Filed by Magnum Hunter Resources, Inc.
pursuant to Rule 425 under the Securities
Act of 1933 and deemed filed pursuant to
Rule 14a-12 of the Securities Act of 1934
Magnum Hunter Resources, Inc. File No.: 1-12508
Subject Company: Magnum Hunter Resources, Inc.
THE FOLLOWING IS A TRANSCRIPT OF THE CONFERENCE CALL
HELD BY MAGNUM HUNTER RESOURCES, INC. AND PRIZE ENERGY CORP.
ON DECEMBER 18, 2001.
MAGNUM HUNTER RESOURCES INC.
Host: Gary Evans
December 18, 2001/2:00 p.m. CST
Moderator
Ladies and gentlemen,
thank you for standing by. Welcome to the Magnum Hunter
and Price Energy Merger teleconference. At this time all participants are in a
listen only mode. Later we will conduct a question and answer session, with
instructions given at that time. As a reminder, this teleconference is being
recorded.
I would now like to turn the conference over to the Chairman, President and Chief Executive Officer, Mr.
Gary Evans. Please go ahead, sir.
G. Evans
Thank you, operator and thank all of you for dialing in today.
We
have an exciting announcement that we made early this morning about a business
combination between Price Energy and Magnum Hunter Resources. The two companies
combined will have a combined enterprise value of about $1.2 billion, and before
I go into the details of the transaction, let me first provide to you the
forward-looking disclosure statement.
The
things that we’ll be talking about today and what was in the release this
morning, contain certain forward-looking statements that are based on
assumptions that in the future may prove not to have been accurate. Those
statements in Magnum Hunter Resources' as well as Price Energy’s
business and prospects are subject to a number of risks, including volatility of
oil and gas prices, the need to develop and replace our reserves, the
substantial capital expenditures required by both companies to fund its
operations, environmental risks, drilling and operating risk, risk related to
exploration of development drilling, uncertainties about estimates of our
reserves, competition, government regulation and the ability of the company to
implement our various business strategies. These and other risks are described
in both company’s reports that are available from the Securities and
Exchange Commission.
The
announcement we made this morning is very exciting for both company’s
shareholders. It’s truly a business combination that is a win-win for each
of our shareholders. Combined, we will have a significantly larger reserve base,
the Company’s reserves will exceed over a trillion cubic feet of
natural gas equivalent based on last year’s 12/31 reserves. The daily
production for the combined companies will increase significantly. On a combined
basis we’re looking at about right at 250 million cubic feet a day.
Historically, if you look at the last nine months, it was about 232. The Company
will have a much stronger balance sheet and with that will come enhanced
financial flexibility. The Company’s debt to capitalization ratio will drop
somewhere between 59 to 66%, depending upon the cash component that’s used
in the completion of the merger.
There’s a strong asset overlay. These two companies properties fit together like a
glove. The Permian Basin of West Texas, where there’s a lot of common
ownership in properties, both there and Southeastern New Mexico, the
mid-continent region of western Oklahoma and the Texas Panhandle, as well as the
onshore Gulf Coast area of south Texas and Louisiana, which will be a new area,
in many respects, for Magnum Hunter, and is an area we’ve been trying to
get involved in for about three or four years.
The
drilling inventory of the combined companies is phenomenal; over 1,000 onshore
drilling locations that are basically picked and in our inventory. Most of these
locations are held by production, so they’re not locations that we have to
drill tomorrow, but that gives us plenty of fuel for growth onshore.
Additionally, Magnum Hunter has over 45 lease blocks in the Gulf of Mexico that
we own and have acquired over the past two years. Most of that is all undrilled.
So if you take the onshore and the offshore, we believe we have one of the
best inventories of any independent oil and gas company to fuel our future
growth.
The significant exploration upside also comes with the efforts that Magnum
Hunter’s been making over the past couple years, both onshore and offshore. We have active
exploration programs going on in West Texas with
Occidental Petroleum, south Texas with Anadarko and offshore primarily operated
and with other companies like Remington, Unocal, El Paso and others.
The
cost savings potential is being reviewed. Obviously both companies are here in
Dallas; we’re only about three miles apart. We believe the synergies of
having two companies combined this closely together will be obvious and as the
transaction progresses over the next three to four months, we’ll determine
exactly how that integration will occur.
