Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - MAGNUM HUNTER RESOURCES CORPFinancial_Report.xls
EX-12.1 - EXHIBIT - MAGNUM HUNTER RESOURCES CORPmhr-2014630xex121.htm
EX-32 - EXHIBIT - MAGNUM HUNTER RESOURCES CORPmhr-2014630xex32.htm
EX-31.1 - EXHIBIT - MAGNUM HUNTER RESOURCES CORPmhr-2014630xex311.htm
EX-31.2 - EXHIBIT - MAGNUM HUNTER RESOURCES CORPmhr-2014630xex312.htm
 
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 June 30, 2014 
-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) (Zip Code)
 
(832) 369-6986
(Registrant's telephone number, including area code)
 
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 x 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 August 7, 2014, there were 199,397,350 shares of the registrant’s common stock ($0.01 par value) outstanding.
 




QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED June 30, 2014
 
TABLE OF CONTENTS
 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (unaudited):
 
 
 
Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013
 
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2014 and 2013
 
 
Consolidated Statement of Shareholders’ Equity for the Six Months Ended June 30, 2014
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per-share data)
(unaudited)
 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
CURRENT ASSETS
 

 
 

Cash and cash equivalents
$
9,120

 
$
41,713

Restricted cash
5,000

 
5,000

Accounts receivable:
 
 
 
Oil and natural gas sales
47,723

 
25,099

Joint interests and other, net of allowance for doubtful accounts of $252 at June 30, 2014 and $196 at December 31, 2013
40,160


30,582

Derivative assets
317

 
608

Inventory
3,830

 
7,158

Investments
10,771

 
2,262

Prepaid expenses and other assets
3,054

 
2,938

Assets held for sale
1,638

 
5,366

Total current assets
121,613

 
120,726

 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 

 
 

Oil and natural gas properties, successful efforts method of accounting, net
1,328,701

 
1,224,659

Gas transportation, gathering and processing equipment and other, net
369,324

 
289,420

Total property, plant and equipment, net
1,698,025

 
1,514,079

 
 
 
 
OTHER ASSETS
 

 
 

Deferred financing costs, net of amortization of $12,195 at June 30, 2014 and $9,735 at December 31, 2013
18,358

 
20,008

Derivative assets, long-term
123

 
25

Intangible assets, net
5,527

 
6,530

Goodwill
30,602

 
30,602

Assets held for sale
84,935

 
162,687

Other assets
4,174

 
1,994

Total assets
$
1,963,357

 
$
1,856,651


The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

1



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and per-share data)
(unaudited)
 
June 30,
2014
 
December 31, 2013
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 

CURRENT LIABILITIES
 

 
 

Current portion of notes payable
$
5,431

 
$
3,804

Accounts payable
128,356

 
107,837

Accounts payable to related parties
690

 
23

Accrued liabilities
55,636

 
44,629

Revenue payable
10,039

 
6,313

Derivative liabilities
5,709

 
1,903

Liabilities associated with assets held for sale
17,961

 
12,865

Other liabilities
2,374

 
6,491

Total current liabilities
226,196

 
183,865

 
 
 
 
NONCURRENT LIABILITIES
 
 
 
Long-term debt
839,009

 
876,106

Asset retirement obligations
16,568

 
16,163

Derivative liabilities, long-term
115,727

 
76,310

Other long-term liabilities
2,163

 
2,279

Long-term liabilities associated with assets held for sale
11,310

 
14,523

Total liabilities
1,210,973

 
1,169,246

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 16)


 


 
 
 
 
REDEEMABLE PREFERRED STOCK
 

 
 

Series C Cumulative Perpetual Preferred Stock ("Series C Preferred Stock"), cumulative dividend rate 10.25% per annum, 4,000,000 authorized, 4,000,000 issued and outstanding as of June 30, 2014 and December 31, 2013, with a liquidation preference of $25.00 per share
100,000

