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EX-31.2 - EX-31.2 - MAGNUM HUNTER RESOURCES CORPa12-9541_1ex31d2.htm
EX-12.1 - EX-12.1 - MAGNUM HUNTER RESOURCES CORPa12-9541_1ex12d1.htm
EX-10.5 - EX-10.5 - MAGNUM HUNTER RESOURCES CORPa12-9541_1ex10d5.htm
EX-10.4 - EX-10.4 - MAGNUM HUNTER RESOURCES CORPa12-9541_1ex10d4.htm
EX-2.2.1 - EX-2.2.1 - MAGNUM HUNTER RESOURCES CORPa12-9541_1ex2d2d1.htm
EX-10.5.1 - EX-10.5.1 - MAGNUM HUNTER RESOURCES CORPa12-9541_1ex10d5d1.htm

Table of Contents

 

 

 

FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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

 

For the quarterly period ended March 31, 2012

 

-OR-

 

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

 

For the transition period from                to               

 

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

incorporation or organization)

 

(IRS Employer

Identification No.)

 

777 Post Oak Boulevard, Suite 650, Houston, Texas 77056

(Address of principal executive offices)

 

(832) 369-6986

(Issuer’s telephone number)

 

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 x  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 o  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 x

 

Accelerated filer o

 

 

 

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 x

 

As of April 30, 2012 there were 131,346,407 shares of the registrant’s common stock ($.01 par value) outstanding.

 

Subsequent to the filing of this Report, we will file an amended report on Form 10-Q/A that will include documents formatted in XBRL (Extensible Business Reporting Language).

 

 

 



Table of Contents

 

MAGNUM HUNTER RESOURCES CORPORATION

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED MARCH 31, 2012

 

TABLE OF CONTENTS

 

 

Page

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited):

1

 

 

Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

1

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011

2

 

 

Consolidated Statement of Other Comprehensive Income (Loss)

3

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2012

4

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

32

 

 

Part II. OTHER INFORMATION

34

 

 

Item 1. Legal Proceedings

34

 

 

Item 1A. Risk Factors

34

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

Item 6. Exhibits

38

 

 

SIGNATURES

40

 



Table of Contents

 

MAGNUM HUNTER RESOURCES CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except shares and per-share data)

 

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

31,499

 

$

14,851

 

Accounts receivable

 

52,461

 

48,083

 

Derivative assets

 

9,288

 

5,732

 

Prepaids and other current assets

 

7,896

 

6,254

 

Assets held for sale - current

 

 

2,749

 

Total current assets

 

101,144

 

77,669

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT (Net of Accumulated Depletion and Depreciation):

 

 

 

 

 

Oil and natural gas properties, successful efforts accounting

 

1,105,002

 

962,965

 

Gas gathering and other equipment

 

122,996

 

112,169

 

Total property and equipment, net

 

1,227,998

 

1,075,134

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Deferred financing costs, net of amortization of $1,520 and $958, respectively

 

10,669

 

10,642

 

Derivatives and other long term assets

 

9,845

 

1,913

 

Assets held for sale – long term

 

 

3,402

 

Total assets

 

$

1,349,656

 

$

1,168,760

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current portion of notes payable

 

$

5,159

 

$

4,565

 

Accounts payable

 

132,889

 

136,698

 

Accrued liabilities

 

6,397

 

5,635

 

Revenue payable

 

17,947

 

10,781

 

Derivatives and other current liabilities

 

8,937

 

7,149

 

Liabilities associated with assets held for sale - current

 

 

2,847

 

Total current liabilities

 

171,329

 

167,675

 

 

 

 

 

 

 

OTHER LIABILITIES:

 

 

 

 

 

Notes payable, less current portion

 

364,366

 

285,824

 

Asset retirement obligation

 

22,457

 

20,089

 

Deferred tax liability

 

94,987

 

95,299

 

Derivatives and other long term liabilities

 

13,958

 

8,954

 

Liabilities associated with assets held for sale – long term

 

 

267

 

Total liabilities

 

667,097

 

578,108

 

 

 

 

 

 

 

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 issued & outstanding as of March 31, 2012 and December 31, 2011, respectively, with liquidation preference of $25.00 per share

 

100,000

 

100,000

 

Series A Convertible Preferred Units of Eureka Hunter Holdings, LLC, cumulative distribution rate of 8.0% per annum, 3,000,000 and none issued & outstanding as of March 31, 2012 and December 31, 2011, respectively, with liquidation preference of $60,000,000

 

58,132

 

 

 

 

 

 

 

 

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, 2,288,309 and 1,437,558 issued & outstanding as of March 31, 2012 and December 31, 2011, respectively, with liquidation preference of $50.00 per share

 

114,416

 

71,878

 

Common stock, $0.01 par value; 250,000,000 shares authorized, 132,718,280 and 130,270,295 shares issued and 132,251,359 and 129,803,374 outstanding as of March 31, 2012 and December 31, 2011, respectively

 

1,322

 

1,298

 

Exchangeable common stock, par value $0.01 per share, 2,426,522 and 3,693,871 issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

 

24

 

37

 

Additional paid in capital

 

574,569

 

569,690

 

Accumulated deficit

 

(157,122

)

(140,070

)

Accumulated other comprehensive loss

 

(9,038

)

(12,463

)

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

 

522,257

 

488,456

 

Non-controlling interest

 

2,170

 

2,196

 

Total shareholders’ equity

 

524,427

 

490,652

 

Total liabilities and shareholders’ equity

 

$

1,349,656

 

$

1,168,760

 

 

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

 

1



Table of Contents

 

MAGNUM HUNTER RESOURCES CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except shares and per-share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

REVENUE:

 

 

 

 

 

Oil and gas sales

 

$

51,172

 

$

13,961

 

Field operations and other

 

6,024

 

576

 

Total revenue

 

57,196

 

14,537

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

Lease operating expenses

 

11,241

 

2,997

 

Severance taxes and marketing

 

3,723

 

995

 

Exploration

 

345

 

315

 

Field operations

 

2,838

 

774

 

Impairment of unproved oil and gas properties

 