The
commodity price hedge position of both companies is quite significant. In fact,
on a pro forma basis, the two combined companies have 55% of their oil and gas
equivalents hedged for 2002 and 28% for 2003, and these hedges, that are
outlined in the press release, are quite favorable in light of today’s
existing commodity prices. Long-lived reserve is something Magnum Hunter has
always preached, the management of Price Energy felt the same. We both built our
companies on acquisitions, that’s caused us to tend to buy from larger
companies and buy long onshore reserves. With the reserve to production ratio
now in excess of 12 years, the activities that Magnum Hunter has been having in
the Gulf of Mexico will just further augment that and allow us to keep this long
reserve life as a foundation to fund the exploration efforts we have ongoing.
The
oil and gas mix becomes more balanced. It will be about 55% natural gas, 45%
crude oil, which is something that we believe with the crude oil prices at a
level that are attractive, we think makes sense for the combined shareholders.
With this combined company, undoubtedly, we’ll be better capitalized and
have a tremendously better opportunity to access the capital markets, both on
the equity side and on the high yield side and in the commercial banking side.
So
with that, I’d like to also introduce the other parties that are here today
with me. We are going to, in a moment, turn the call over to everybody in the
audience. Immediately to my left today is Phil Smith, he is the Chairman and CEO
of Price; Lon Kile, the President and Chief Operating Officer will also be here
to help answer your questions. From our company, Dick Frazier, our President and
Chief Operating Officer; and Chris Tong, our Senior VP and Chief Financial
Officer is here; as well as Mike McInerney, who heads up the Investor Relations
area and is Vice President of our Company.
So,
I think that the press release that we put up today, we tried to be pretty
explicit with the details of the transaction. I want to go over again what the
terms are so everybody has a good understanding of what we’ve proposed. I
also want to alert everyone that when you get to your questions for the company,
we’re trying our best not to give a lot of pro forma information.
We’re trying to work off historical numbers. The reason for that is that we
don’t know the timing of the closing of this transaction. It could be
February, it could be March, it could be April, it could be May. It all depends
on the Securities and Exchange Commission and the time aspects of having your
statements current or stale in those filings.
We
do plan to make a filing with the SEC, a combined filing, sometime in the next
couple weeks; we’re working on it already. We announced in the press
release it would be filed at least in January. We’re hoping to speed that
up and perhaps get it filed sometime, like I said, in the next two to three
weeks.
So,
let me just kind of outline, again, the terms of the definitive agreement. The
Price shareholders are going to receive $24 per common share payable in 2.5
shares of Magnum Hunter common stock for each share of Price Energy. There also
is a cash component that is associated with this offer. That cash component is
on a sliding scale, with a minimum of $.25 per common share to a maximum of
$5.25 per common share to the Price shareholders. That sliding scale is totally
dependent upon Magnum Hunter’s market price in a scale with a floor of $7.50,
a ceiling of $9.50 during the average of 20 trading days, it is on the fourth
trading day prior to closing. I know that’s a little complicated and
it’s going to be difficult to track. We won’t know when we have
clearance from the SEC until they call us and say that we’re effective.
That will then begin the triggering point of when the shares will be priced.
Both
companies have the ability to walk the transaction should Magnum Hunter stock
fall below $7.50, Price would have that opportunity. If it goes above $9.50, we
would have that opportunity. I want to assure you though, that we believe that
that scale is sufficient based on the values here and it is not the intent to
leave the transaction. We both have that right but not the obligation. It is our
goal to close this transaction for the benefit of all shareholders involved.
So,
with that being said, I’d like to have Bill, our moderator, open up the
question and answer session and we’ll be happy to address the many
questions, I’m sure, that our audience has today.
Moderator
Our first
question will come from the line of Tim Cuther at JP Morgan. Please go ahead.
T. Cuther
Hey, Gary, how are you doing?
A quick question for you, with regards to the sliding scale, do you have the
financing in place if you get towards the upper end of that?
G. Evans
The existing credit
facilities of both companies, the borrowing bases that
are available, are sufficient to fund the cash portion. Now, obviously, with a
merger we’ve got to put together a new senior bank credit facility.
We’re already in the process of beginning to do that at this time. We plan
to have a meeting with all of our banks in mid-January and we believe that the
reserves and the borrowing base of the combined companies will be greater than
they are separately. So, in answer to your question, we don’t believe there
will be any need for additional capital outside of senior bank credit facilities
to fund the cash portion if we should have to fund the maximum amount.