 
100,000

Series A Convertible Preferred Units of Eureka Hunter Holdings, LLC (the "Eureka Hunter Holdings Series A Preferred Units"), cumulative distribution rate of 8.0% per annum, 10,592,540 and 9,885,048 issued and outstanding as of June 30, 2014 and December 31, 2013, respectively, with a liquidation preference of $214,776 and $200,620 as of June 30, 2014 and December 31, 2013, respectively
149,379

 
136,675

 
249,379

 
236,675

SHAREHOLDERS’ EQUITY
 

 
 

Preferred Stock of Magnum Hunter Resources Corporation, 10,000,000 shares authorized, including authorized shares of Series C Preferred Stock
 
 
 
Series D Cumulative Preferred Stock ("Series D Preferred Stock"), cumulative dividend rate 8.0% per annum, 5,750,000 authorized, 4,424,889 issued and outstanding as of June 30, 2014 and December 31, 2013, with a liquidation preference of $50.00 per share
221,244

 
221,244

Series E Cumulative Convertible Preferred Stock ("Series E Preferred Stock"), cumulative dividend rate 8.0% per annum, 12,000 authorized, 3,803 issued and 3,722 outstanding as of June 30, 2014 and December 31, 2013, with a liquidation preference of $25,000 per share
95,069

 
95,069

Common stock, $0.01 par value per share, 350,000,000 shares authorized, and 200,299,799 and 172,409,023 issued, and 199,384,847 and 171,494,071 outstanding as of June 30, 2014 and December 31, 2013, respectively
2,003

 
1,724

Additional paid in capital
924,185

 
733,753

Accumulated deficit
(742,830
)
 
(586,365
)
Accumulated other comprehensive loss
(983
)
 
(19,901
)
Treasury Stock, at cost:
 
 
 
Series E Preferred Stock, 81 shares as of June 30, 2014 and December 31, 2013
(2,030
)
 
(2,030
)
Common stock, 914,952 shares as of June 30, 2014 and December 31, 2013
(1,914
)
 
(1,914
)
Total Magnum Hunter Resources Corporation shareholders’ equity
494,744

 
441,580

Non-controlling interest
8,261

 
9,150

Total shareholders’ equity
503,005

 
450,730

Total liabilities and shareholders’ equity
$
1,963,357

 
$
1,856,651


The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

2



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per-share data)
(unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
REVENUES AND OTHER
 
 
 
 
 
 
 
Oil and natural gas sales
$
78,190

 
$
49,583

 
$
148,362

 
$
84,224

Natural gas transportation, gathering, processing, and marketing
48,363

 
13,974

 
80,012

 
29,870

Oilfield services
5,954

 
3,612

 
11,575

 
7,305

Other revenue
9

 
739

 
11

 
743

     Total revenue
132,516

 
67,908

 
239,960

 
122,142

OPERATING EXPENSES
 
 
 
 
 
 
 
Lease operating expenses
14,836

 
15,213

 
34,792

 
22,881

Severance taxes and marketing
6,627

 
4,016

 
12,201

 
6,848

Exploration
9,187

 
3,546

 
23,216

 
33,279

Impairment of proved oil and gas properties
158

 
9,968

 
158

 
9,968

Natural gas transportation, gathering, processing, and marketing
44,754

 
13,414

 
74,753

 
26,845

Oilfield services
4,089

 
4,066

 
8,036

 
7,401

Depletion, depreciation, amortization and accretion
35,953

 
26,375

 
65,361

 
43,663

Loss (gain) on sale of assets, net
(687
)
 
1,183

 
2,772

 
1,164

General and administrative
18,738

 
16,364

 
34,010

 
36,341

     Total operating expenses
133,655

 
94,145

 
255,299

 
188,390

 
 
 
 
 
 
 
 
OPERATING LOSS
(1,139
)
 
(26,237
)
 
(15,339
)
 
(66,248
)
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest income
41

 
81

 
86

 
138

Interest expense
(20,434
)
 
(18,793
)
 
(44,283
)
 
(37,494
)
Gain (loss) on derivative contracts, net
(42,836
)
 
6,400

 
(42,489
)
 
(1,091
)
Other expense (income)
264

 
(465
)
 
