American Oil and Gas Reporter - May 2015 - 56

be easy to adopt an attitude of doom and
gloom," McAllister allows. "But personally, I find it exciting to watch our teams
rise to the challenge of making our projects better and better. They are finding
ways to become more efficient, and then
sharing their ideas with others so their projects can improve as well."
Responding To Prices
In response to the declines in oil and
natural gas prices, Magnum Hunter Resources Corp. decided to "hunker down"
to wait out the worst of the downcycle, reports Chairman and Chief Executive Officer Gary C. Evans. "We made the decision on Jan. 1 to temporarily stop drilling
and completion operations in order to conserve our liquidity. As well economics improve, we will look to resume drilling operations later in the year," he clarifies.

Magnum Hunter is taking advantage of
the drilling respite to upgrade its internal
information technology infrastructure,
including installing a new enterprise resource planning system to improve business efficiencies and lower costs, Evans
reports.
In the meantime, Evans says Magnum
Hunter will continue to sharpen its operational focus on the Marcellus and Utica
plays. "We continue to be happy with our
decision to become a Marcellus/Utica
pure play because we believe the rocks we
have in the Marcellus and Utica are
world-class reserves that can provide
positive economics at lower commodity
prices," he comments.
Riding Out The Cycle

In his 30-year career, Evans has lived
through his share of industry cycles. "This

"The difference between this time and prior big
price drops is the market could right itself much
faster. The United States has the know-how,
technology, people, equipment and infrastructure
to succeed in shale plays, and that is why when
things turn around, our industry will enable this
country to become truly energy independent."

Gary C. Evans
Estimating that Marcellus service costs
have fallen 20-25 percent from the highs
of last year, Evans says the combination
of good reservoir rock and a large acreage
position in the Marcellus and Utica plays
should allow Magnum Hunter to achieve
attractive returns even at lower commodity prices. "We are seeking to get back to
a 30-35 percent internal rate of return,"
Evans details. "The high quality rock of
the Marcellus and Utica in our lease position provide very favorable drilling results, but under current economic conditions, the focus is on managing costs and
being selective about when to drill as much
as about what prospects to drill."
To increase its access to capital, Magnum Hunter is negotiating an approximately $500-million joint venture targeting Utica assets on the Ohio side of the Ohio River. Evans says the company expects to
complete negotiations and form the venture by midsummer.
56 THE AMERICAN OIL & GAS REPORTER

downturn is similar to the 2008 decline, but
there a few differences," he assesses. "The
decline in prices has happened faster.
However, oil and gas companies have
greater access to capital in both the public
and bond markets, so our industry has raised
around $15 billion in the first four months
of the year. That access to capital has helped
minimize the pain suffered by exploration,
drilling and production companies.
"The impact on the industry will be
quite different from what we saw in the
1980s," he adds. "Shale properties have decline curves much steeper than conventional vertical drilling, so we are going to see
a more dramatic drop in production. In fact,
it is occurring already. In early April, we
began to witness a drop in Bakken oil production, and gas production has been flat
since December. As a result, the rollover
should happen much faster than in 2008."
Even so, Evans predicts gas prices will
stay within the $2.50-$3.50 range for the

next two years. "Until more demand
comes from industrial plants, chemical
plants, coal-to-gas switching, and LNG exports, gas will continue to be all about
weather," he explains. "Fortunately, our
Marcellus/Utica assets can generate positive returns down to $2.00 an Mcf."
Turning to oil, he points out that U.S.
storage levels reached an 80-year high in
March. "However, gasoline demand is increasing rapidly, so we have forces working in our favor. If I had to predict oil
prices, I would put them between $50 and
$60 this year, maybe getting up to $70 next
year," Evans says.
If OPEC buckles or the turmoil in the
Middle East intensifies, oil prices could recover more quickly. "Even if neither of
those wild cards come into play, the market will right itself," Evans assures. "The
difference between this time and prior big
price drops is that there is only 1.0 million1.5 million bbl/d of oversupply in an 83million bbl/d market. That is much smaller than the 14 million bbl/d oversupply we
had in the 1980s, so the market could right
itself much faster."
While the aforementioned wild cards
could create a V-shaped recovery, Evans
reiterates that he expects a more gradual
price increase. "Frankly, I am hoping the
recovery will be gradual, because in the
long run, that will be healthier for our industry. If prices stay close to where they
are, we will learn to operate and build our
businesses at $50 oil.
"The determining factor is good-quality rock," he allows. "The longer today's
prices persist, the more the market will separate the haves and have-nots. If prices go
back to $100, marginal properties will begin to work again. As is, we all are getting
leaner and meaner, which is making us better prepared to operate successfully and at
higher margins as prices recover."
Technology will continue to play a key
role in efficiency gains, Evans predicts. "It
is what has allowed us to do what we are
doing today, and it is not going to go away.
We will continue to have new technology that will enable us to do things better,"
he says. "The United States has the knowhow, technology, people, equipment and
infrastructure to succeed in shale plays, and
that is why when things turn around, our
industry will enable this country to become
truly energy independent."
Ì

Coming In June

Special Report:
Permian Basin Activity Update

American Oil and Gas Reporter - May 2015

Table of Contents for the Digital Edition of American Oil and Gas Reporter - May 2015