T. Cuther
And just one other
question. The year-end reserve number for Price at the end of 2000,
now, that doesn't include the Apache acquisition that they did, is that correct?
G. Evans
That is correct, it does not.
T. Cuther
Okay, so what would the reserve add there?
G. Evans
About $11 million BOE.
T. Cuther
Great, thanks.
Moderator
Our next question will come from the line of Van Levy at CIBC. Please go ahead.
V. Levy
Good afternoon, gentlemen.
G. Evans
Hello, Van.
V. Levy
Congratulations, it looks like a real good merger.
G. Evans
Thank you very much.
V. Levy
A couple of questions. Number one, Gary, I want to know what went into your
mind when you were putting this together. What strategic value do you think
you’re getting from the Price side of the equation and I’m really
driving at maybe the stability of those assets and cash flow, etc.? That’s
question number one.
Question
number two would be, we’ve gone through almost all of the year, can you
give us a sense of both companies what their proved, undeveloped component would
be compared to the beginning of the year, has it changed materially?
G. Evans
To answer your first question, I think we all recognize that the next
twelve months in our business is going to be rocky, it could be great or it
could be bad or it could be middle of the road, a lot of it is dependent upon
factors outside of our control. So, the one thing that we’ve strived to do
is to be sure that when opportunities come about in this business, that
we’re in a financial position to take advantage of them. And the one thing
that made the Price merger so attractive from our side is that their stable,
long-lived prove reserve base with substantial cash flow would allow us to
continue to fund the exploration effort that Magnum Hunter has had ongoing for
the last two years, primarily in the Gulf of Mexico, and as you know, the cap ex
expenditures in that arena are extensive, especially when you’ve been
running 90%, 95% success rates like we have.
So, to fund the infrastructure of platforms, the pipelines and to get these wells
online takes a lot of capital and we were also concerned that we didn’t
want to become too dependent on the Gulf of Mexico for growth and by sort of
recapitalizing the company with Price’s long-lived onshore stable assets,
gives us the flexibility to expand, if we like, the exploration effort and to
look at opportunities we might have to pass on because of our current capital
structure.
In many ways it was to better balance the company and make a better-rounded
organization to have an opportunity to grow in the future. We also believe there
will be other acquisition opportunities coming about over the next six to 12
months. A lot of larger companies have finally announced that they are going to
begin divestitures and we believe a billion dollar, one TCF company is in a
better position to take advantage of those opportunities than either one of our
companies were on their own.
The question is, you know, we’ve probably been drilling more exploration than
…, Price has probably been drilling more … and limited exploration, so
when you look at the combined companies, there’s still about 25% of our
reserves, in round numbers, that is proved undeveloped. What we have to do, to
be sure that we maximize the dollars that we spend, is we’ve got to take a
hard look at all the opportunities that we have on the combined basis and
determine which ones should be hydrated and which ones should not be even
drilled.
As any organization, when you grow like this, there’s going to be things that
float to the top and things that fall to the bottom and the best thing that we
can do is be open and honest with ourselves as to which projects are going to
generate the best rate of return and concentrate only on those projects. That
will likely mean that we will begin divesting quite a few properties. In fact,
we’ve talked at length about possibly divesting between $50 to $100 million
of oil and gas properties over the next 12 months, in either GE type
partnerships like we did last year or the year before last or with other
financial instruments as they have been offered to us from other banks. We might
just sell to other independents, it depends on who pays the top dollar. But
there’s no question that our goal is to continue to deliver on a combined
basis, rationalize the assets and only drill those … or those exploration
projects that have the highest rate of return.
V. Levy
Okay, Gary, one last question. My asset value for Price is somewhere around
$27 a share, using the $3 price stack. When I’m looking at something like a
$3.50, I get the $35 number. Are you seeing something similar to that in your
work?
G. Evans
Well, obviously, all those net asset values are totally dependent upon
commodity prices. There’s no question on the reserves, Price has a third
party engineer report, we had our engineers review the top properties. We were
within 5% of one another, so we believe like you, those reserves are solid, they
have long life, there’s plenty of history to them. But you know the
question is, where is the price deck going to be? And those price decks are the
ones that change the net asset value more than anything else we can do. We feel
like we’ve insulated ourselves to a large degree because we’ve got
these hedges in place. We’ve got hedges on the books, both on the Magnum
Hunter and Price side, that are significantly above the market. Fortunately,
they’re not with Enron and we hope to be able to determine exactly what our
cash flow is because we’ve got fixed prices on our deck for the next year.