8,671

 

 

Depreciation, depletion and accretion

 

26,728

 

5,468

 

General and administrative

 

15,199

 

6,783

 

Total expenses

 

68,745

 

17,332

 

 

 

 

 

 

 

OPERATING LOSS

 

(11,549

)

(2,795

)

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

Interest income

 

7

 

3

 

Interest expense

 

(5,384

)

(784

)

Loss on derivative contracts

 

(1,415

)

(3,342

)

Other income

 

368

 

 

Total other income and expense 

 

(6,424

)

(4,123

)

 

 

 

 

 

 

Loss from continuing operations before income taxes and non-controlling interest

 

(17,973

)

(6,918

)

 

 

 

 

 

 

Income tax benefit

 

810

 

 

Net income attributable to non-controlling interest

 

26

 

(32

)

 

 

 

 

 

 

Loss attributable to Magnum Hunter Resources Corporation from continuing operations

 

(17,137

)

(6,950

)

 

 

 

 

 

 

Income from discontinued operations

 

354

 

260

 

Gain on sale of discontinued operations

 

4,325

 

 

 

 

 

 

 

 

Net loss

 

(12,458

)

(6,690

)

 

 

 

 

 

 

Dividends on Preferred Stock

 

(4,594

)

(2,608

)

 

 

 

 

 

 

Net loss attributable to common shareholders

 

$

(17,052

)

$

(9,298

)

 

 

 

 

 

 

Weighted average number of common shares outstanding, basic and diluted

 

133,122,192

 

75,642,091

 

 

 

 

 

 

 

Loss from continuing operations, basic and diluted

 

$

(0.16

)

$

(0.12

)

 

 

 

 

 

 

Income from discontinued operations, basic and diluted

 

$

0.03

 

$

 

 

 

 

 

 

 

Net loss per common share, basic and diluted

 

$

(0.13

)

$

(0.12

)

 

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

 

2



Table of Contents

 

MAGNUM HUNTER RESOURCES CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(In thousands, except shares and per-share data)

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Net loss

 

$

(12,458

)

$

(6,690

)

Foreign currency translation

 

3,502

 

 

Unrealized loss on available for sale investments

 

(77

)

 

Total comprehensive loss

 

$

(9,033

)

$

(6,690

)

 

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

 

3


 


Table of Contents

 

MAGNUM HUNTER RESOURCES CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands)

 

 

 

Number

 

Number of Shares

 

Number of

 

 

 

 

 

 

 

Additional

 

 

 

Accumulated Other

 

 

 

Unearned

 

 

 

Total

 

 

 

of Shares

 

of Exchangeable

 

Shares of Series D

 

Common

 

Exchangeable

 

Series D

 

Paid in

 

Accumulated

 

Comprehensive

 

Treasury

 

Common shares

 

Noncontrolling

 

Shareholders’

 

 

 

of Common

 

Common Stock

 

Preferred Stock

 

Stock

 

Common Stock

 

Preferred Stock

 

Capital

 

Deficit

 

Income (Loss)

 

Stock

 

in KSOP

 

Interest

 

Equity

 

BALANCE, January 1, 2012

 

129,803

 

3,694

 

1,438

 

$

1,298

 

$

37

 

$

71,878

 

$

569,690

 

$

(140,070

)

$

(12,463

)

$

(1,310

)

$

(604

)

$

2,196

 

$

490,652

 

Restricted stock issued to employees and directors

 

44

 

 

 

 

 

 

40

 

 

 

 

 

 

40

 

Share based compensation

 

 

 

 

 

 

 

4,577

 

 

 

 

 

 

4,577

 

Issued shares of Series D Preferred Stock for cash

 

 

 

850

 

 

 

42,538

 

(2,796

)

 

 

 

 

 

39,742

 

Issued shares of Common Stock upon warrant exercise

 

9

 

 

 

 

 

 

22

 

 

 

 

 

 

22

 

Issued shares of common stock upon stock option exercise

 

831

 

 

 

8

 

 

 

1,137

 

 

 

 

 

 

1,145

 

Dividends Preferred Stock

 

 

 

 

 

 

 

 

(4,594

)

 

 

 

 

(4,594

)

Issued shares of common stock for acquisition of assets

 

297

 

 

 

3

 

 

 

1,899

 

 

 

 

 

 

1,902

 

Issued shared of common stock upon exchange of MHR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchangeco Corporation’s exchangeable shares

 

1,267

 

(1,267

)

 

13

 

(13

)

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

(12,458

)

 

 

 

(26

)

(12,484

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

3,502

 

 

 

 

3,502

 

Unrealized loss on available for sale securities

 

 

 

 

 

 

 

 

 

(77

)

 

 

 

(77

)

BALANCE, March 31, 2012

 

132,251

 

2,427

 

2,288

 

$

1,322

 

$

24

 

$

114,416

 

$

574,569

 

$

(157,122

)

$

(9,038

)

$

(1,310

)

$

(604

)

$

2,170

 

$

524,427

 

 

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

 

4


 


Table of Contents

 

MAGNUM HUNTER RESOURCES CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(12,458

)

$

(6,690

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Noncontrolling Interest

 

(26

)

32

 

Depletion, depreciation, and accretion

 

26,778

 

5,530

 

Asset impairment

 

8,671

 

 

Share based compensation

 

4,617

 

1,384

 

Cash paid for plugging wells

 

(99

)

 

Gain on sale of assets

 

(4,051

)

4

 

Unrealized loss on derivative contracts

 

2,902

 

3,350

 

Amortization of deferred financing costs included in interest expense

 

563

 

349

 

Deferred taxes

 

(810

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(3,647

)

(2,655

)

Inventory

 

(1,193

)

 

Prepaid expenses and other current assets

 

(519

)

(379

)

Accounts payable

 

(23,688

)

6,159

 

Revenue payable

 

7,166

 

1,684

 

Accrued liabilities

 

19,353

 

487

 

Net cash provided by operating activities

 

23,559

 

9,255

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Capital expenditures and advances

 

(180,760

)

(65,541

)

Change in restricted cash and deposits

 

