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Magnum Hunter vastly expands New Mexico position $243M deal with EnCana gives company nearly 100 bcf proved gas equivalent reserves on acreage near its own Morrow-Atoka-Strawn drilling program Ray Tyson Petroleum News Houston Correspondent
Magnum Hunter Resources, among the fastest growing exploration and production independents in the United States, was forced to wait three long years for the opportunity to meaningfully expand its oil and gas position in southeastern New Mexico.
The company sat it out while the properties, situated largely in New Mexico’s Lea and Eddy counties, passed from one owner to another. But patience finally paid off for the Irving, Texas-based company.
In a $243 million deal announced June 21, Magnum Hunter said it agreed to purchase nearly 100 billion cubic feet of proved gas equivalent reserves and other assets from Tom Brown, a recent acquisition and subsidiary of big Canadian independent EnCana Corp.
“Our management team has been chasing this group of assets for over three years,” said Gary Evans, Magnum Hunter’s chief executive officer. “While these assets have gone through a number of different owners during this period, minimum development on the properties has occurred.” Properties in area Magnum Hunter is drilling Moreover, the properties are in the vicinity of Magnum Hunter’s current Morrow-Atoka-Strawn drilling program, an area representing the company’s most active and successful onshore area of focus in recent years.
With the combination of recent farm-ins from major companies plus the properties being acquired in Tom Brown property acquisition, Magnum Hunter would become one of the largest producers and mineral acreage owners in southeastern New Mexico.
Since the program’s inception in 1999, the company has participated in 66 successful wells out of 68 attempts. It also has maintained a two-rig drilling program for the past 26 months on company operated properties, in addition to participating in new wells operated by other companies active in this region.
Of the proved reserves acquired from Tom Brown, 77 percent are natural gas, according to DeGolyer and MacNaughton, an independent reservoir engineering firm. The deal includes 45 proved undeveloped locations. Additional 50-70 drilling locations in Morrow formation However, Magnum Hunter said its geologists and engineers have identified an additional 50 to 70 drilling locations in the Morrow formation alone that could be developed into proven reserves. Magnum Hunter’s internal reserve estimates provide for 50 billion cubic feet of proved, probable and possible reserves from additional wells, the company said.
Magnum Hunter said it based its reserve projections on similar results achieved from the company’s earlier Burlington Resources Permian basin acquisition in 1997 and the Mallon Resources property acquisition completed in 2001. The company said it achieved a low finding and development cost in this core geographic area of $1.02 per thousand cubic feet of gas equivalent.
In addition to the 458 producing oil and gas wells provided in the transaction, Magnum Hunter said it also would acquire about 44,000 net acres of undeveloped leasehold mineral interests. About $26 million of the $243 million purchase price was allocated to the undeveloped mineral acreage position, the company added.
The properties to be acquired currently produce about 18 million cubic feet of gas per day and 870 barrels of liquids per day, or about 23 million cubic feet of gas equivalent per day, representing a hefty 72 percent increase to Magnum Hunter’s existing 32 million cubic feet of equivalent per day of production from its existing properties in southeastern New Mexico. Deal would more than double well count in SE New Mexico Additionally, it represents an increase of about 11 percent of the company’s current total net daily production. The acquisition would more than double Magnum Hunter’s well count and mineral acreage position in southeast New Mexico, the company said.
Magnum Hunter said the deal is expected to close on or before July 30, with an effective date of May 1.
Magnum Hunter said it intends to finance the acquisition through the issuance of 15 million shares of common stock plus borrowings under its credit facility. The company expects a debt-to-capitalization ratio of between 51 and 54 percent after completing financing of the acquisition.
Lehman Brothers and Deutsche Bank Securities will serve as joint book-running managers for the common share offering.
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