V. Levy
Great, thanks. Congratulations.
G. Evans
Thank you.
Moderator
Our next question will come from the line of Ray Deacon at RBC, please go ahead.
R. Deacon
Yes, Gary, I had a question for you. Do you expect any price related
reserve revisions this year, I guess either on the Price side or at Magnum
Hunter? You know, if we see gas prices end up at $2.30 - $2.40 will that affect
the quantity of reserves or will we see any negative revisions?
G. Evans
Well, if you look at 12/31/2000 versus 12/31/2001, undoubtedly for any
E&P company, when you’re using $10 gas and $30 oil versus $2.80 gas or
$2.30 gas or whatever it’s going to be and $18-$19 oil, there are going to
be reserve additions because it’s just the way it’s calculated from an
economic life. Now, are we expecting a write-down? No, but there’s still
ten or so days left until the end of the month. I think in the current price
environment we’re probably going to be okay, but I think there will
definitely be reserve reductions just because of the economic life, based on
last year’s extraordinary numbers.
R. Deacon
And where would you, I know it’s early, but what particular fields
or assets on the Price side would you expect to or are you most excited about or
where you would expect to see some growth going forward?
G. Evans
Well, I’ve got Dick here with me and I know there are some areas that
he is very excited about and there’s also some acreage. One thing that we
really didn’t mention is the large acreage position that Price has, not
only that’s held by production but acreage that they received in a Pioneer
acquisition that covers quite a few states. Dick and his team have done a pretty
thorough job of looking at all the opportunities that Price has and I know the
one property in Oklahoma, it was a high priority. Here, I’ll turn this over
to Dick.
D. Frazier
I think the thing that we’re most pleased about is the way their
properties fit with ours. Geographically, there’s such a good fit, the
overlap of personnel should work out well for everybody. Specifically, the Eola
Robertson, … in Oklahoma, we think, has a lot of potential. We think there
are some properties in southeast New Mexico that we may be able to get some
added value from, Keystone, Warwink, there are re-completions there that we
think probably will work real well.
G. Evans
We have a new water flood project starting.
D. Frazier
There are two or three pretty nice water flood projects that are in
various stages. The other thing is that they’ve got a pretty good south
Texas and south Louisiana presence that we don’t have that is an area that
we’ve tried to get into but we just haven’t found the right mix of
properties and the right environment to be able to buy in that area. It’s
all very exciting for our technical team. We’re ready to dig in a little
deeper and get started working with them.
R. Deacon
Do you have any estimate of what kind of cap ex you'd need to try to maintain flat production on the Price
properties or is it too early to tell?
G. Evans
Well, you know, we announced our cap ex yesterday. We wanted to get that
out before this announcement so everybody kind of knew what our plans were for
2002, which is $75 million. I believe on the Price side they’re looking at
around $30 million, which should hold their production flat. That tells you a
lot, when you’re talking about over half the TCF of reserves and you can
maintain production flat with $30 million, it tells you a lot about the life and
the quality of the assets.
R. Deacon
Right. Well, thanks very much.
Moderator
Our next question will come from the line of Scott Burke at Frost Securities. Please go ahead.
S. Burke
Hi guys.
G. Evans
Hello, Scott, how are you today?
S. Burke
I'm well, thanks.
G. Evans
I think you're one of the few analysts who followed us both.
S. Burke
Yes, that looks like a great deal for both of you.
I just had a quick question about the hedges. You had outlined the hedges that
you’ve got in your press release and I just wondered did you have
additional hedges that you put on in response to this acquisition or are those
just existing hedges that you have previously had?
G. Evans
Well, Magnum Hunter put on some new hedges over the past two weeks, and
that is something we would have done anyway. But to ensure that the commercial
bank group felt comfortable with respect to the combined credit, we felt like it
was important to also put those hedges in place. The gas market has been kind of
a wild card here lately and we put $60 million of new hedges a day on gas side,
for Magnum Hunter for 2002 and then we put another $50 million for the first six
months of 2003, and those were straight swaps and I think were outlined in that
press release.
S. Burke
And then also, combining the production, Price had generally had kind of
lower realizations or higher differentials. Just in trying to kind of do a pro
forma model here, do you have any guidance for what you guys expect for
differentials and then also perhaps operating expenses?