(5

)

(17

)

Proceeds from sales of assets

 

783

 

(4

)

Net cash used in investing activities

 

(179,982

)

(65,562

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net proceeds from sale of preferred shares

 

39,742

 

47,282

 

Proceeds from sale of Series A Preferred units in Eureka Hunter Holdings

 

58,132

 

 

Proceeds from exercise of warrants and options

 

1,168

 

5,039

 

Preferred stock dividend paid

 

(4,447

)

(2,562

)

Principal repayments of debt

 

(52,925

)

(26,251

)

Proceeds from borrowings on debt

 

131,977

 

36,044

 

Payment of deferred financing costs

 

(595

)

 

Change in other long-term liabilities

 

52

 

37

 

Net cash provided by financing activities

 

173,104

 

59,589

 

Effect of exchange rate changes on cash

 

(33

)

 

Net increase in cash and cash equivalents

 

16,648

 

3,282

 

Cash and cash equivalents, beginning of period

 

14,851

 

554

 

Cash and cash equivalents, end of period

 

$

31,499

 

$

3,836

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid for interest

 

$

5,619

 

$

311

 

Non-cash transactions

 

 

 

 

 

Common stock issued for acquisitions

 

$

1,902

 

$

7,542

 

Accrued capital expenditures

 

$

25,505

 

$

7,723

 

Proceeds from sale of assets

 

$

7,706

 

$

 

 

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

 

5



Table of Contents

 

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, 2011.  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 that would substantially duplicate the disclosure contained in the audited consolidated financial statements as reported in the 2011 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 stockholders 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 March 31, 2012 was 24,854,878.  There were 12,106,637 potentially dilutive securities outstanding at March 31, 2011.  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 during those periods.

 

The following table summarizes the types of potentially dilutive securities outstanding as of March 31, 2012 and 2011 (in thousands):

 

 

 

March 31,

 

 

 

2012

 

2011

 

Warrants

 

13,517

 

149

 

Restricted Shares granted, not yet issued

 

6

 

61

 

Common Stock Options

 

11,332

 

11,896

 

 

NOTE 2 — LIQUIDITY

 

At March 31, 2012, we had cash and cash equivalents of $31.5 million, of which $786 thousand of the cash was held by Eureka Hunter Holdings, LLC (“Eureka Holdings”) and was only available for use by Eureka Holdings, and a working capital deficit of $70.2 million. For the three months ended March 31, 2012, we had net loss attributable to common shareholders of $17.1 million and an operating loss from continuing operations of $17.1 million, including an $8.7 million impairment of long-lived assets.

 

We depend on our credit agreements, as described in Note 9, to fund a portion of our operating and capital needs. Under our senior revolving credit agreement, our borrowing base at March 31, 2012, based upon our proved reserves, was $235.0 million, and our remaining borrowing capacity was $30 million on March 31, 2012. On May 2, 2012, pursuant to the sixth amendment to the credit facility, our borrowing base under our senior revolving credit agreement was increased from $235.0 million to $275.0 million, making our remaining borrowing capacity $60.0 million.  See Note 16 Subsequent Events, for more information. Pursuant to the terms of our senior revolving credit agreement in the fall of 2012, our borrowing base is to be redetermined based upon our June 30, 2012 reserve report.

 

At March 31, 2012, we were not in compliance with the covenant contained in our senior revolving and term loan credit agreements that requires we maintain certain ratios of current assets to current liabilities as described in Note 9. We have received a waiver of the covenant at March 31, 2012, pursuant to the sixth amendment, and through the seventh amendment, the bank group amended the covenant requirement as of June 30, 2012.  Management believes it is probable we will be in compliance with the covenant based upon the amended criteria at June 30, 2012, and upon the completion of the Baytex acquisition. We must also be in compliance with the covenant for the quarterly measurement dates following June 30, 2012.  Management believes it is probable we will be in compliance with these covenants at least through March 31, 2013.

 

At March 31, 2012, Eureka Hunter Pipeline, LLC was not in compliance with the covenants contained in the Eureka Hunter Credit Facilities that require Eureka Holdings to maintain certain ratios of debt to EBITDA and interest coverage. We have received a waiver of the covenants at March 31, 2012.  On April 2, 2012, Eureka Holdings closed on the acquisition of certain assets of TransTex.  The

 

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cash flows associated with that acquisition will be included in the covenant determinations going forward based on an amendment to the Eureka Hunter Credit Facilities. Since the TransTex acquisition was closed after the end of the first quarter, those figures were not included in the covenant calculation but will be on a going forward basis.  Management believes it is probable Eureka Holdings will be in compliance with the covenant based upon the amended facility. We must also be in compliance with the covenant for the quarterly measurement dates following June 30, 2012.  Management believes it is probable we will be in compliance with these covenants at least through March 31, 2013.

 

We believe the combination of (i) cash on hand, (ii) cash flow generated from the expected success of prior capital development projects, (iii) debt available under our credit agreements and (iv) our ability to access the capital markets, provide sufficient means to conduct our operations, meet our contractual obligations, including our debt covenant requirements and undertake our capital expenditure program for the twelve months ending March 31, 2013.

 

NOTE 3 — 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, Triad Hunter, LLC, Alpha Hunter Drilling, LLC, Eureka Hunter Pipeline, LLC, Eureka Hunter Land,  LLC, Hunter Real Estate, LLC, NGAS Hunter, LLC, Magnum Hunter 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, NGAS Gathering, LLC, Sentra Corporation, Energy Hunter Securities, Inc and MHR Acquisition Bakken Hunter, LLC and MHR Services, LLC. We also have consolidated our 87.5% controlling interest in PRC Williston, LLC, or PRC, and our 83.4% controlling interest in Eureka Hunter Holdings, LLC, with noncontrolling interests recorded for the outside interest in those majority owned subsidiaries. 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 Hunter Disposal, LLC, we reclassified the gain on sale and all prior operating income and related interest expense for this property 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 (the “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 March 31, 2012, Energy Hunter Securities, Inc. had net capital of $107,000 and aggregate indebtedness of $43,000.

