SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	-OR-

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-32997

MAGNUM HUNTER RESOURCES CORPORATION

(Name of registrant as specified in its charter)

Delaware		86-0879278
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

     Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding twelve months, and (2) has been subject to such filing requirements for the past 90 days.

     Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

     Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of November 8, 2011 there were 128,796,305 shares of the registrant’s common stock ($0.01 par value) outstanding.

 

 

MAGNUM HUNTER RESOURCES CORPORATION

QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):			1
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010			1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010			2
Consolidated Statement of Other Comprehensive Income			3
Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2011			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			47
Part II. OTHER INFORMATION			47
Item 1. Legal Proceedings			47
Item 1A. Risk Factors			47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 6. Exhibits			48
SIGNATURES			50
EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

MAGNUM HUNTER RESOURCES CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per-share data)

		September 30,				December 31,
		2011				2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	8,175			$	554
Accounts receivable			37,178				11,705
Derivatives			7,677				—
Prepaids and other current assets			5,848				867
Total current assets			58,878				13,126
PROPERTY AND EQUIPMENT (Net of Accumulated Depletion and Depreciation):
Oil and natural gas properties, successful efforts accounting			888,219				189,912
Gas gathering and other equipment			109,888				42,689
Total property and equipment, net			998,107				232,601
OTHER ASSETS:
Deferred financing costs, net of amortization of $408 and $1,237 respectively			10,967				2,678
Derivatives and other long-term assets			9,612				562
Total assets		$	1,077,564			$	248,967
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of notes payable		$	4,344			$	7,132
Accounts payable			91,797				33,319
Accrued liabilities			12,329				435
Revenue payable			5,745				2,630
Derivatives and other current liabilities			1,357				719
Total current liabilities			115,572				44,235
OTHER LIABILITIES:
Notes payable, less current portion			209,507				26,019
Asset retirement obligation			14,707				4,455
Deferred tax liability			94,763				—
Derviatives and other long term liabilities			2,769				700
Total liabilities			437,318				75,409
COMMITMENTS AND CONTINGENCIES (Note 13)
REDEEMABLE PREFERRED STOCK:
Series C Cumulative Perpetual Preferred Stock, cumulative dividend rate 10.25% per annum, 4,000,000 authorized, 4,000,000 and 2,809,456 issued & outstanding as of September 30, 2011 and December 31, 2010, respectively, with liquidation preference of $25.00 per share			100,000				70,236
SHAREHOLDERS’ EQUITY:
Preferred Stock, 10,000,000 shares authorized			—				—
Series D Cumulative Perpetual Preferred Stock, cumulative dividend rate 8.0% per annum, 5,750,000 authorized, 1,421,237 and none issued & outstanding as of September 30, 2011 and December 31, 2010, respectively, with liquidation preference of $50.00 per share			71,062				—
Common stock, $0.01 par value, 250,000,000 shares authorized, 129,983,781 and 74,863,135 shares issued and 129,516,860 and 74,863,135 outstanding as of September 30, 2011 and December 31, 2010, respectively			1,295				749
Exchangeable common stock, par value $0.01 per share, 3,778,245 and none issued & outstanding as of September 30, 2011 and December 31, 2010, respectively			38				—
Additional paid in capital			564,255				152,439
Accumulated deficit			(79,149	)			(49,402	)
Accumulated other comprehensive income			(17,460	)			—
Treasury stock at cost, 761,652 shares			(1,310	)			(1,310	)
Unearned common stock in KSOP at cost, 153,300 shares			(604	)			(604	)
Total Magnum Hunter Resources Corporation shareholders’ equity			538,127				101,872
Non-controlling interest			2,119				1,450
Total shareholders’ equity			540,246				103,322
Total liabilities and shareholders’ equity		$	1,077,564			$	248,967

The accompanying notes are an integral part of these unaudited consolidated financial statements

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per-share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
REVENUE:
Oil and gas sales		$	25,547			$	6,578			$	65,555			$	19,647
Field operations and other			6,892				1,342				14,545				3,330
Total revenue			32,439				7,920				80,100				22,977
EXPENSES:
Lease operating expenses			7,606				2,686				17,101				7,785
Severance taxes and marketing			1,933				648				4,729				1,878
Exploration			403				241				1,140				697
Field operations			5,954				1,300				10,184				3,143
Impairment of oil & gas properties			—				20				—				20
Depreciation, depletion and accretion			12,485				1,786				28,829				5,888
General and administrative			17,378				4,634				47,949				17,903
Total expenses			45,759				11,315				109,932				37,314
OPERATING LOSS			(13,320	)			(3,395	)			(29,832	)			(14,337	)
OTHER INCOME AND (EXPENSE):
Interest income			10				50				14				55
Interest expense			(2,272	)			(982	)			(6,988	)			(2,675	)
Gain (loss) on derivative contracts			17,341				(62	)			16,667				2,348
Other income and (expense)			24				—				111				—
Total other income & expense			15,103				(994	)			9,804				(272	)
Gain (loss) from continuing operations before income taxes and non-controlling interest			1,783				(4,389	)			(20,028	)			(14,609	)
Income tax benefit			272				—				470				—
Net income attributable to non-controlling interest			(55	)			(26	)			(172	)			(91	)
Net income (loss) attributable to Magnum Hunter
Resources Corporation from continuing operations			2,000				(4,415	)			(19,730	)			(14,700	)
Income from discontinued operations			—				690				—				1,645
Net income (loss)			2,000				(3,725	)			(19,730	)			(13,055	)
Dividend on Preferred Stock			(3,952	)			(601	)			(10,017	)			(1,310	)
Net loss attributable to common shareholders		$	(1,952	)		$	(4,326	)		$	(29,747	)		$	(14,365	)
Weighted average number of common shares outstanding
Basic and diluted			131,082,854				67,996,180				106,651,326				62,010,895
Basic and diluted
Net loss from continuing operations		$	(0.01	)		$	(0.07	)		$	(0.28	)		$	(0.26	)
Net income from discontinued operations		$	—			$	0.01			$	—			$	0.03
Net loss per common share		$	(0.01	)		$	(0.06	)		$	(0.28	)		$	(0.23	)

The accompanying notes are an integral part of these unaudited consolidated financial statements

MAGNUM HUNTER RESOURCES CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(In thousands, except shares and per-share data)

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Net income (loss)		$	2,000			$	(3,725	)		$	(19,730	)		$	(13,055	)
Foreign currency translation			(14,320	)			—				(17,542	)			—
Unrealized gain (loss) on available for sale investments			74				—				82				—
Total comprehensive loss		$	(12,246	)		$	(3,725	)		$	(37,190	)		$	(13,055	)