G. Evans
Again, we’re trying not to give out much pro forma information yet
because of the timing of when those will occur. I think if you want to try to
get into the intricate details of our numbers, we’ve got to get some things
filed with the SEC first. I would say, Scott, you’re going to have to work
off the historical information that both companies have provided.
S. Burke
Okay, I'll do that. That's all the questions I have. Thanks.
G. Evans
Thank you.
Moderator
Our next question will come from the line of Bill Dodge at Ryan Beck. Please go ahead.
B. Dodge
Good afternoon, Gary and everybody. I have a balance sheet question and an income statement question.
A balance sheet question, whether you can clarify on what the debt ratio will be
after the merger, 59 to 65%, and whether there’s an asset write-up issue
involved there at all as an uncertainty?
G. Evans
No, the 59 to 65% number is totally dependent upon the cash portion of the
exchange. Obviously, if we have to pay more cash because our stock is lower,
that drives it to the high end of that 66 number. If we use a little cash,
it’s down to 59%.
B. Dodge
If you pay cash there's no asset write-up involved?
G. Evans
No, the barometer there is goodwill. Oil and gas companies can book
goodwill now and we don’t know what that goodwill number is going to be.
There will be some form of goodwill on our financial statements and we’re
working with Deloitte and Touche on that right now.
B. Dodge
But would you say 59-66% you're pretty sure what the shareholder ecquity number is in that?
G. Evans
Yes, if you just want me to give you a pro forma as of Sept 30, the book equity is a little over $400
million, $402 million.
B. Dodge
Yes, I have that. I was just wondering what changes going forward?
And on the income statement, you say in the release that the merger is accretive of
improved reserves, net asset value and many financial measures. … elaborate
on what some of those many financial measures are.
G. Evans
I would say when you look at the pro forma EBIT DA, it's accretive. Pro forma cash flow is significantly
accretive. Pro forma earnings is accretive, so basically...
B. Dodge
But can you think of anything where it's not accretive?
G. Evans
Yes, you know we didn’t want to name them all but I can’t,
we’ve analyzed this thing from A to Z and there’s not been one ratio
in anything I’ve seen, from our … opinion, from our bank to the guys
that helped us on doing the analysis, that has not been accretive.
B. Dodge
Okay, thanks. It looks like a good deal.
G. Evans
Thank you very much.
Moderator
Our next question will come from the line of Tom Vanbuskirk at Troy Assets, please go ahead.
T. Vanbuskirk
Hi. Can you fill in a couple of details on terms? First off, you mentioned something about walk-away
provisions. Also is there a walk-away date, break-up fee? And maybe also, if you could go into a little
bit more about the background of the transaction, whether the other company had been shopped ahead of time
etc.?
G. Evans
Okay, I’ll try to answer part of that and then I’ll probably
turn your last question over to Phil Smith. The question related to, sorry I
forgot my train of thought, what was the question?
P. Smith
This is Phil. I'll pick it up.
G. Evans
Okay.
P. Smith
According to Delaware law, we are required on Price's side to have our fiduciary out and we did negotiate
one in the merger agreement so we have one for that.
The question whether we’ve shopped the company, I don’t really want to
address that directly. I will say in the course of business, in the oil and gas
business, every day you get contacted by somebody to talk so I think I’ll
let it go at that.
G. Evans
If you want to know a little bit about the history, Lon and Phil and I, we
had a meeting a year and a half-ago and discussed this idea, and the timing
wasn’t right. They were rather new and were still working on building their
acquisitions, we were just beginning our exploration front and you know, timing
has so much to do with why marriages work. The key owner in Price, their largest
shareholder, is Natural Gas Partners, and Ken Hersh, who runs the fund, has
been a friend of mine for the last 10 or 15 years and their office is a mile
down the road and we’ve talked about doing business for years.
So, it’s been the kind of thing where we knew each other, we respected one
another, this is all the parties involved, we followed what each other has done.
Our philosophies were really exactly the same as far as how we felt like
companies should be built, timing of buying of properties, how to do that. The
only difference was we had an exploration front going on that Price didn’t
at this point and rather them building that from scratch, they decided to ride
our horse because of the success we’ve had.
Our business needs to have a lot more consolidation. There are other companies, much
smaller than us, that need to be consolidated and you’re seeing that. The
industry is getting smaller and smaller and I think will continue to be so. In
order for us to compete, we feel like we have to be bigger and bigger and
that’s to get the attention from Wall Street, to get the attention from the
capital markets and to have the capital necessary to fuel our future growth. It
was something that a lot of discussion was held and when we started to make the
decision it happened very quickly, within the last ten days.