 

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 OperationsRevenue Recognition, which requires covered entities to record regulatory assets and liabilities resulting from actions of regulators. We did not have any gas transmission, compression and processing revenue which included gas utility sales from Sentra Corporation’s regulated operations during the three months ended March 31, 2012 and 2011.

 

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Other Comprehensive Income

 

The functional currency of the countries in which we operate is the U.S. dollar in the United States and the Canadian Dollar in Canada.  For purposes of consolidation, we translate the assets and liabilities of our Canadian Subsidiary into U.S. Dollars at current exchange rates while revenues and expenses are translated at the average rates in effect for the period.  The related translation gains and losses are included in accumulated other comprehensive income within stockholders’ equity on our consolidated balance sheets. During the three months ended March 31, 2012 and 2011, we recognized a translation gain of $3.5 million and $0, net of the related income taxes, respectively.

 

Unproved Oil and Gas Properties

 

Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance. We recorded $8.7 million in unproved property impairment during the three months ended March 31, 2012, comprising $4.9 million and $3.8 million in our Appalachian and Williston Basin regions, respectively, due to expiring acreage that we chose not to develop.  We recorded none for the three months ended March 31, 2011.

 

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 three months ended March 31, 2012 and December 31, 2011:

 

Level 1 Classification:

 

Available for Sale Securities

 

At March 31, 2012, and December 31, 2011, the Company held common stock of companies publicly traded on the TSX Venture Exchange and the NYSE Amex 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 March 31, 2012 and December 31, 2011, 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 March 31, 2012 and December 31, 2011, the Company’s derivative contracts were with major financial institutions, most of which are senior lenders to the Company, 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.

 

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The following tables present recurring financial assets and liabilities which are carried at fair value as of March 31, 2012 and December 31, 2011:

 

 

 

Fair Value Measurements on a Recurring Basis

 

 

 

March 31, 2012
(In thousands)

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

421

 

$

 

$

 

Commodity derivatives

 

$

 

$

10,746

 

$

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

421

 

$

10,746

 

$

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

18,635

 

$

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

$

18,635

 

$

 

 

 

 

Fair Value Measurements on a Recurring Basis

 

 

 

December 31, 2011
(In thousands)

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

497

 

$

 

$

 

Commodity derivatives

 

$

 

$

6,924

 

$

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

497

 

$

6,924

 

$

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

11,912

 

$

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

$

11,912

 

$

 

 

NOTE 5 — ACQUISITIONS

 

Eagle Operating

 

On March 30, 2012, the Company, through its wholly owned subsidiary, Williston Hunter ND, LLC, a Delaware limited liability company (“Williston Hunter”), closed on the purchase of certain assets of Eagle Operating, Inc. (“Eagle”), effective April 1, 2011.  Total consideration was $52.9 million consisting of $51.0 million in cash and 296,859 shares of Magnum Hunter restricted common stock valued at $1.9 million based on a price of $6.41 per share.

 

The fair value of the assets acquired approximated the $52.9 million of consideration paid.

 

The following table summarizes the purchase price and the fair values of the net assets acquired from Eagle at the date of acquisition as determined as of March 31, 2012 (in thousands):

 

Fair value of total purchase price:

 

 

 

296,859 shares of common stock issued on March 30, 2012 at $6.41 per share

 

$

1,903

 

Cash

 

50,973

 

Total

 

$

52,876

 

 

 

 

 

Amounts recognized for assets acquired and liabilities assumed:

 

 

 

Oil and gas properties

 

$

54,832

 

Asset retirement obligation

 

(1,956

)

Total

 

$

52,876

 

 

Utica Shale Asset Acquisition

 

On February 17, 2012, the Company closed on the acquisition of leasehold mineral interests located predominately in Noble County, Ohio for a total purchase price of $24.8 million.  The Utica Acreage consists of approximately 15,558 gross (12,186 net) acres.

 

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The fair value of the assets acquired approximated the $24.8 million of consideration paid.

 

The following table summarizes the purchase price and the fair values of the net assets acquired at the date of acquisition as determined as of March 31, 2012 (in thousands):

 

Fair value of total purchase price:

 

 

 

Cash

 

$

24,826

 

Total

 

$

24,826

 

 

 

 

 

Amounts recognized for assets acquired and liabilities assumed:

 

 

 

Oil and gas properties

 

$

24,826

 

Total

 

$

24,826

 

 

The following unaudited summary, prepared on a pro forma basis, presents the results of operations for the three month periods ended March 31, 2012, and 2011, as if the acquisitions of Eagle Operating assets, the Utica Shale assets, and the Eureka Hunter Holdings, LLC 8% Series A Preferred Units transaction (See Note 11 Shareholders’ Equity) had occurred as of the beginning of 2011. The pro forma information includes the effects of adjustments for operating income and expense, 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 acquisition had been completed as of the beginning of each period presented, nor are they necessarily indicative of future consolidated results.

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands, except per share data)

 

Total operating revenue

 

$

59,506

 

$

16,590

 

Total operating costs and expenses

 

70,817

 

19,600

 

Operating loss

 

(11,311

)

(3,010

)

Interest expense and other

 

(5,704

)

(4,372

)

Net loss from continuing operations

 

(17,015

)

(7,382

)

Income from discontinued operations

 

4,679

 

260

 

Dividends on preferred stock

 

(5,609

)

(3,771

)

Net loss attributable to common stockholders

 

$

(17,945

)

$

(10,893

)

Loss per common share, basic and diluted

 

$

(0.13

)

$

(0.14

)

Income per common share, discontinued operations

 

$

0.03

 

$

 

 

NOTE 6 — DISCONTINUED OPERATIONS

 