The accompanying notes are an integral part of these unaudited consolidated financial statements

     

MAGNUM HUNTER RESOURCES CORPORATION

		Number				Number of Shares				Number of																Additional
		of Shares				of Exchangeable				Shares of Series D				Common				Exchangeable				Series D				Paid in				Accumulated				Accumulated Other				Treasury				Unearned Common				Noncontrolling				Total Shareholders’
		of Common				Common Stock				Preferred Stock				Stock				Common Stock				Preferred Stock				Capital				Deficit				Comprehensive Income				Stock				Shares in KSOP				Interest				Equity
BALANCE, January 1, 2011			74,863				—				—			$	749			$	—			$	—			$	152,439			$	(49,402	)		$	—			$	(1,310	)		$	(604	)		$	1,450			$	103,322
Restricted stock issued to employees and directors			120				—				—				1				—				—				413				—				—				—				—				—				414
Stock compensation			—				—				—				—				—				—				19,603				—				—				—				—				—				19,603
Issued shares of Series C Preferred Stock for cash			—				—				—				—				—				—				(689	)			—				—				—				—				—				(689	)
Issued shares of Common Stock for cash			1,714				—				—				17				—				—				13,875				—				—				—				—				—				13,892
Issued shares of Series D Preferred Stock for cash			—				—				1,421				—				—				71,062				(6,094	)			—				—				—				—				—				64,968
Issued shares of Common Stock upon warrant exercise			808				—				—				8				—				—				2,405				—				—				—				—				—				2,413
Issued shares of common stock upon stock option exercise			5,284				—				—				53				—				—				4,660				—				—				—				—				—				4,713
Dividends on Series C Cumulative Perpetual Preferred			—				—				—				—				—				—				—				(7,686	)			—				—				—				—				(7,686	)
Dividends on Series D Preferred Stock			—				—				—				—				—				—				—				(2,331	)			—				—				—				—				(2,331	)
Issued 12,875,093 warrants for payment of dividends on common stock with fair market value of $6.7 million			—				—				—				—				—				—				—				—				—				—				—				—				—
Issued 378,174 warrants for payment of dividends on MHR Exchangeco
Corporation’s exchangeable common stock with fair market value of $197 thousand			—				—				—				—				—				—				—				—				—				—				—				—				—
Issued shares of common stock for acquisition of assets			946				—				—				9				—				—				7,533				—				—				—				—				—				7,542
Issued shares of common stock for acquisition of NGAS Resources			6,635				—				—				66				—				—				52,951				—				—				—				—				—				53,017
Issued shares of common stock to employees for change in control payments for NGAS Resources			351				—				—				4				—				—				2,798				—				—				—				—				—				2,802
Issued 138,388 warrants in replacement of NGAS Resources warrants			—				—				—				—				—				—				190				—				—				—				—				—				190
Noncontrolling interest acquired in NGAS acquisition			—				—				—				—				—				—				—				—				—				—				—				497				497
Issued shares of common stock for acquisition of NuLoch Resources			38,132				—				—				381				—				—				281,794				—				—				—				—				—				282,175
Issued exchangeable shares for acquisition of NuLoch Resources			—				4,276				—				—				43				—				31,600				—				—				—				—				—				31,643
Issued shared of common stock upon exchange of MHR Exchangeco Corporation’s exchangeable shares			498				(498	)			—				5				(5	)			—				—				—				—				—				—				—				—
Issued shares of Common Stock for commitment fee			166				—				—				2				—				—				777				—				—				—				—				—				779
Net loss			—				—				—				—				—				—				—				(19,730	)			—				—				—				172				(19,558	)
Other comprehensive income:
Foreign currency translation			—				—				—				—				—				—				—				—				(17,542	)			—				—				—				(17,542	)
Unrealized gain on available for sale securities			—				—				—				—				—				—				—				—				82				—				—				—				82
BALANCE, September 30, 2011			129,517				3,778				1,421			$	1,295			$	38			$	71,062			$	564,255			$	(79,149	)		$	(17,460	)		$	(1,310	)		$	(604	)		$	2,119			$	540,246

The accompanying notes are an integral part of these unaudited consolidated financial statements

MAGNUM HUNTER RESOURCES CORPORATION

(In thousands)

		Nine Months Ended
		September 30,
		2011				2010
Cash flows from operating activities
Net loss		$	(19,730	)		$	(13,055	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Noncontrolling Interest			172				91
Depletion, depreciation, and accretion			28,829				7,138
Amortization of deferred financing costs included in interest expense			3,045				861
Gain on sale of assets			(640	)			(47	)
Cash paid for plugging wells			(8	)			—
Share-based compensation			19,922				5,151
Unrealized (gain) loss on derivative contracts			(17,221	)			1,181
Asset impairment			—				20
Deferred taxes			(470	)			—
Changes in operating assets and liabilities:
Accounts receivable and accrued revenue			(10,426	)			1,158
Inventory			(3,006	)			70
Prepaid expenses and other current assets			(675	)			(502	)
Accounts payable			7,968				(1,577	)
Revenue payable			1,943				138
Accrued Liabilities			554				3,018
Net cash provided by operating activities			10,257				3,645
Cash flows from investing activities
Capital expenditures and advances			(201,618	)			(26,690	)
Cash paid in acquisitions, net of cash received of $2.5 million			(78,523	)			(59,500	)
Change in restricted cash and deposits			(2,837	)			(980	)
Proceeds from sales of assets			9,459				50
Net cash used in investing activities			(273,519	)			(87,120	)
Cash flows from financing activities
Net proceeds from sale of common stock and warrants			13,892				24,423
Net proceeds from sale of preferred shares			94,042				22,879
Proceeds from exercise of warrants and options			7,126				13,799
Purchase of company shares and loan to KSOP			—				(541	)
Options surrendered for cash			—				(116	)
Preferred stock dividend paid			(10,017	)			(1,335	)
Cash paid upon conversion of Series B Preferred Stock			—				(11,250	)
Proceeds from borrowings on debt			408,587				72,580
Principal repayment of debt			(234,047	)			(35,779	)
Payment of deferred financing costs			(8,528	)			(2,630	)
Change in other long-term liabilities			59				—
Net cash provided by financing activities			271,114				82,030
Effect of exchange rate changes on cash			(231	)			—
Net increase (decrease) in cash and cash equivalents			7,621				(1,445	)
Cash and cash equivalents, beginning of period			554				2,282
Cash and cash equivalents, end of period		$	8,175			$	837
Supplemental disclosure of cash flow information
Cash paid for interest		$	3,867			$	1,966
Non-cash transactions
Series B Preferred stock issued for acquisition of Triad		$	—			$	14,982
Debt assumed in acquisitions		$	71,895			$	3,411
Common stock issued for payment of services		$	779			$	165
Common stock issued in conversion of Series C stock		$	—			$	3,732
Accrued capital expenditures		$	12,412			$	10,253
Common stock issued for acquisitions		$	345,537			$	—
Exchangeable common stock issued for acquisition of NuLoch Resources		$	31,642			$	—
Warrants issued for payment of common stock dividends		$	6,695			$	—
Warrants issued for payment of dividends on MHR Exchangeco Corporation exchangeable shares		$	197			$	—

The accompanying notes are an integral part of these unaudited consolidated financial statements

NOTE 1—BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Magnum Hunter Resources Corporation (the “Company” or “Magnum Hunter”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report on Form 10-K, as amended, for the year ended December 31, 2010. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation 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. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements as reported in the 2010 annual report on Form 10-K, as amended, have been omitted.