T. Vanbuskirk
Okay, and just the question on break-up fees?
G. Evans
There is a break-up fee involved should a third party get involved. On both sides, it's $15 million and
that's the break-up fee.
T. VanBuskirk
Thanks.
Moderator
Our next question will come from the line of Jeff Goldman at First Capital. Please go ahead.
J. Goldman
Yes, as a follow up to the last question, I was wondering how much due diligence was completed? It sounds
like maybe only ten days or maybe how long have you been under a confidentiality agreement?
G. Evans
We’ve been under a confidentiality agreement for about a month and a
half. The thing that sped up the due diligence effort is that our engineering
firm had already evaluated most of the properties that Price had because they
had done work for other clients in the same fields and that’s what sped it
up.
J. Goldman
Okay. Is there anything else that's left?
G. Evans
To do on due diligence?
J. Goldman
Yes.
G. Evans
No, we've inspected plants. We've done environmental review. No, nothing's left. We've been working
around the clock.
J. Goldman
Okay, and also can you expand a little bit on the logic behind the cash sliding component and the
assumptions behind it and maybe why you didn't have something that's simpler?
G. Evans
It’s quite simple. We do not want to do a reverse merger and by
keeping the stock component fixed, in order to get the value that Price needed,
when you look at the net asset value of the company, that’s what caused the
sliding scale cash component.
J. Goldman
Okay. Thank you.
Moderator
Our next question will come from the line of Rod Dunlap at BNP Paribas, please go ahead.
R. Dunlap
Good morning, guys. Just kind of curious if you've approached the rating agencies with this deal as of yet
and what their feedback might have been if you have?
G. Evans
I was trying to get a little sleep. We definitely plan to go to the rating
agencies. We wanted to get the information out, have the call happen and it is
our goal to meet with the rating agencies in January. We believe that we’re
going to be hitting them hard for an improvement in our rating because
we’ve been doing that anyway on the Magnum Hunter front and one of the
biggest negatives we ever heard out of the agencies, in fact, the only negative
that I can remember, is size. And well, we’re solving that problem and
we’re going to be with a lower debt to equity ratio, higher production, a
better rounded base, and we’re expecting a rating increase.
R. Dunlap
Okay, just one notch?
G. Evans
Well, I’m not going to be asking for just one notch, but I guess
I’ll be happy with whatever I get. We’ll probably, again, I think a
lot of the rating agencies’ decisions are going to be, you know, we’ve
represented in the past that we would do things, then deliver, do things, then
deliver. We’ve always done that. When we went to the bond market, before we
were 87% debt to cap, we told the bondholders we would deliver. We did an equity
offering of $37 million, we did a convertible preferred offering of $50 million
and we’ve done a warrant issue of $60 million. So, we’ve always done
what we said we would do. We plan to deliver by selling between $15 and $100
million of properties. If we can convince the rating agency that we will do
that, we’ve done that in the past, then I think we have a good chance of
getting maybe more than one notch.
R. Dunlap
Okay, great transaction. Thanks guys.
G. Evans
Thank you.
Moderator
Our next question will come from the line of Erin Larson at John
S. Herald Company.
E. Larson
Good afternoon. I have two quick questions. First, how many fully diluted shares does Price currently have
outstanding?
And second, how many options are currently outstanding and is there a weighted
average exercise price for the options?
G. Evans
I'm going to turn the call over to Lon Kile and he's better suited to answer that than me and give me a
chance to be quiet.
L. Kile
The fully diluted shares outstanding are going to be $14.8 million. The average exercise price on the
options, which constitutes about $2.2 million of that number, is $8.58.
E. Larson
Great, I appreciate it.
Moderator
Our next question will come from Luca Ipalito at Chesapeake Partners, please go ahead.
L. Ipalito
A couple more questions on the mechanics, if you'll bear with me. You mentioned in the press release
walk-away's outside of certain prices. Could you explain that a little bit more?
G. Evans
Well, basically both companies have the ability to walk away from the transaction should the market price
of Magnum Hunter fall outside of the collar.
L. Ipalito
So below $7.50?
G. Evans
And above $9.50.
L. Ipalito
Magnum can walk, and above $9.50 Price can walk?
G. Evans
No, you've got it backwards. Below $7.50 Price can walk; above $9.50, Magnum can walk.