On February 17, 2012, the Company, through its wholly owned subsidiary, Triad Hunter, LLC, sold 100% of the equity ownership interest of Hunter Disposal, LLC, for total consideration of $9.9 million comprising cash of $2.2 million, 1,846,722 common shares of GreenHunter Energy, Inc, valued at $3.3 million based on a closing price of $1.79 per share, 88,000 shares of GreenHunter Energy, Inc. 10% Series C Preferred Stock, valued at $2.2 million based on a stated value of $25 per share, and a promissory note of $2.2 million which is convertible, at the option of the Company, into 880,000 shares of GreenHunter Energy common stock based on the conversion price of $2.50 per share.  The cash proceeds from the sale were adjusted downward to $783,000 for changes in working capital to reflect the effective date of the sale of December 31, 2011. GreenHunter Energy is a related party as described in Note 12.  The operating results of Hunter Disposal, LLC, for the three months ended March 31, 2012 and March 31, 2011, have been reclassified as discontinued operations in the consolidated statements of operations as detailed in the table below:

 

 

 

(in thousands)

 

 

 

2012

 

2011

 

Field operations revenue

 

$

2,400

 

$

783

 

Operating expenses

 

(2,047

)

(518

)

Other income (expense)

 

1

 

(5

)

Gain on sale of discontinued operations

 

4,325

 

 

Income from discontinued operations

 

$

4,679

 

$

260

 

 

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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 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 ASC 815.

 

As of March 31, 2012, we had the following derivative instruments in place:

 

Natural Gas

 

Period

 

MMBTU/day

 

Price per MMBTU

 

Collars

 

Apr 2012 - Dec 2012

 

11,910

 

$4.58 - $6.42

 

 

 

Jan 2013 - Dec 2013

 

12,500

 

$4.50 - $5.96

 

 

 

 

 

 

 

 

 

Swaps

 

Apr 2012 - Dec 2012

 

16,100

 

$3.53

 

 

 

Jan 2013 - Dec 2013

 

16,000

 

$3.51

 

 

 

 

 

 

 

 

 

Ceilings sold (call)

 

Jan 2014 - Dec 2014

 

16,000

 

$5.91

 

 

Crude Oil

 

Period

 

Bbls/day

 

Price per Bbl

 

Collars

 

Apr 2012 - Dec 2012

 

3,000

 

$81.69 - $98.92

 

 

 

Jan 2013 - Dec 2013

 

2,763

 

$81.38 - $97.61

 

 

 

Jan 2014 - Dec 2014

 

663

 

$85.00 - $91.25

 

 

 

Jan 2015 - Dec 2015

 

259

 

$85.00 - $91.25

 

 

 

 

 

 

 

 

 

Floors sold (put)

 

Apr 2012 - Dec 2012

 

1,450

 

$79.14

 

 

 

Jan 2013 - Dec 2013

 

763

 

$65.00

 

 

 

Jan 2014 - Dec 2014

 

663

 

$65.00

 

 

 

 

 

 

 

 

 

Floors purchased (put)

 

Apr 2012 - Dec 2012

 

1,553

 

$93.52

 

 

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

 

 

 

 

 

December 31,

 

 

 

December 31,

 

instruments

 

Balance Sheet Classification

 

March 31, 2012

 

2011

 

March 31, 2012

 

2011

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets - Derivatives

 

$

9,288

 

$

5,732

 

$

 

$

 

 

 

Derivatives and Other Long Term Assets

 

1,458

 

1,192

 

 

 

 

 

Derivative and other Current Liabilities

 

 

 

(7,571

)

(5,800

)

 

 

Derivative and other Long Term Liabilities

 

 

 

(11,064

)

(6,112

)

Total Commodity

 

 

 

$

10,746

 

$

6,924

 

$

(18,635

)

$

(11,912

)

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

3/31/2012

 

3/31/2011

 

 

 

(in thousands)

 

(in thousands)

 

Realized gain

 

1,487

 

8

 

Unrealized (loss)

 

(2,902

)

(3,350

)

Net loss

 

$

(1,415

)

$

(3,342

)

 

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

 

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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 three month period ended March 31, 2012:

 

 

 

Three Months Ended

 

 

 

March 31, 2012

 

 

 

(in thousands)

 

Asset retirement obligation at beginning of period

 

$

20,584

 

Assumed in Eagle Operating acquisition

 

1,956

 

Liabilities incurred

 

18

 

Liabilities settled

 

(54

)

Accretion expense

 

370

 

Revisions in estimated liabilities

 

57

 

Effect of foreign currency translation

 

24

 

Asset retirement obligation at end of period

 

22,955

 

Less: current portion

 

(498

)

Asset retirement obligation at end of period

 

$

22,457

 

 

NOTE 9 — NOTES PAYABLE

 

Notes payable at March 31, 2012 consisted of the following:

 

 

 

March 31, 2012

 

 

 

(in thousands)

 

Various equipment and real estate notes payable with maturity dates April 2012 - August 2021, interest rates of 0.00% - 6.34%

 

$

18,525

 

Eureka Hunter Pipeline, LLC second lien term loan due August 16, 2018, interest rate of 12.5%

 

46,000

 

Second lien term loan due October 13, 2016, interest rate of 8% at March 31, 2012

 

100,000

 

Senior revolving credit facility due April 13, 2016, interest rate of 3.5% at March 31, 2012

 

205,000

 

 

 

$

369,525

 

Less: current portion

 

(5,159

)

Total Long-Term Debt

 

$

364,366

 

 

The following table presents the approximate annual maturities of debt:

 

 

 

(in thousands)

 

2012

 

$

4,252

 

2013

 

3,704

 

2014

 

2,465

 

2015

 

4,201

 

Thereafter

 

354,903

 

Total

 

$

369,525

 

 

On February 14, 2012, the Company entered into the Fifth Amendment to the Second Amended and Restated Credit Agreement.  The Fifth Amendment increased the borrowing base on the Senior Revolving Credit Facility from $200 million to $235 million.

 

On February 14, 2012, the Company entered into the Second Amendment to the Second Lien Term Loan Credit Agreement.  The Second Amendment amends certain provisions of the Second Lien Term Loan Credit Agreement to correspond to the amendments made pursuant to the Fifth Amendment to the Second Amended and Restated Credit Agreement.

 

On May 2, 2012, the Company entered into the Sixth Amendment to the Second Amended and Restated Credit Agreement, as amended.  Pursuant to the sixth amendment to the credit facility, our borrowing base under our senior revolving credit agreement was increased from $235.0 million to $275.0 million.  The Seventh Amendment to the Second Amended and Restated Credit Agreement reduced the current ratio covenant to 0.85 for June 30, 2012.   See Note 16 — Subsequent Events for additional information.