Income or Loss per Share

Basic income or loss per common share is net income or loss available to common shareholders divided by the weighted average of common shares outstanding during the period. Diluted income or loss per common share is calculated in the same manner, but also considers the impact to net income and common shares outstanding for the potential dilution from in-the-money common stock options and warrants, and convertible debentures and preferred stock.

We have issued potentially dilutive instruments in the form of restricted common stock granted and not yet issued, common stock warrants, and common stock options. The total number of potentially dilutive securities at September 30, 2011 was 26,284,178. There were 11,610,034 potentially dilutive securities outstanding at September 30, 2010. We did not include the potentially dilutive securities in our calculation of diluted loss per share during either period because to include them would be anti-dilutive due to our net loss attributable to common shareholders during those periods.

The following table summarizes the types of potentially dilutive securities outstanding as of September 30, 2011 and 2010 (in thousands):

		September 30,
		2011				2010
Warrants			13,532				1,859
Restricted Shares granted, not yet issued			25				105
Common Stock Options			12,727				9,646

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Presentation

The consolidated financial statements include the accounts of Magnum Hunter and our wholly-owned subsidiaries, Eagle Ford Hunter, Inc. (f/k/a Sharon Hunter Resources, Inc.) (“Sharon”), Triad Hunter, LLC, Alpha Hunter Drilling, LLC, Hunter Disposal, LLC, Eureka Hunter Pipeline, LLC, Eureka Hunter Pipeline Partners, LLC, Hunter Real Estate, LLC, NGAS Hunter, LLC (f/k/a MHR Acquisition Company I, LLC), Magnum Hunter Production, Inc. (f/k/a NGAS Production, Inc.), Magnum Hunter Resources GP, LLC, Magnum Hunter Resources LP, MHR Callco Corporation, MHR Exchangeco Corporation, Williston Hunter Canada, Inc., Williston Hunter, Inc., Williston Hunter ND, LLC (f/k/a MHR Acquisition II, LLC), NGAS Gathering, LLC, Sentra Corporation, Energy Hunter Securities, Inc (f/k/a NGAS Securities, Inc) and MHR Acquisition Company III, LLC. We also have consolidated our 87.5% controlling interest in PRC Williston, LLC (“PRC”) with noncontrolling interests recorded for the outside interest in PRC. The consolidated financial statements also reflect the interest of Magnum Hunter Production, Inc. in various managed drilling partnerships. We account for the interests in these partnerships using the proportionate consolidation method. All significant intercompany balances and transactions have been eliminated.

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions and conditions. Significant estimates are required for proved oil and gas reserves which may have a material impact on the carrying value of oil and gas property.

Critical accounting policies are defined as those significant accounting policies that are most critical to an understanding of a company’s financial condition and results of operations. We consider an accounting estimate or judgment to be critical if (i) it requires

assumptions to be made that were uncertain at the time the estimate was made, and (ii) changes in the estimate or different estimates that could have been selected, could have a material impact on our results of operations or financial condition.

Reclassification of Prior-Year Balances

Certain prior-year balances in the consolidated financial statements have been reclassified to correspond with current-year classifications. As a result of the sale of our Cinco Terry oil and gas properties on October 29, 2010, we reclassified the gain on sale and all prior operating income and related interest expense for these properties as discontinued operations.

Regulated Activities

Energy Hunter Securities, Inc. 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 (Exchange Act). 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. At September 30, 2011, Energy Hunter Securities, Inc. had net capital of $58,000 and aggregate indebtedness of $44,000.

Sentra Corporation’s gas distribution billing rates are regulated by Kentucky’s Public Service Commission based on recovery of purchased gas costs. We account 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. For the nine months ended September 30, 2011 and 2010, our gas transmission, compression and processing revenue includes gas utility sales from Sentra Corporation’s regulated operations aggregating $61,000 and $0, respectively.

NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amended guidance changes several aspects of the fair value measurement guidance in ASC 820, Fair Value Measurement, further clarifying how to measure and disclose fair value. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended. The amendment is effective for the Company at the beginning of January 2012, with early adoption prohibited. The adoption of this amendment is not expected to materially affect the Company’s financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income which amended requirements for the presentation of other comprehensive income (OCI), requiring presentation of comprehensive income in either a single, continuous statement of comprehensive income or on separate but consecutive statements, the statement of operations and the statement of OCI. The amendment is effective for the Company at the beginning of fiscal year 2013 with early adoption permitted. The adoption of this guidance will not impact the Company’s financial position, results of operations or cash flows and will only impact the presentation of OCI on the financial statements.

NOTE 4 — 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

We used the following fair value measurements for certain of our assets and liabilities during the nine months ended September 30, 2011 and 2010:

Level 1 Classification:

Available for Sale Securities

At September 30, 2011, the Company held common stock of a company publicly traded on the TSX Venture Exchange with quoted prices in active markets. Accordingly, the fair market value measurements of these securities have been classified as Level 1.

Level 2 Classification:

Derivative Instruments

At September 30, 2011 and December 31, 2010, the Company had commodity derivative financial instruments in place. The Company does not apply hedge accounting; therefore, the changes in fair value subsequent to the initial measurement are recorded as income or expense. The estimated fair value amounts of the Company’s 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 derivative instruments are valued using public indexes, the instruments themselves are traded with unrelated counterparties and are not openly traded on an exchange. See Note 7 — Financial Instruments and Derivatives, for additional information.

As of September 30, 2011 and December 31, 2010, the Company’s derivative contracts were with Bank of Montreal, Keybank National Association, Credit Suisse Energy LLC, UBS AG London Branch, and Deutsche Bank AG London Branch, which are participants in our revolving credit facility, and have investment grade credit ratings which are believed to have a minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above; however, the Company does not anticipate such nonperformance.

