Magnum Hunter, among the fastest growing exploration and production independents in the United States, has surprised investors with a bold move that could lead to the sale of the company or perhaps a merger with another company.
That’s because Magnum Hunter says the company’s true value is not reflected in its current stock price and that any further drilling or acquisitions it could make would not generate the financial pop it desires given today’s strong commodity price environment.
“I just believe the commodity price environment so much overwhelms anything we could do operationally on any assets we have at the current time,” Gary Evans, Magnum Hunter’s president and chief executive officer, said in an Oct. 7 conference call with investors and analysts.
“So what a great time to try and figure out how to enhance the value of these tremendous assets the company has in its portfolio.”
In one of its largest deals ever announced in June, Magnum Hunter agreed to pay $240 million for nearly 100 billion cubic feet of proved gas equivalent reserves and other assets from Tom Brown, an acquisition and subsidiary of big Canadian independent EnCana. The deal has since closed.
Evans to retire from management team
Evans, 46, who has been with Magnum Hunter since its inception in 1985, also stunned investors with his announced retirement from the management team effective next April. However, he will remain a member of the company’s board of directors.
“There is nobody here trying to keep their job, earn a paycheck at the expense of the shareholders,” Evans said. “It’s a matter of we’ve reached this level and where do we go from here.”
The company also appointed Jerry Box, 66, chairman of the board. A board member since 1999, the former president and chief operating officer of Oryx Energy has been handed the task of finding a replacement for Evans, as well as heading up a special committee to explore “strategic alternatives” for the company.
“We’ll take whatever steps necessary to ensure that all possible alternatives regarding Magnum Hunter’s strategic future will be investigated thoroughly,” Box said.
Both he and Evans said the board would soon hire financial advisors to assist with developing a strategy, but insisted the company was not under a deadline to come up with a final plan. In addition to a merger or outright sale of the company, taking on a financial partner using a leverage tool known as Volumetric Production Payment (VPP), also is being explored, along with other undisclosed options, the company said.
“What we’re trying to do is keep our minds open and look at all the possible alternatives that might exist out there,” Evans asserted.
From $1,000 to $1.8 billion
In its nearly 20 years of existence, Magnum Hunter expanded on an initial shoe string investment of $1,000 into a company with $1.8 billion in assets and annual revenues exceeding $450 million.
Magnum Hunter also owns an impressive portfolio of U.S. oil and gas properties, located primarily in the Midcontinent region, the Permian basin, the Gulf Coast region and the Gulf of Mexico, where the company owns interests in some 250 offshore blocks.
Additionally, Magnum Hunter owns and operates three gas gathering systems covering more than 480 miles and a 50 percent or greater ownership interest in four natural gas processing plants.
At year-end, Magnum Hunter had an interest in 5,591 wells and had estimated proved reserves of 838.4 billion cubic feet of natural gas equivalent. About 75 percent the reserves were proved developed reserves.
For the six months of 2004, Magnum Hunter’s revenues rose 33 percent to $210.4 million compared to the same period last year, while net income before accounting changes totaled $42.5 million, up from $11.8 million. Annual production is expected to exceed last year’s output by around 10 percent.
“There is intrinsic value embedded in a group of hard assets in the company that is not being valued with the stock price,” Evans said.
Magnum Hunter is currently trading at under $13 per share. A few weeks ago, the company valued the company’s assets at roughly $17 per share, but that was when natural gas prices were $6.03 per thousand cubic feet and oil was $37.05 per barrel. Gas is currently selling at over $7 per thousand cubic feet and oil at over $50 per barrel.
“We have one of the largest inventories in the United States of any publicly traded company,” Evans said. “We believe that in this environment, with a lack of prospects, a lack of properties … Magnum Hunter really stands out.”