 

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At March 31, 2012, we were not in compliance with the covenant contained in our senior revolving and term loan credit agreements that requires we maintain certain ratios of current assets to current liabilities as described above. We have received a waiver of the covenant at March 31, 2012, pursuant to the sixth amendment, and through the seventh amendment, the bank group amended the covenant requirement as of June 30, 2012.  Management believes it is probable we will be in compliance with the covenant based upon the amended criteria at June 30, 2012. We must also be in compliance with the covenant for the quarterly measurement dates following June 30, 2012.  Management believes it is probable we will be in compliance with these covenants at least through March 31, 2013.

 

At March 31, 2012, Eureka Hunter Pipeline, LLC was not in compliance with the covenants contained in the Eureka Hunter Credit Facilities that require Eureka Hunter to maintain certain ratios of debt to EBITDA and interest coverage. We have received a waiver of the covenants at March 31, 2012.  On April 2, 2012, Eureka Hunter closed on the acquisition of certain assets of TransTex.  The cash flows associated with that acquisition will be included in the covenant determinations going forward based on an amendment to the Eureka Hunter Credit Facilities. Management believes it is probable Eureka Hunter will be in compliance with the covenant based upon the amended facility. We must also be in compliance with the covenant for the quarterly measurement dates following June 30, 2012.  Management believes it is probable we will be in compliance with these covenants at least through March 31, 2013.

 

NOTE 10 — SHARE BASED COMPENSATION

 

Under the amended and restated 2006 Stock Incentive Plan, our common stock, common stock options, and stock appreciation rights may be granted to employees and other persons who contribute to the success of Magnum Hunter. Currently, 20,000,000 shares of our common stock are authorized to be issued under the plan, and 3,147,268 shares have been issued as of March 31, 2012.

 

We recognized share-based compensation expense of $4.6 million and $1.4 million for both the three months ended March 31, 2012 and 2011, respectively.

 

A summary of common stock option and stock appreciation rights activity for the three months ended March 31, 2012 is presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Exercise Price

 

Outstanding at beginning of period

 

12,566,199

 

$

5.64

 

Exercised

 

(831,200

)

$

1.38

 

Cancelled

 

(403,486

)

$

7.79

 

Outstanding at end of period

 

11,331,513

 

$

5.88

 

Exercisable at end of period

 

7,210,939

 

$

5.75

 

 

A summary of the Company’s non-vested common stock options and stock appreciation rights as of March 31, 2012 is presented below.

 

Non-vested Common Stock Options

 

Shares

 

Non-vested at beginning of period

 

5,650,782

 

Vested

 

(1,149,972

)

Cancelled

 

(380,236

)

Non-vested at end of period

 

4,120,574

 

 

Total unrecognized compensation cost related to the non-vested common stock options was $7.1 million and $9.7 million as of March 31, 2012 and 2011, respectively. The cost at March 31, 2012, is expected to be recognized over a weighted-average period of 1.47 years. At March 31, 2012, the aggregate intrinsic value for common stock options was $9.0 million; and the weighted average remaining contract life was 5.89 years.

 

Total unrecognized compensation cost related to the above non-vested, restricted shares amounted to $663 thousand and $1.1 million as of March 31, 2012 and 2011, respectively. The cost at March 31, 2012, is expected to be recognized over a weighted-average period of 1.66 years.

 

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NOTE 11 SHAREHOLDERS’ EQUITY

 

Common Stock

 

During the three months ended March 31, 2012, the Company issued 43,858 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.

 

On March 30, 2012, the Company issued 296,859 restricted shares of the Company’s common stock valued at approximately $1.9 million based on a price of $6.41 per share as partial consideration for the acquisition of the assets of Eagle Operating.  See note 5 — Acquisitions for additional information.

 

During the three months ended March 31, 2012, the Company issued 8,719 shares of the Company’s common stock upon the exercise of warrants for total proceeds of approximately $22 thousand.

 

During the three months ended March 31, 2012, the Company issued 831,200 shares of the Company’s common stock upon the exercise of fully vested common stock options for proceeds of approximately $1.1 million.

 

During the three months ended March 31, 2012, the Company issued 1,267,349 shares of the Company’s common stock upon exchange of 1,267,349 shares of MHR Exchangeco Corporation’s exchangeable shares.

 

Series D Cumulative Preferred Stock

 

During the three months ended March 31, 2012, the Company sold 850,751 shares of our 8.0% Series D Cumulative Perpetual Preferred Stock with a liquidation preference of $50.00 per share under the At the Market (“ATM”) sales agreement for net proceeds of $39.7 million.  The Series D Preferred Stock cannot be converted into common stock of the Company but may be redeemed by the Company, at the Company’s option, on or after March 14, 2014 for par value or $50.00 per share or in certain circumstances, prior to such date as a result of a change in control.

 

Eureka Hunter Holdings, LLC, 8% Series A Preferred Units

 

On March 21, 2012, the Company sold 3,000,000 Preferred Units of Eureka Hunter Holdings, LLC (“Eureka Holdings”), a majority-owned subsidiary of the Company, to Ridgeline Midstream Holdings, LLC (“Ridgeline”), an affiliate of ArcLight Capital Partners, LLC.  The preferred units sold represent 16.6% of the ownership of Eureka Holdings on a basis as converted to Series A Common Units of Eureka Holdings.  The preferred units sold were valued at $60.0 million.  Eureka Holdings will pay cumulative distributions quarterly on the Series A Preferred Units at a fixed rate of 8% per annum of the initial liquidation preference.  The distribution rate is increased to 10% if any distribution is not paid when due.  The Board of Directors of Eureka Hunter Holdings may elect to pay up to 75% of the dividends owed during March 21, 2012 through March 21, 2013 in the form of “paid-in-kind” units and up to 50% during June 30, 2013 through March 31, 2014.  The Series A Preferred Units can be converted into Series A Common Units of Eureka Holdings upon demand by Ridgeline at any time or by Eureka Holdings upon the consummation of an initial public offering, provided that Eureka Holdings converts no less that 50% of the Preferred Units into Common Units at that time.  The Company can redeem all outstanding Series A Preferred units at their liquidation preference any time after March 21, 2017.  Holders of the Series A Preferred units can force redemption of all outstanding Series A Preferred units any time after March 21, 2020, at a redemption rate of the higher of the liquidation value and an internal investment rate of return calculation.  The Eureka Hunter Holdings, LLC 8% Series A Preferred units are recorded as temporary equity because a forced redemption by the holders of the preferred units is outside the Company’s control.