The following tables present recurring financial assets and liabilities which are carried at fair value as of September 30, 2011 and December 31, 2010:

		Fair Value Measurements on a Recurring Basis
						September 30, 2011
		(In thousands)
		Level 1				Level 2				Level 3
Available for sale securities		$	332				—			$	—
Commodity derivatives		$	—			$	16,443			$	—
Total assets at fair value		$	332			$	16,443			$	—
Commodity derivatives		$	—			$	—			$	—
Total liabilities at fair value		$	—			$	—			$	—

		Fair Value Measurements on a Recurring Basis
						December 31, 2010
		(In thousands)
		Level 1				Level 2				Level 3
Commodity derivatives		$	—			$	—			$	—
Total assets as fair value		$	—			$	—			$	—
Commodity derivatives		$	—			$	778			$	—
Total liabilities at fair value		$	—			$	778			$	—

NOTE 5 — ACQUISITIONS

Triad

On February 12, 2010, the Company completed the acquisition of the assets of privately-held Triad Energy Corporation and certain of its affiliated entities (collectively, “Triad”) from bankruptcy, resulting in approximately eight months of operating activity for these assets for the nine months ended September 30, 2010. See our 2010 annual report on Form 10-K, as amended, for details.

PostRock

On December 24, 2010, Magnum Hunter Resources Corporation and Triad Hunter, LLC entered into a Purchase and Sale Agreement with PostRock MidContinent Production, LLC (“PostRock”) and Quest Eastern Resources, LLC, pursuant to which Triad Hunter, LLC agreed to purchase certain oil and gas properties and leasehold mineral interests and related assets located in Wetzel and Lewis Counties, West Virginia. The Purchase Agreement provided for the acquisition to be completed in three phases for total consideration of $49.3 million consisting of 50% restricted common stock and 50% cash for the first two phases, and 100% cash for the third phase. Both of the two initial phases were effective as of November 1, 2010.

The first phase of the acquisition closed on December 30, 2010. See our 2010 annual report on Form 10-K, as amended, for details.

On January 14, 2011, we closed the second phase of the PostRock acquisition, which consisted of the Lewis County assets, for total consideration of approximately $13.3 million which consisted of 946,314 shares of the Company’s restricted common stock and a cash payment of approximately $5.8 million.

On June 16, 2011, we closed the third phase of the PostRock acquisition comprising of assets located in Wetzel and Lewis Counties for a total purchase price of $4.9 million in cash before considering applicable adjustments.

Wetzel County, West Virginia Asset Acquisition

On April 7, 2011, the Company purchased oil and gas properties and related assets located in Wetzel County, West Virginia. The assets purchased included approximately 4,451 gross acres (2,225 net acres) of oil and gas leases and mineral interests and existing wells with proven reserves.

We acquired the assets for a total purchase price of $20.0 million, payable in cash and subject to customary purchase price adjustments. Subject to the indemnification obligations set forth in the Purchase Agreement, we assumed certain customary liabilities in connection with the acquisition.

NGAS

On April 13, 2011, the Company completed the acquisition of all of the outstanding common shares of NGAS Resources, Inc, (“NGAS”) for total consideration of approximately $124.5 million consisting of $15.3 million in cash, $53.1 million in debt assumed, 6,986,104 shares of our common stock valued at approximately $55.8 million based on the closing stock price of $7.99 on April 13, 2011, and $1.2 million in warrant liability, of which $1.0 million was paid out in cash upon exercise of the cash option (included in $53.1 million in cash above) and 138,388 warrants are outstanding that are exercisable for common stock of the Company. The Company has liquidated NGAS into a wholly-owned subsidiary of the Company, NGAS Hunter, LLC, and changed the name of its subsidiary NGAS Production Co. to Magnum Hunter Production, Inc. and the name of another subsidiary, NGAS Securities, Inc. to Energy Hunter Securities, Inc.

The fair value of the net assets acquired, based on our preliminary assessment, approximated the $124.5 million in consideration paid or assumed.

The following table summarizes the purchase price and the preliminary estimate of the fair values of the net assets acquired from NGAS at the date of acquisition as determined as of September 30, 2011 (in thousands, except share information):

Fair value of total purchase price:
6,635,478 shares of common stock issued on April 13, 2011 at $7.99 per share		$	53,017
Senior credit facility paid off at closing			33,282
NGAS 6% convertible notes paid off in cash at closing			13,683
Contract payment in cash			12,929
Other long-term debt assumed			6,160
350,626 shares of common stock issued for change in control payments at $7.99 per share			2,802
Tax on change of control payments paid in cash			1,363
Common stock warrants settled in cash			1,044
Common stock warrants issued in conversion of NGAS warrants			190
Total		$	124,470
Amounts recognized for assets acquired and liabilities assumed:
Working capital		$	(9,502	)
Oil and gas properties			133,595
Equipment and other fixed assets			9,055
Asset retirement obligation			(8,678	)
Total		$	124,470
Working capital acquired:
Cash		$	1,908
Accounts receivable			3,662
Prepaid Expenses			416
Inventory			278
Accounts payable			(7,483	)
Revenue payable			(1,547	)
Payroll tax payable			(206	)
Advances			(3,751	)
Deferred compensation			(379	)
Accrued Liabilities			(2,400	)
Total working capital acquired		$	(9,502	)

NuLoch

On May 3, 2011, the Company completed the acquisition of all of the outstanding common shares of NuLoch Resources, Inc., (“NuLoch”) for total consideration of approximately $430.5 million consisting of 38,131,848 shares of our common stock and 4,275,998 exchangeable shares of MHR Exchangeco Corporation, an indirect wholly-owned Canadian subsidiary of the Company, which are exchangeable for shares of Company common stock, with a combined value of approximately $313.8 million based on the closing stock price of $7.40 on May 3, 2011, $18.8 million in debt assumed, and deferred tax liability of approximately $97.9 million. The Company has changed the name of NuLoch to Williston Hunter Canada, Inc. and its subsidiary NuLoch America Corporation to Williston Hunter, Inc.

The fair value of the net assets acquired, based upon our preliminary estimate, approximated the $430.5 million in consideration paid or assumed.