20

 
(681
)
     Total other expense, net
(62,965
)
 
(12,777
)
 
(86,666
)
 
(39,128
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
(64,104
)
 
(39,014
)
 
(102,005
)
 
(105,376
)
Income tax benefit

 
39,300

 

 
44,199

INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX
(64,104
)
 
286

 
(102,005
)
 
(61,177
)
Income (loss) from discontinued operations, net of tax
3,889

 
(7,684
)
 
7,251

 
9,079

Gain (loss) on disposal of discontinued operations, net of tax
(5,212
)
 
172,452

 
(32,374
)
 
172,452

NET INCOME (LOSS)
(65,427
)
 
165,054

 
(127,128
)
 
120,354

Net loss attributed to non-controlling interests
780

 
386

 
889

 
889

INCOME (LOSS) ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
(64,647
)
 
165,440

 
(126,239
)
 
121,243

Dividends on preferred stock
(15,330
)
 
(14,129
)
 
(30,226
)
 
(27,617
)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
(79,977
)
 
$
151,311

 
$
(156,465
)
 
$
93,626

Weighted average number of common shares outstanding, basic and diluted
184,479,312

 
169,690,633

 
178,346,940

 
169,657,806

Loss from continuing operations per share, basic and diluted
$
(0.42
)
 
$
(0.08
)
 
$
(0.74
)
 
$
(0.52
)
Income (loss) from discontinued operations per share, basic and diluted
(0.01
)
 
0.97

 
(0.14
)
 
1.07

NET INCOME (LOSS) PER COMMON SHARE, BASIC AND DILUTED
$
(0.43
)
 
$
0.89

 
$
(0.88
)
 
$
0.55

 
 
 
 
 
 
 
 
AMOUNTS ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
(63,324
)
 
$
672

 
$
(101,116
)
 
$
(60,288
)
Income (loss) from discontinued operations, net of tax
(1,323
)
 
164,768

 
(25,123
)
 
181,531

Net income (loss)
$
(64,647
)
 
$
165,440

 
$
(126,239
)
 
$
121,243


The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

3



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
NET INCOME (LOSS)
$
(65,427
)
 
$
165,054

 
$
(127,128
)
 
$
120,354

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
1,130

 
(7,070
)
 
(1,218
)
 
(11,799
)
Unrealized gain (loss) on available for sale investments
(549
)
 
4,466

 
(605
)
 
4,449

Amounts reclassified from accumulated other comprehensive income upon sale of Williston Hunter Canada, Inc.
20,741

 

 
20,741

 

Total other comprehensive income (loss)
21,322

 
(2,604
)
 
18,918

 
(7,350
)
COMPREHENSIVE INCOME (LOSS)
(44,105
)
 
162,450

 
(108,210
)
 
113,004

Comprehensive loss attributable to non-controlling interests
780

 
386

 
889

 
889

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
$
(43,325
)
 
$
162,836

 
$
(107,321
)
 
$
113,893

 
The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

4



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
(in thousands)
 
 
Number of Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series D
Preferred Stock
 
Series E
Preferred Stock
 
Common Stock
 
Series D
Preferred Stock
 
Series E
Preferred Stock
 
Common
Stock
 
Additional
Paid in
Capital
 
Accumulated
Deficit
 
Accumulated Other
Comprehensive
Income (loss)
 
Treasury
Stock
 
Non - controlling
Interest
 
Total
Shareholders’
Equity
BALANCE, January 1, 2014
4,425

 
4

 
172,409

 
$
221,244

 
$
95,069

 
$
1,724

 
$
733,753

 
$
(586,365
)
 
$
(19,901
)
 
$
(3,944
)
 
$
9,150

 
$
450,730

Share-based compensation

 

 
47

 

 

 
1

 
3,374

 

 

 

 

 
3,375

Sale of common stock

 

 
25,729

 

 

 
257

 
178,318

 

 

 

 

 
178,575

Dividends on preferred stock

 

 

 

 

 

 

 
(30,226
)
 

 

 

 
(30,226
)
Shares of common stock issued upon exercise of common stock options

 

 
2,115

 

 

 
21

 
8,740

 

 

 

 

 
8,761

Net loss

 

 

 

 

 

 

 
(126,239
)
 

 

 
(889
)
 
(127,128
)
Foreign currency translation

 

 

 

 

 

 

 

 
(1,218
)
 

 

 
(1,218
)
Unrealized loss on available for sale securities, net

 

 

 

 

 

 

 

 
(605
)
 

 

 
(605
)
Amounts reclassified from accumulated other comprehensive income upon sale of Williston Hunter Canada, Inc.