 

NOTE 12 — RELATED PARTY TRANSACTIONS

 

We rented an airplane for business use at various times from Pilatus Hunter, LLC, an entity 100% owned by Mr. Evans, our Chairman and CEO. Airplane rental expenses totaled $34,000 and $123,000 for the three months ended March 31, 2012 and 2011, respectively.

 

During the three months ended March 31, 2011, we obtained accounting services and use of office space from GreenHunter Energy, Inc., an entity for which Mr. Evans is an officer and major shareholder and for which Mr. Ormand is also a director.  This agreement has terminated and all accounting services are now controlled by Magnum Hunter personnel.  Professional services expenses totaled $0 and $18,000 for the three months ended March 31, 2012 and 2011, respectively.

 

During the three months ended March 31, 2012 and 2011, the Company paid rent of $14,000 and $9,000, respectively, pertaining to a lease for a corporate apartment from an executive of the Company which is being used by other Company employees which terminates in May of 2012 and the company will not renew it.

 

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Table of Contents

 

During the three months ended March 31, 2012, Eagle Ford Hunter, Triad Hunter, and Hunter Disposal, LLC, wholly owned subsidiaries of the Company, rented storage tanks for disposal water and equipment from GreenHunter Energy, Inc.  Rental costs totaled $424,000 and $0 for the three months ended March 31, 2012 and 2011, respectively.  As of March 31, 2012, our net accounts payable to GreenHunter Energy, Inc. was $499,000 this lease.

 

On February 17, 2012, the Company sold its wholly-owned subsidiary, Hunter Disposal, LLC, to GreenHunter Water, LLC, a wholly-owned subsidiary of GreenHunter Energy, Inc.  The terms and conditions of the equity purchase agreement between the parties were approved by the audit committee or an independent special committee for each party.  Total consideration for the sale was approximately $9.9 million comprising $2.2 million in cash, 1,846,722 shares of GreenHunter restricted common stock with a fair value of $3.3 million based on a closing price of $1.79 per share, 88,000 shares of GreenHunter Energy, Inc. 10% Series C cumulative preferred stock with a stated value of $2.2 million, and a $2.2 million convertible promissory note due to the Company.  In connection with the sale, Triad Hunter, LLC, entered into agreements with Hunter Disposal, LLC and GreenHunter Water, LLC for wastewater hauling and disposal capacity in Kentucky, Ohio, and West Virginia and a five-year tank rental agreement with GreenHunter Water, LLC.  See Note 6 — Discontinued Operations for additional information.

 

Mr. Evans, our Chairman and Chief Executive Officer, is a 4.0% limited partner TransTex Gas Services, LP, which limited partnership received consideration of 585,000 Series A common units of Eureka Holdings, LLC, and cash of $46.8 million upon the Company’s acquisition of certain of its assets.  In addition, Eureka Hunter and TransTex agreed to provide the limited partners of TransTex the opportunity to purchase additional Class A common units in lieu of a portion of the cash distribution they would otherwise receive. Certain limited partners purchased such units, including Mr. Evans, who purchased 27,641 Class A common units of Eureka Holdings, LLC, for $553,000 at the same purchase price offered to all TransTex investors.  See Note 16 Subsequent Events, for more information.

 

NOTE 13 — COMMITMENTS AND CONTINGENCIES

 

We had no material changes to our commitments and contingencies for the three month period ended March 31, 2012.

 

NOTE 14 — SEGMENT REPORTING

 

The Oilfield Services, Midstream, and Upstream functions best define the operating segments of Company that are reported separately. The factors used to identify these reportable segments are based on the nature of the operations that are undertaken by each segment. The Upstream segment is organized and operates to explore for and produce crude oil and natural gas. The Company has significant operations both in the United States and in Canada in the Upstream segment. The Oilfield Services segment is organized and operates to sell services to third party producers of crude oil and natural gas as well as to affiliate subsidiaries of the Company. The Midstream segment operates a network of pipelines that gathers natural gas. These segments are broadly understood across the petroleum and petrochemical industries.

 

These functions have been defined as the operating segments of the Company because they are the segments (1) that engage in business activities from which revenues are earned and expenses are incurred; (2) whose operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and (3) for which discrete financial information is available.

 

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Table of Contents

 

The following tables set forth operating activities by segment for the three months ended March 31, 2012 and 2011, respectively.

 

 

 

For the Three Months Ended March 31, 2012

 

 

 

(in thousands)

 

 

 

Corporate

 

 

 

Canadian

 

 

 

Oilfield

 

Intersegment

 

 

 

 

 

Unallocated

 

U.S. Upstream

 

Upstream

 

Midstream

 

Services

 

Eliminations

 

Total

 

Oil and gas Sales

 

$

 

$

42,119

 

$

9,053

 

$

 

$

 

$

 

$

51,172

 

Field operations and other

 

 

1,478

 

 

1,164

 

4,593

 

(1,211

)

6,024

 

Total revenue

 

 

43,597

 

9,053

 

1,164

 

4,593

 

(1,211

)

57,196

 

Lease operating expenses

 

 

10,774

 

1,330

 

 

 

(863

)

11,241

 

Severance taxes and marketing

 

 

3,085

 

638

 

 

 

 

3,723

 

Exploration

 

 

343

 

2

 

 

 

 

345

 

Field operations expense

 

 

718

 

 

120

 

2,348

 

(348

)

2,838

 

Impairment of oil & gas properties

 