The following table summarizes the purchase price and the preliminary estimate of the fair values of the net assets of NuLoch as of the date acquired as determined as of September 30, 2011 (in thousands):

Fair value of total purchase price:
38,131,846 shares of common stock issued on May 3, 2011 at $7.40 per share		$	282,176
4,275,998 exchangeable shares at $7.40 per share			31,642
Debt assumed			18,770
Net deferred tax liability			97,912
Total		$	430,500
Amounts recognized for assets acquired and liabilities assumed:
Working capital		$	(20,711	)
Oil and gas properties			447,540
Equipment and other fixed assets			5,167
Asset retirement obligation			(1,496	)
Total		$	430,500
Working capital acquired:
Cash		$	640
Accounts receivable			5,951
Prepaid expenses			359
Accounts payable			(27,661	)
Total working capital acquired		$	(20,711	)

The consolidated statement of operations includes Triad’s revenue of $15.2 million for the nine months ended September 30, 2010 and Triad’s operating income of $1.9 million for the nine months ended September 30, 2010. The consolidated statement of operations includes PostRock’s revenue of $2.9 million for the nine months ended September 30, 2011 and PostRock’s operating income of $2.1 million for the nine months ended September 30, 2011. The consolidated statement of operations includes NGAS’s revenue of $10.7 million for the nine months ended September 30, 2011 and NGAS’s operating loss of $2.7 million for the nine months ended September 30, 2011. The consolidated statement of operations includes NuLoch’s revenue of $8.0 million for the nine months ended September 30, 2011 and NuLoch’s operating loss of $1.1 million for the nine months ended September 30, 2011.

The following summary, prepared on a pro forma basis, presents the results of operations for the three and nine months ended September 30, 2011 and 2010, as if the acquisitions of Triad, the PostRock assets, NGAS, and NuLoch, along with transactions necessary to finance the acquisitions, had occurred as of January 1, 2010. This unaudited pro forma information includes the effects of adjustments for interest expense, depreciation and depletion expense, and dividend expense. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been completed as of the beginning of the period presented, nor are they necessarily indicative of future consolidated results.

		Three Months
		Ended
		September 30,				Nine Months Ended September 30,
		2010				2011				2010
		(in thousands, except per share data)
Total operating revenue		$	22,389			$	96,537			$	72,075
Total operating costs and expenses			28,115				139,771				100,046
Operating loss			(5,726	)			(43,234	)			(27,971	)
Interest expense and other			(473	)			(9,474	)			(1,707	)
Net loss attributable to Magnum Hunter Resources Corporation			(6,199	)			(33,760	)			(29,678	)
Dividends on preferred stock			(601	)			(10,017	)			(1,507	)
Net loss attributable to common stockholders		$	(6800	)		$	(43,777	)		$	(31,185	)
Loss per common share, basic and diluted		$	(0.06	)		$	(0.34	)		$	(0.27	)

NOTE 6 — DISCONTINUED OPERATIONS

On October 29, 2010, we entered into a definitive purchase and sale agreement for the sale of our 10.0% non-operated working interest in the Cinco Terry oil and gas properties located in Crockett County, Texas, which closed on October 29, 2010. See our 2010 annual report on Form 10-K, as amended, for details. The operating results of the Cinco Terry property for the three and nine months ended September 30, 2010 have been reclassified as discontinued operations in the consolidated statements of operations as detailed in the table below:

		Three months ended				Nine months ended
		September 30, 2010				September 30, 2010
		(in thousands)				(in thousands)
Oil and Gas Sales and other revenues		$	1,703			$	4,273
Operating expenses			(898	)			(2,287	)
Other income (expense)			(115	)			(341	)
Income from discontinued operations		$	690			$	1,645

NOTE 7 — FINANCIAL INSTRUMENTS AND DERIVATIVES

We enter into certain commodity derivative instruments which are effective in mitigating commodity price risk associated with a portion of our future monthly natural gas and crude oil production and related cash flows. Our oil and gas operating revenues and cash flows are impacted by changes in commodity product prices, which are volatile and cannot be accurately predicted. Our objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of our future crude oil and natural gas sales from the risk of significant declines in commodity prices, which helps insure our ability to fund our capital budget. We have not designated any of our commodity derivatives as hedges under the applicable accounting standards.

As of September 30, 2011, we had the following derivative instruments in place:

Natural Gas		Period				MMBTU/day				Price per MMBTU
Collars		Oct 2011 — Dec 2011					2,143			$	5.37 — $7.43
		Jan 2012 — Dec 2012					11,910			$	4.58 — $6.42
		Jan 2013 — Dec 2013					12,500			$	4.50 — $5.96
Swaps		Oct 2011 — Dec 2011					113			$	5.98
		Jan 2012 — Dec 2012					100			$	6.15
Ceilings sold (call)		Jan 2014 — Dec 2014					10,000			$	6.15
Crude Oil		Period				Bbls/day				Price per Bbl
Collars		Oct 2011 — Dec 2011					1,497			$	62.61 — $102.98
		Jan 2012 — Dec 2012					3,259			$	75.81 — $98.31
		Jan 2013 — Dec 2013					2,947			$	74.82 — $97.21
		Jan 2014 — Dec 2014					947			$	85.00 — $91.25
		Jan 2015 — Dec 2015					947			$	85.00 — $91.25
Swaps		Oct 2011 — Dec 2011					43			$	85.09
Floors sold (put)		Oct 2011 — Dec 2011					147			$	60.00
		Jan 2012 — Dec 2012					50			$	55.00
Floors purchased		Oct 2011 — Dec 2011					1260			$	84.37
		Jan 2012 — Dec 2012					153			$	80.00

The following table summarizes the fair value of our derivative contracts as of the dates indicated:

In thousands				Gross Derivative Assets								Gross Derivative Liabilities
Derivatives not designated as hedging				September 30,				December 31,				September 30,				December 31,
instruments		Balance Sheet Classification		2011				2010				2011				2010
Commodity
		Current Assets - Derivatives		$	14,552			$	—			$	(6,875	)		$	—
		Derivatives and Other Long Term Assets			24,166				—				(15,400	)			—
		Derivative and other Current Liabilities			—				1,743				—				(2,462	)
		Derivative and other Long Term Liabilities			—				500				—				(559	)
Total Commodity				$	38,718			$	2,243			$	(22,275	)		$	(3,021	)

The following tables summarize the net gain (loss) on derivative contracts for the three and nine months ended September 30, 2011 and 2010:

		Three Months Ended				Nine Months Ended
		September 30, 2011				September 30, 2011
		(in thousands)				(in thousands)
Realized (loss)		$	(45	)		$	(554	)
Unrealized gain			17,386				17,221
Net gain		$	17,341			$	16,667

		Three Months Ended				Nine Months Ended
		September 30, 2010				September 30, 2010
		(in thousands)				(in thousands)
Realized gain		$	441			$	3,529
Unrealized (loss)			(503	)			(1,181	)
Net gain (loss)		$	(62	)		$	2,348

NOTE 8 — ASSET RETIREMENT OBLIGATIONS

The Company records a liability for the fair value of an asset’s retirement obligation in the period in which it is incurred and the corresponding cost is capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. We have included estimated future costs of abandonment and dismantlement in our successful efforts amortization base and amortize these costs as a component of our depreciation, depletion, and accretion expense in the accompanying consolidated financial statements.