L. Ipalito
And I guess my question is why? That may seem naive, but I mean...
G. Evans
Again, this is an all-stock transaction. I think both companies want to
ensure that this is received favorably and viewed properly by the market.
It’s a right, not an obligation, and neither party, at this point, believes
that’s going to happen.
L. Ipalito
And what do you expect the coverage ratios to be pro forma?
G. Evans
Well, again, we’ve tried to sort of state that because we don’t
know the timing of when this is going to close, all those ratios are kind of a
moving target, so we are trying to work off historical data.
L. Ipalito
I guess I'm very surprised that with Magnum's stock at $7.78, you would have a walk-away in which Price can
walk below $7.50.
G. Evans
It was $8.50 when we negotiated the transaction. That is the middle of the collar.
L. Ipalito
Thank you for the clarification.
Moderator
Our next question will come from the line of Brad Vigo with Credit Lyonnaise. Please go ahead.
B. Vigo
Thanks. Congratulations, guys. It looks like a pretty good deal. My question is really kind of to narrow
in Magnum Hunter's year-end reserves. Have you given any guidance on what you expect reserve replacement
to be or where you think you're going to come out at year-end versus your year-end 2000 reserve?
G. Evans
No, we haven't given any guidance because we're in the middle of doing that right now.
B. Vigo
Okay. But kind of off the cuff, what would you say?
G. Evans
I'm not going to answer that, sorry. I'm sorry, I can't answer that.
B. Vigo
Alright. Thanks.
Moderator
Our next question will come from the line of Chris Carnie with CBA Securities. Please go ahead.
C. Carnie
Hi, would you be able to give any information on what you paid per
MCF in this transaction of natural gas?
G. Evans
Well, if you look at last year’s numbers, it was somewhere in the
$.79 to $.85 range. The final number won’t be determined until the deal
happens and we know what each other’s reserves are, but it was definitely
less than the market and you know, it could be as low as, like I say, mid $.80’s to
as high as a buck.
C. Carnie
Okay, thank you very much.
Moderator
Our next question will come from Mark Moony from GE Capital, please go ahead.
M. Moony
Hi guys, pretty exciting transaction. I’m just coming in late to this
whole thing so I have basically three numbers that I’m curious about. Worst
case, what would the liquidity and availability be for the combined entities
once this transaction occurs, that’s one number I’m looking for.
Second would be the combined funded debt and finally, the combined pro forma
EBITDA.
D. Frazier
Well, Mark in answer to some of those questions and Lon, please correct
me if I’m wrong, but I believe in the worst case scenario where we paid the
$5.25 per share in cash, looking at September numbers on a combined basis and
where our borrowing bases are currently, etc, we’d have a minimum of $60 to
$70 million in bank availability plus a positive net working capital number,
which would be somewhere in the $15 -$20 million range the working capital
side.
M. Moony
Okay, great.
D. Frazier
As far as debt goes, if you look at the September numbers, I believe that Price was at $251 in September and
we had, I think, let me look here...
L. Kile
You know the bonds are $129.5 and the commercial bank debt for Magnum Hunter at September 30 was in the $140
range.
D. Frazier
On a combined basis, assuming there was no cash component, which is not
right because there’s a minimum cash component of $.25 a share, but
we’d have $523 million in combined long term debt, and again it’s
going to depend on the stock price at closing for us. But when you look at the
debt to capital ratio on September ‘01 pro forma numbers, as Gary mentioned
earlier, we have a debt to capital ratio between … and 56%.
M. Moony
Right. And then combined EBIT DA kind of after funded debt EBITDA number?
D. Frazier
Two hundred thirty-two million combined EBITDA.
M. Moony
Wow.
D. Frazier
That's really 12 months.
M. Moony
What would it have been based on third quarter? I guess that's probably tweaking it too much.
D. Frazier
Well, see, yes, we’re looking at basically that number as being a
number right in the ballpark for next year as well. Because of the hedges in our
production growth, that number should be around the same level.
M. Moony
Okay, great. Wow.
D. Frazier
It's a great deal. Your coverage's just got a whole lot better.
M. Moony
Great, I appreciate it. Now will there be some additional pro forma information available soon?
G. Evans
Particular lenders, like yourself, that are working with us, we can give you
some more information.
M. Moony
Okay, real good. I appreciate it. Congratulations.
G. Evans
Thank you.
