, including any royalty interests, in the underlying acreage, giving the Company 100% ownership of and rights to oil, natural gas, and other minerals located in or under and that may be produced from the property, at any depth. The total purchase price for this transaction was approximately
$22.7 million
, for which the Company had previously made a deposit of
$2.5 million
as of
June 30, 2014
.
Takeover Bid
On June 20, 2014, the Company lodged a Bidder’s Statement with the Australian Securities and Investments Commission, through its wholly owned subsidiary, Outback Shale Hunter Pty Ltd, an Australian company, to commence an off-market takeover offer (the "Offer") for Ambassador Oil and Gas Limited, an Australian company listed on the Australian Securities Exchange ("ASX") (ASX: AQO) ("Ambassador"). Pursuant to the Offer, the Company is offering
one
share of its common stock, par value
$0.01
per share, for every
23.6
ordinary (or common) shares of Ambassador. Based on the closing price of the Company’s common stock on the New York Stock Exchange of
$8.20
on June 30, 2014 (and the Australian dollar/U.S. dollar exchange rate on that date), the implied value under the Offer was A
$0.369
per Ambassador ordinary share. If the Company acquires all of the Ambassador ordinary shares under the Offer, and if all of the Ambassador shareholders elect to receive shares of Company common stock, the Company will issue approximately
6,019,427
shares of its common stock at an aggregate implied value of approximately
$49.4 million
based on the closing price of the Company’s common stock on June 30, 2014. The Company's Offer is subject to a competing offer for Ambassador made by an Australian company listed on ASX.
Settlement Agreement with Seminole Energy Services
On January 10, 2014, the Company and certain of its subsidiaries entered into an Omnibus Settlement Agreement and Release (the "Settlement Agreement") dated January 9, 2014 with Seminole Energy Services, LLC and certain of its affiliates (collectively, "Seminole"). In connection with and pursuant to the terms of the Settlement Agreement, the Company and Seminole agreed to release and discharge each other from all claims and causes of action alleged in, arising from or related to certain legal proceedings and to terminate, amend and enter into certain new, related agreements effective immediately prior to year-end on December 31, 2013 (the "New Agreements").
By entering into the New Agreements, the Company and Seminole restructured their existing agreements. The Company obtained a reduction in gas gathering rates it pays for natural gas owned or controlled by the Company that is gathered on the Stone Mountain Gathering System. The Company and Seminole collectively agreed to construct an enhancement of the Rogersville Plant designed to recover less ethane and more propane from the natural gas processed at the Rogersville Plant. The parties also agreed to reduce and extend the Company's contractual horizontal well drilling obligations owed to Seminole. The Company's drilling obligation to Seminole, which required the Company to drill and complete four wells in southern Appalachia, expired on June 30, 2014, and, pursuant to the Settlement Agreement, the Company paid Seminole
$450,000
as a result of the Company's decision not to drill
two
out of the required
four
wells.
The Company and Seminole also agreed to modify the natural gas processing rates the Company will pay for processing at the Rogersville Plant, the Company's allocation of natural gas liquids ("NGL") recovered from gas processed and the costs of blend stock necessary to blend with the NGL produced from the Rogersville Plant, and certain deductions to the NGL purchase price the Company will pay Seminole for the Company's NGL produced from the Rogersville Plant. Seminole sold to the Company Seminole's
50%
interest in a natural gas gathering trunk line and treatment facility located in southwestern Muhlenberg County, Kentucky, which had previously been owned equally by Seminole and the Company.
Drilling Rig Purchase
During June 2014, the Company, through its 100% owned subsidiary, Alpha Hunter Drilling, LLC, signed an agreement to purchase a new drilling rig for a total purchase price of approximately
$6.5 million
, including a
$1.3 million
deposit due on July 1, 2014 with the remainder due upon delivery on January 15, 2015.