 

8,671

 

 

 

 

 

8,671

 

Depreciation, depletion, and accretion

 

 

21,242

 

4,819

 

468

 

199

 

 

26,728

 

General and administrative

 

10,823

 

3,320

 

693

 

312

 

51

 

 

15,199

 

Total expenses

 

10,823

 

48,153

 

7,482

 

900

 

2,598

 

(1,211

)

68,745

 

Interest income

 

 

1

 

769

 

 

 

(763

)

7

 

Interest expense

 

(3,993

)

(788

)

(1

)

(1,282

)

(83

)

763

 

(5,384

)

Gain (loss) on derivative contracts

 

(1,415

)

 

 

 

 

 

(1,415

)

Other income and (expense)

 

 

369

 

(1

)

 

 

 

368

 

Total other income and expense

 

(5,408

)

(418

)

767

 

(1,282

)

(83

)

 

(6,424

)

Income (loss) from continuing operations before non-controlling interest

 

(16,231

)

(4,974

)

2,338

 

(1,018

)

1,912

 

 

(17,973

)

Income tax expense (benefit)

 

 

(1,392

)

582

 

 

 

 

(810

)

Net income attributable to non-controlling interest

 

 

26

 

 

 

 

 

26

 

Income (loss) from continuing operations

 

(16,231

)

(3,556

)

1,756

 

(1,018

)

1,912

 

 

(17,137

)

Income from discontinued operations

 

 

 

 

 

354

 

 

354

 

Gain on sale of discontinued operations

 

 

4,325

 

 

 

 

 

 

4,325

 

Net loss

 

$

(16,231

)

$

769

 

$

1,756

 

$

(1,018

)

$

2,266

 

$

 

$

(12,458

)

 

 

 

For the Three Months Ended March 31, 2011

 

 

 

(in thousands)

 

 

 

Corporate

 

 

 

Canadian

 

 

 

Oilfield

 

Intersegment

 

 

 

 

 

Unallocated

 

U.S. Upstream

 

Upstream

 

Midstream

 

Services

 

Eliminations

 

Total

 

Oil and gas Sales

 

$

 

$

13,961

 

$

 

$

 

$

 

$

 

$

13,961

 

Field operations and other

 

 

283

 

 

301

 

944

 

(952

)

576

 

Total revenue

 

 

14,244

 

 

301

 

944

 

(952

)

14,537

 

Lease operating expenses

 

 

3,154

 

 

 

 

(157

)

2,997

 

Severance taxes and marketing

 

 

995

 

 

 

 

 

995

 

Exploration

 

 

315

 

 

 

 

 

315

 

Field operations expense

 

 

369

 

 

101

 

1,099

 

(795

)

774

 

Depreciation, depletion, and accretion

 

 

4,928

 

 

436

 

104

 

 

5,468

 

General and administrative

 

6,076

 

480

 

 

107

 

120

 

 

6,783

 

Total expenses

 

6,076

 

10,241

 

 

644

 

1,323

 

(952

)

17,332

 

Interest income

 

3

 

 

 

 

 

 

3

 

Interest expense

 

(744

)

(5

)

 

 

(35

)

 

(784

)

Gain (loss) on derivative contracts

 

(3,342

)

 

 

 

 

 

(3,342

)

Total other income and expense

 

(4,083

)

(5

)

 

 

(35

)

 

(4,123

)

Income (loss) from continuing operations before non-controlling interest

 

(10,159

)

3,998

 

 

(343

)

(414

)

 

(6,918

)

Net income attributable to non-controlling interest

 

 

(32

)

 

 

 

 

(32

)

Net income (loss) from continuing operations

 

(10,159

)

3,966

 

 

(343

)

(414

)

 

(6,950

)

Income from discontinued operations

 

 

 

 

 

260

 

 

260

 

Net income (loss)

 

$

(10,159

)

$

3,966

 

$

 

$

(343

)

$

(154

)

$

 

$

(6,690

)

 

16



Table of Contents

 

NOTE 15 CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS

 

The Company and certain of its wholly-owned subsidiaries, Eagle Ford Hunter, Inc., Triad Hunter, LLC, NGAS Hunter, LLC, Williston Hunter ND, LLC, Bakken Hunter, LLC and Williston Hunter, Inc. (collectively, “Guarantor Subsidiaries”), may fully and unconditionally guarantee the obligations of the Company under any debt securities that it may issue pursuant to a universal shelf registration statement, on a joint and several basis, on Form S-3.  Condensed consolidating financial information for Magnum Hunter Resources Corporation, the Guarantor Subsidiaries and the other subsidiaries of the Company (the “Non Guarantor Subsidiaries”) as of March 31, 2012 and December 31, 2011, and for the three months ended March 31, 2012 and 2011, was as follows:

 

Magnum Hunter Resources Corporation and Subsidiaries Condensed Consolidating Balance Sheets

(in thousands)

 

 

 

As of March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Magnum Hunter

 

 

 

Magnum Hunter

 

 

 

 

 

 

 

Resources

 

 

 

Resources

 

Guarantor

 

Non Guarantor

 

 

 

Corporation

 

 

 

Corporation

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

53,464

 

$

25,951

 

$

21,729

 

$

 

$

101,144

 

Intercompany accounts receivable

 

737,401

 

 

 

(737,401

)

 

Property and equipment (using successful efforts accounting)

 

13,016

 

576,585

 

638,397

 

 

1,227,998

 

Investment in subsidiaries

 

192,577

 

 

 

(192,577

)

 

Other assets

 

9,187

 

8,078

 

3,249

 

 

20,514

 

Total Assets

 

$

1,005,645

 

$

610,614

 

$

663,375

 

$

(929,978

)

$

1,349,656

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

37,288

 

$

90,132

 

$

43,909

 

$

 

$

171,329

 

Intercompany accounts payable

 

 

304,742

 

432,659

 

(737,401

)

 

Long-term liabilities

 

321,187

 

25,980

 

148,601

 

 

495,768

 

Redeemable preferred stock

 

214,416

 

 

58,132

 

 

272,548

 

Shareholders’ equity