Moderator
The next question will come from the line of Jeff Chimiluski at CitiGroup, please go ahead.
J. Chimiluski
Yes, you mentioned earlier that the credit facility was going to be used to fund the cash, I was just
wondering how large the facility is and what the undrawn capacity is?
G. Evans
Well, if you look at Price's facility, I'll let Lon Kile respond to that. Magnum Hunter has $160 million
borrowing base as of the end of September, we had about $20 million available. Lon?
L. Kile
Yes, our borrowing base is $375 with the current credit facility. We have
outstanding currently $240, but the additional $50 million from $325 to $375 is
only available for acquisitions. So, basically you have between $240 and $325,
which would be $85 million of the capacity under the Price credit facility right
now.
J. Chimiluski
And on the Magnum Hunter you said you had $160 and $20 of it...?
G. Evans
Was available.
J. Chimiluski
Was available? So, just doing the math, $5.25 times, was it twelve million shares, is there capacity for the
cash component on there?
G. Evans
Well, if you add up the $20 million and their $85...
J. Chimiluski
Okay, got you.
G. Evans
And working capital, we're not even including working capital there,
that's just bank credit availability.
J. Chimiluski
I was assuming the Magnum Hunter facility was being used to write the check.
G. Evans
Well, no, it's going to be a combined company. It will be a new facility.
These existing facilities, in many respects, are somewhat meaningless because there's
going to be a whole new facility that we believe will be bigger and better.
J. Chimiluski
Okay, thank you.
Moderator
Our next question will come from the line of Nicos Hannapollo at Morgan Stanley,
(and I apologize for the last name). Please go ahead.
N. Hannapollo
Not a problem. Sorry to go back to this collar question that the
caller asked a little bit ago. Your stocks are 100 day … of 50% so even
when you strike the deal at a year and a half in the middle of a quarter,
it’s still very likely that within the life of this deal it’s going to
go above or below. What I really don’t understand is say your price goes up
a lot, presumably, both companies, if they were separate, would both benefit
because your both exposed to similar commodity prices or market conditions. So,
if you really want to do this … you protect at $24, I still don’t
understand why you would have such a narrow collar?
G. Evans
Well, again, the collar is only an option, it's not an obligation. I wouldn't put too much weight on the
collar.
N. Hannapollo
Okay, thank you.
G. Evans
Okay?
Plus it was 17% down and up, it’s not that narrow of a collar, it’s 35%.
G. Evans
Okay, Bill, I think we're wrapped up.
Moderator
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That does conclude your teleconference for today. Thank you for your participation
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In connection with the proposed merger, Magnum Hunter and Prize will file a joint proxy statement/prospectus with the Securities and Exchange Commission. INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders may obtain a free copy of the joint proxy statement/prospectus (when available) and other documents filed by Magnum Hunter and Prize with the Commission at the Commission’s web site at http://www.sec.gov. Free copies of the joint proxy statement/prospectus, once available, and each company’s other filings with the Commission may also be obtained from the respective companies. Free copies of Magnum Hunter’s filings may be obtained by directing a request to Magnum Hunter Resources, Inc., 600 East Las Colinas Blvd., Suite 1100, Irving, Texas 75039, Attn: Michael P. McInerney, telephone: (972) 401-0752. Free copies of Prize’s filings may be obtained by directing a request to Prize Energy Corp., 3500 William D. Tate, Suite 200, Grapevine, Texas 76051, Attn: Lon C. Kile, telephone: (817) 424-0406.
Magnum Hunter, Prize and their respective directors, executive officers and other members of their management and employees may be soliciting proxies from their respective stockholders in favor of the merger. Information concerning persons who may be considered participants in the solicitation of Magnum Hunter’s stockholders and Prize’s stockholders, respectively, under the rules of the Commission, including their interests in the merger, will be set forth in the joint proxy statement/prospectus to be filed by Magnum Hunter and Prize with the Commission.
The information in this release includes certain forward-looking statements that are based on assumptions that in the future may prove not to have been accurate. Those statements, and Magnum Hunter Resources, Inc.‘s business and prospects, are subject to a number of risks, including volatility of oil and gas prices, the need to develop and replace reserves, the substantial capital expenditures required to fund its operations, environmental risks, drilling and operating risks, risks related to exploration and development drilling, uncertainties about estimates of reserves, competition, government regulation, and the ability of the company to implement its business strategy. These and other risks are described in the company’s reports that are available from the SEC.