The following table summarizes the Company’s asset retirement obligation transactions during the nine month period ended September 30, 2011:

		(in thousands)
Asset retirement obligation at beginning of period		$	4,455
Assumed in NGAS acquisition			8,678
Assumed in NuLoch acquisition			1,496
Liabilities incurred			103
Liabilities settled			(8	)
Accretion expense			618
Effect of foreign currency exchange			(115	)
Revisions in estimated liabilities			(25	)
Asset retirement obligation at end of period			15,202
Less: current portion			(495	)
Asset retirement obligation at end of period		$	14,707

NOTE 9 — NOTES PAYABLE

Notes payable at September 30, 2011 consisted of the following:

		September 30, 2011
		(in thousands)
Various equipment notes payable with maturity dates April 2012 — August 2021, interest rates of 0.00% — 6.34%		$	12,851
Eureka Hunter Pipeline, LLC second lien term loan due August 16, 2018, interest rate of 12.5%			31,000
Second lien term loan due October 13, 2016, interest rate of 8% at September 30, 2011			100,000
Senior revolving credit facility due April 13, 2016, interest rate of 2.95% at September 30, 2011			70,000
		$	213,851
Less: current portion			(4,344	)
Total Long-Term Debt		$	209,507

The following table presents the approximate annual maturities of debt:

		(in thousands)
2011		$	739
2012			4,313
2013			2,813
2014			1,063
Thereafter			204,923
Total		$	213,851

Notes Payable

On April 13, 2011 the Company assumed various notes payable for equipment and a building upon the closing of the acquisition of NGAS. The notes have maturity dates ranging from September 2012 to April 2021 and bear interest rates of 0.00% to 5.875%. As of September 30, 2011, there was $6.0 million outstanding on these notes.

In connection with the Triad acquisition in February 2010, the Company assumed various notes payable for equipment which have a principal balance of $6.8 million at September 30, 2011, and are collateralized by the financed equipment.

Eureka Hunter Pipeline, LLC Second Lien Credit Agreement

On August 16, 2011, Eureka Hunter Pipeline, LLC (“Eureka”), a wholly owned subsidiary of the Company, entered into (i) a First Lien Credit Agreement (the “First Lien Agreement”) by and among Eureka and SunTrust Bank, as Administrative Agent (the “Administrative Agent”), and (ii) a Second Lien Term Loan Agreement (the “Second Lien Agreement”), by and among Eureka, PennantPark Investment Corporation (“PennantPark”) and U.S. Bank National Association, as Collateral Agent (the First Lien Agreement and the Second Lien Agreement being collectively referred to as the “Eureka Credit Agreements”).

The First Lien Agreement provides for a revolving credit facility (the “Revolver”) in an aggregate principal amount of up to $100 million (with an initial committed amount of $25 million), secured by a first lien on substantially all of the assets of Eureka. The Second Lien Agreement provides for a $50 million term loan facility (the “Term Loan ”), secured by a second lien on substantially all of the assets of Eureka. The entire $50 million Term Loan must be drawn before any portion of the Revolver can be drawn. The revolver has a maturity date of August 16, 2016, and the term loan has a maturity date of August 16, 2018. On August 16, 2011, Eureka drew down $31 million under the term loan, $21 million of which was distributed to the parent Company to repay existing corporate intercompany indebtedness. Both the Revolver and the Term Loan are non-recourse to the Company.

The terms of the First Lien Agreement provide that the Revolver may be used for (i) revolving loans, (ii) swingline loans in an aggregate amount of up to $5 million at any one time outstanding, or (iii) letters of credit in an aggregate amount of up to $5 million at any one time outstanding. The Revolver provides for a commitment fee of 0.5% per annum based on the unused portion of the commitment under the Revolver.

Borrowings under the Revolver will, at Eureka’s election, bear interest at:

	•		a base rate equal to the highest of (i) the prime lending rate announced from time to time by the Administrative Agent, (ii) the then-effective Federal Funds Rate plus 0.5% per annum, or (iii) the Adjusted LIBO Rate (as defined in the First Lien Agreement) for a one-month interest period on such day plus 1.0% per annum, plus an applicable margin ranging from 1.25% to 3.5%; or
	•		the Adjusted LIBO Rate, plus an applicable margin ranging from 2.25% to 3.5%.

Borrowings under the Term Loan will bear interest at 9.75% in cash and 2.75% of which may be paid, at the sole option of Eureka, in either shares of $0.01 par value, restricted common stock of the Company or cash.

If an event of default occurs under either the Revolver or the Term Loan, the lenders may increase the interest rate then in effect by an additional 2.0% per annum for the period that the default exists on both the Revolver and the Term Loan.

The Eureka Credit Agreements contain negative covenants that, among other things, restrict the ability of Eureka to, with certain exceptions: (1) incur indebtedness; (2) grant liens; (3) dispose of all or substantially all of its assets or enter into mergers, consolidations, or similar transactions; (4) change the nature of its business; (5) make investments, loans, or advances or guarantee obligations; (6) pay cash dividends or make certain other payments; (7) enter into transactions with affiliates; (8) enter into sale and leaseback transactions; (9) enter into hedging transactions; (10) amend its organizational documents or material agreements; or (11) make certain undisclosed capital expenditures.

The Credit Agreements also require Eureka to satisfy certain financial covenants, including maintaining:

	•		a consolidated total debt to capitalization ratio of not more than 60%;
	•		a consolidated EBITDA to consolidated interest expense ratio ranging from (i) not less than 1.0 to 1.0 for the fiscal quarter ending March 31, 2012, to (ii) (A) for the Term Loan, not less than 2.75 to 1.0 for the fiscal quarter ending December 31, 2014, and (B) for the Revolver, not less than 3.0 to 1.0 for the fiscal quarter ending December 31, 2014 (if any portion of the Revolver has been drawn);
	•		a consolidated total debt to consolidated EBITDA ratio ranging from (i) not greater than 7.0 to 1.0 for the fiscal quarter ending March 31, 2012, to (ii) (A) for the Term Loan, not greater than 4.25 to 1.0 for the fiscal quarter ending December 31, 2014, and (B) for the Revolver, not greater than 4.0 to 1.0 for the fiscal quarter ending June 30, 2014 (if any portion of the Revolver has been drawn); and
	•		a ratio of consolidated debt under the Revolver to consolidated EBITDA of (i) for the Term Loan, not greater than 3.5 to 1.0, and (ii) for the Revolver, if any portion of the Revolver has been drawn, not greater than (A) 3.5 to 1.0 for the fiscal quarters ending March 31, 2012 and June 30, 2012, and (B) 3.25 to 1.0 for each fiscal quarter thereafter.

