Magnum Hunter Resources finally released its required 2012 fourth quarter and full-year financial report, nearly three months after missing a crucial March 18 filing deadline with the U.S. Securities and Exchange Commission.
It turns out that the Houston, Texas-based E&P independent had a stellar 2012, with both revenue and production more than doubling compared to the previous year, according to the company’s latest 10-K filing.
Magnum Hunter also informed analysts in a June 14 conference call that it anticipated filing its 2013 first-quarter 10-Q financial report (also late) within 30 days, and that it should be on time and back on track with the company’s second-quarter filing by the Aug. 10 deadline.
Gary Evans, chairman and chief executive officer of Magnum Hunter, originally issued an apology for busting the 2012 fourth quarter and full-year reporting deadline, citing accounting problems.
“I have lots of excuses but the excuses are totally unacceptable; and for that, we apologize to our shareholders and our lenders and our investors,” Evans said in a March conference call.
CEO accepted responsibility
Evans personally accepted responsibility, suggesting that his eagerness as head of the company to grow Magnum Hunter contributed to accounting problems, noting troubles with assimilating two acquisitions into the company last year. In effect, he said, Magnum Hunter did not have sufficient accounting personnel to keep pace with company growth.
“And so is this a black eye? Absolutely,” Evans said in March. “Is this being fixed? Most definitely.”
Evans told analysts June 14 that Magnum Hunter was finally able to file its federally mandated 10-K report after the board fired its accounting firm, PricewaterhouseCoopers, on April 10, and hired BDO on April 16 to complete the audit.
It’s “quite unusual” for a company to dismiss its accounting firm,” Evans said, noting that the board and senior management team “stand firm that we had very valid reasons” for firing the generally respected accounting firm.
“And I think the proof is in the pudding,” he added, “that we hired a completely new accounting firm, the fifth largest in the country who didn’t know us from Adam, and they accomplished the goal in less than 60 days with an unqualified audit opinion. Need I say more?”
MHR strengthens oversight
Magnum Hunter also strengthened its accounting department with a new chief accounting officer and head of financial reporting, as well as adding controllers.
“We have a remediation plan that is in place,” said Ronald Ormand, chief financial officer and executive vice president of Magnum Hunter. “The primary aspect of that, obviously, are new and more qualified people (and) new processes that will create efficiencies and more timely reporting for the company and a new integrated accounting system. This will be occurring throughout 2013 and into early 2014.”
Evans said Magnum Hunter was “rubbed” and “scrubbed” by the auditors, “and I think it’s a testimony to the entire team that there was really nothing found. We have a clean opinion. …”
“This has been a trying time for me and our management team and our employees,” he added. “There was a lot of scrutiny on us. There were a lot of questions about our credibility and our accountability.”
The 10-K report depicts an E&P company with growth on its mind, one of the factors that contributed to its accounting woes.
Revenue, production soars
Total revenues for full-year 2012 rocketed 139 percent to $271 million compared to $114 million for 2011, while revenues for the final quarter of the year jumped 101 percent to $83.7 million compared to $41.6 million for the same quarter a year earlier.
Management attributed the huge increase in revenue to a boom in oil and gas production, resulting from a combination of acquisitions and increased drilling efforts throughout 2012 in Magnum Hunter’s unconventional resource plays, notably the Bakken petroleum system.
Production for full-year 2012 soared 139 percent to an average 14,587 barrels of oil equivalent per day versus 5,510 boe per day in 2011. Output for the fourth quarter alone rose 60 percent to 14,587 boe per day compared to 9,124 boe per day for the prior year’s final quarter.
Magnum Hunter reaffirmed its year-end 2013 production exit rate guidance at 23,000-25,000 boe per day, representing upward of a 71 percent increase over 2012.
Income loss reported
On the downside, Magnum Hunter reported a net income loss of $167.4 million for full-year 2012 compared to a net loss of $90.7 million for full-year 2011, and a net loss of $85.4 million for the fourth quarter of 2012 versus a loss of $94.3 million for the final quarter of 2011.
However, a significant portion ($74.7 million) of Magnum Hunter’s reported losses in 2012 were due to non-cash impairments on the value of a large acreage position the company initially acquired, “which led us to focus on other areas, thereby impairing certain acreage that will expire in the future.”
Evans pointed out that for a company of Magnum Hunter’s size, a total acreage position of 725,000 net acres “is absolutely phenomenal.”
“So it’s okay to write off some acreage, which we did (in) areas that we don’t plan to drill,” he said.
Magnum Hunter said its net income for the 2012 fourth quarter was actually $8.9 million when adjusted for non-cash and non-recurring expenses, while the company’s net loss for full-year 2012 was $16.5 million when adjusted.
Magnum Hunter’s proved reserves as of Dec. 31, 2012, which were disclosed in the company’s previously released reserve update on Jan. 23, 2013, remained unchanged at 73.1 million boe. About 63 percent were oil and natural gas liquids, with 52 percent classified as proved developed producing reserves.