The obligations of Eureka under both the Revolver and the Term Loan may be accelerated upon the occurrence of an Event of Default (as such term is defined in each of the Credit Agreements) under either Credit Agreement. Events of Default include customary events for these types of financings, including, among others, payment defaults, defaults in the performance of affirmative or negative covenants, the inaccuracy of representations or warranties, defaults under the Term Loan (with respect to the Revolver) or the Revolver (with respect to the Term Loan), defaults relating to judgments, material defaults under certain material contracts of Eureka, and defaults by the Company which cause the acceleration of the Company’s debt under its existing senior secured revolving credit facility administered by the Bank of Montreal.

In connection with the Credit Agreements, (i) Eureka and its existing subsidiary, entered into customary ancillary agreements and arrangements, which provide that the obligations of Eureka under the Credit Agreement are secured by substantially all of the assets of Eureka and such subsidiary, consisting primarily of pipelines, pipeline rights-of-way, and a gas processing plant, and (ii) Triad Hunter, LLC, the sole parent of Eureka and a wholly owned subsidiary of the Company, entered into customary ancillary agreements and arrangements, which granted the lenders under the Credit Agreements a non-recourse security interest in Triad’s equity interest in Eureka. As of September 30, 2011, there was $31 million outstanding on the Term Loan and no outstanding balance on the Revolver.

Second Lien Term Loan Credit Agreement

On September 28, 2011, the Company entered into a Second Lien Term Loan Credit Agreement (the "Second Lien Credit Agreement”) by and among the Company, Capital One, N.A., as Administrative Agent, BMO Harris Financing, Inc., as Syndication Agent, Citibank, N.A., as Documentation Agent, BMO Capital Markets Corp. and Capital One, N.A., as Joint Lead Arrangers and Bookrunners, and the lenders party thereto.

The Second Lien Credit Agreement provides for a term loan credit facility (the “Term Loan Facility”) maturing on October 13, 2016, in an aggregate principal amount of $100 million, which was fully drawn on the closing date. Amounts repaid under the Term Loan Facility may not be redrawn in the future.

Borrowings under the Term Loan Facility will, at the Company’s election, bear interest at either: (i) an alternative base rate (“ABR”) equal to the higher of (A) the Prime Rate, (B) the Federal Funds Effective Rate plus 0.5% per annum and (C) the LIBO Rate for a one month interest period in effect on such day plus 1.0%; or (ii) the Adjusted LIBO Rate, which is the rate stated on Reuters BBA Libor Rates LIBOR01, provided that such amount shall not be less than 1.0% per annum through June 30, 2012 and not less than 2.0% per annum for any period after June 30, 2012; plus in each of the cases described in clauses (i) and (ii) above, an applicable margin of 6.0% for ABR loans and 7.0% for Adjusted LIBO Rate loans for periods through June 30, 2012 and 7.0% for ABR loans and 8.0% for Adjusted LIBO Rate loans for periods after June 30, 2012.

Overdue amounts shall bear interest at a rate equal to 2.0% per annum plus the rate applicable to ABR loans.

The Company may elect to prepay amounts due under the Term Loan Facility without penalty during the first 12 months. The Company will be subject to a 2.0% penalty of the principal amount being prepaid during the second year of the Term Loan Facility and a 1.0% penalty of the principal amount being prepaid during the third year of the Term Loan Facility. Any optional prepayments made after the third year of the Term Loan Facility will not be subject to an additional prepayment premium or penalty.

The Company is subject to mandatory prepayments under the Term Loan Facility for certain percentages of the net cash proceeds received as a result of: (i) future issuances of certain debt securities, including those convertible into the Company’s common stock or other equity interests; (ii) sales or other dispositions of the Company’s property and assets subject to customary reinvestment provisions and certain other exceptions; and (iii) future issuances of the Company’s equity interests including its common stock, preferred stock and other convertible securities subject to certain exceptions.

The Second Lien Credit Agreement contains negative covenants that, among others things, restrict the ability of the Company and its restricted subsidiaries to, with certain exceptions: (1) incur indebtedness; (2) grant liens; (3) change the nature of its business; (4) dispose of its assets; (5) enter into mergers, consolidations or similar transactions; (6) make investments, loans or advances; (7) pay cash dividends, unless certain conditions are met, and subject to a “basket” of $20,000,000 per year available for payment of dividends on preferred stock; and (8) enter into transactions with affiliates.

The Second Lien Credit Agreement also requires the Company to satisfy certain financial covenants, including maintaining (1) a ratio of current assets to current liabilities of not less than (a) 0.85 to 1.0 for each fiscal quarter ending on or before March 31, 2012 and (b) 1.0 to 1.0 for each fiscal quarter ending thereafter; (2) a ratio of its Total Reserve Value (as such term is defined in the Second Lien Credit Agreement) to total indebtedness under the Credit Agreement (as defined below) and Second Lien Credit Agreement of not less than 1.5 to 1.0; (3) a ratio of EBITDAX to interest of not less than 2.125 to 1.0 commencing with the fiscal quarter ending September 30, 2011; and (4) a ratio of total debt to EBITDAX of not more than (a) 5.25 to 1.0 for the fiscal quarter ending September 30, 2011, and (b) 4.75 to 1.0 for each fiscal quarter ending thereafter.

The obligations of the Company under the Second Lien Credit Agreement may be accelerated upon the occurrence of an Event of Default (as such term is defined in the Second Lien Credit Agreement). Events of Default include customary events for a financing agreement of this type, including, without limitation, payment defaults, defaults in the performance of affirmative or negative covenants, the material inaccuracy of representations or warranties, bankruptcy or related defaults, defaults on other indebtedness of the Company, defaults relating to judgments and the occurrence of a Change in Control (as such term is defined in the Second Lien Credit Agreement), which includes instances where a third party becomes the beneficial owner of 30% or more of the Company’s outstanding equity interests.

The Company’s obligations under the Second Lien Credit Agreement have been secured by the grant of a second priority lien on substantially all of the assets of the Company and its restricted subsidiaries, including the oil and gas properties of the Company and its restricted subsidiaries.

In connection with the Second Lien Credit Agreement, the Company and its restricted subsidiaries also entered into certain customary ancillary agreements and arrangements, which, among other things, provide that the indebtedness, obligations and liabilities of the Company arising under or in connection with the Second Lien Credit Agreement are unconditionally guaranteed by such restricted subsidiaries.

Senior Credit Facility

On April 13, 2011, the Company entered into a Second Amended and Restated Credit Agreement, (the “Senior Credit Facility” or “revolving credit facility”). The Senior Credit Facility amended and restated, in its entirety, that certain Amended and Restated Credit Agreement dated February 12, 2010.

The Senior Credit Facility provides for an asset-based, senior secured revolving credit facility maturing April 13, 2016. The initial borrowing base was set at $120 million upon the completion of the Company’s acquisition of NGAS. The borrowing base was subsequently increased to $145 million upon the completion of the Company’s acquisition of NuLoch, which closed on May 3, 2011. The revolving credit facility is governed by a semi-annual borrowing base redetermination derived from the Company’s proved crude oil and natural gas reserves, and based on such redeterminations, the borrowing base may be decreased or may be increased up to a maximum commitment level of $250 million. The borrowing base is subject to such periodic redeterminations commencing November 1, 2011.

The facility may be used for loans and, subject to a $10,000,000 sublimit, letters of credit. The facility provides for a commitment fee of 0.5% based on the unused portion of the borrowing base under the facility.

Borrowings under the facility will, at the Company’s election, bear interest at either: (i) an alternate base rate (“ABR”) equal to the higher of (A) the Prime Rate, (B) the Federal Funds Effective Rate plus 0.5% per annum and (C) the LIBO Rate for a one month interest period on such day plus 1.0%; or (ii) the adjusted LIBO Rate, which is the rate stated on Reuters BBA Libor Rates LIBOR01 market for one, two, three, six or twelve months, as adjusted for statutory reserve requirements for eurocurrency liabilities, plus, in each of the cases described in clauses (i) and (ii) above, an applicable margin ranging from 1.25% to 2.75% for ABR loans and from 2.25% to 3.75% for adjusted LIBO Rate loans.

If an event of default occurs and is continuing, the lenders may increase the interest rate then in effect by an additional 2% per annum plus the rate applicable to ABR loans.

The Senior Credit Facility contains negative covenants that, among other things, restrict the ability of the Company to, with certain exceptions: (1) incur indebtedness; (2) grant liens; (3) make certain payments; (4) change the nature of its business; (5) dispose of all or substantially all of its assets or enter into mergers, consolidations or similar transactions; (6) make investments, loans or advances; (7) pay cash dividends, unless certain conditions are met, and subject to a “basket” of $20,000,000 per year available for payment of dividends on preferred stock; and (8) enter into transactions with affiliates. The Second Restated Credit Agreement also requires the Company to satisfy certain financial covenants, including maintaining (1) a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0; (2) a ratio of EBITDAX to interest of not less than 2.5 to 1.0; and (3) a ratio of total debt to EBITDAX of not more than (a) 4.5 to 1.0 for the fiscal quarters ending June 30, 2011 and September 30, 2011 and (b) 4.0 to 1.0 for each fiscal quarter ending thereafter. The Company is also required to enter into certain commodity hedging agreements pursuant to the terms of the facility which is satisfied at September 30, 2011.

The obligations of the Company under the facility may be accelerated upon the occurrence of an event of default. Events of default include customary events for a financing agreement of this type, including, without limitation, payment defaults, defaults in the performance of affirmative or negative covenants, the inaccuracy of representations or warranties, bankruptcy or related defaults, defaults relating to judgments and the occurrence of a change in control.

Subject to certain permitted liens, the Company’s obligations under the Senior Credit Facility have been secured by the grant of a first priority lien on no less than 80% of the value of the proved oil and gas properties of the Company and its subsidiaries, which liens include those properties acquired through the acquisition of NGAS, and additional liens were granted on the properties acquired upon the closing of the NuLoch acquisition.

In connection with the facility, the Company and certain of its subsidiaries also entered into certain customary ancillary agreements and arrangements, which, among other things, provide that the indebtedness, obligations and liabilities of the Company arising under or in connection with the facility are unconditionally guaranteed by such subsidiaries.

On July 13, 2011, the Company entered into the first amendment of our Senior Credit Facility to increase our borrowing base available under the facility by $25 million from $145 million to $170 million effective June 30, 2011, an increase of 17% in the borrowing base. Other amendments to the facility include the elimination of interest rate floor provisions.

On August 15, 2011, the Company entered into the Second Amendment (the “Second Amendment”) to our Senior Credit Facility, as amended.

Pursuant to the Second Amendment, the Company’s borrowing base was initially increased from $170 million to $187.5 million. The Second Amendment also modifies certain provisions restricting the Company’s ability to declare dividends on its outstanding capital stock to allow (i) for dividends payable in the form of the issuance of common or preferred stock, warrants, options or other rights or interests and (ii) for the payment of up to $500,000 to pay cash in lieu of fractional shares in connection with any stock splits or reverse stock splits.

On September 28, 2011, the Company entered into the Third Amendment (the “Third Amendment ”) to our Senior Credit Facility, as amended.

Pursuant to the Third Amendment and in connection with the Company entering into the Second Lien Credit Agreement, the Company’s borrowing base was resized to $167.5 million from $187.5 million. The Third Amendment also provides that the borrowing base shall automatically be reduced by $0.30 for each $1.00 of the principal amount of any senior unsecured notes issued by the Company in the future which proceeds are not used to repay the Term Loan Facility under the Second Lien Credit Agreement. The Third Amendment permitted the Company to enter into the Second Lien Credit Agreement and grant liens with respect thereto, and the possible future issuance of senior unsecured notes in an amount not to exceed $300 million. The Third Amendment also modified the financial covenant that currently requires the Company to maintain a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0 by increasing such ratio to 1.05 to 1.0 if the Term Loan Facility is not repaid in full by June 30, 2012. At September 30, 2011, the Company had loans outstanding under the Senior Credit Facility of $70 million.

NOTE 10 —SHARE BASED COMPENSATION

We recognized share-based compensation expense of $7.9 million and $19.9 million for the three and nine months ended September 30, 2011, and we recognized $1.0 million and $5.2 million for the three and nine months ended September 30, 2010.

A summary of common stock option and stock appreciation rights activity for the nine months ended September 30, 2011 is presented below:

						Weighted-
						Average
		Shares				Exercise Price
Outstanding at beginning of period			12,779,282			$	2.65
Granted			5,492,792			$	7.82
Exercised			(5,284,250	)		$	0.89
Cancelled			(260,575	)		$	2.73
Outstanding at end of period			12,727,249			$	5.61
Exercisable at end of period			5,098,125			$	3.97