 

 

 

 

 

 

 

 
20,741

 

 

 
20,741

BALANCE, June 30, 2014
4,425

 
4

 
200,300

 
$
221,244

 
$
95,069

 
$
2,003

 
$
924,185

 
$
(742,830
)
 
$
(983
)
 
$
(3,944
)
 
$
8,261

 
$
503,005


The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

5



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(127,128
)
 
$
120,354

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
  Depletion, depreciation, amortization and accretion
65,361

 
73,078

     Exploration
22,489

 
34,168

     Impairment of proved oil and gas properties
158

 
16,034

     Impairment of other operating assets
616

 
263

     Share-based compensation
3,375

 
8,699

     Cash paid for plugging wells
(27
)
 

     Loss (gain) on sale of assets
35,761

 
(206,082
)
     Unrealized loss on derivative contracts
37,938

 
786

     Unrealized loss on investments
403

 
1,152

     Amortization and write-off of deferred financing costs and discount on Senior Notes included in interest expense
7,740

 
2,758

     Deferred tax benefit

 
(6,475
)
Changes in operating assets and liabilities:
 
 
 
     Accounts receivable, net
(15,588
)
 
7,760

     Inventory
3,475

 
(459
)
     Prepaid expenses and other current assets
(1,147
)
 
(802
)
     Accounts payable
(23,817
)
 
24,099

     Revenue payable
5,204

 
(1,204
)
     Accrued liabilities
3,934

 
(261
)
Net cash provided by operating activities
18,747

 
73,868

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures and advances
(257,469
)
 
(277,492
)
Change in restricted cash

 
1,500

Change in deposits and other long-term assets
(2,406
)
 
154

Proceeds from sales of assets
74,503

 
380,036

Net cash provided by (used in) investing activities
(185,372
)
 
104,198

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net proceeds from sale of common shares
178,575

 

Net proceeds from sale of preferred shares

 
10,181

Equity issuance costs

 
(109
)
Proceeds from sale of Eureka Hunter Holdings Series A Preferred Units
11,956

 
19,600

Proceeds from exercise of warrants and options
8,761

 

Preferred stock dividend
(23,646
)
 
(10,424
)
Repayments of debt
(197,216
)
 
(327,076
)
Proceeds from borrowings on debt
161,616

 
105,991

Deferred financing costs
(6,042
)
 
(701
)
Change in other long-term liabilities
(13
)
 
(52
)
Net cash provided by financing activities
133,991

 
(202,590
)
Effect of changes in exchange rate on cash
41

 
(357
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(32,593
)
 
(24,881
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
41,713

 
57,623

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
9,120

 
$
32,742


The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

6



MAGNUM HUNTER RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 - GENERAL
 
Organization and Nature of Operations

Magnum Hunter Resources Corporation, a Delaware corporation, operating directly and indirectly through its subsidiaries (together with its subsidiaries, the "Company" or "Magnum Hunter"), is a Houston, Texas based independent exploration and production company engaged in the United States in the acquisition and development of producing properties and undeveloped acreage and the production of oil and natural gas, along with certain midstream and oilfield services activities.
Presentation of Consolidated Financial Statements
 
The accompanying unaudited interim consolidated financial statements of Magnum Hunter are presented in U.S. Dollars and have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during reporting periods. Actual results could differ materially from those estimates.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for the fair statement 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.  The year-end balance sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP. 

Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with GAAP that would substantially duplicate the disclosures contained in the audited consolidated financial statements as reported in the Company's Annual Report on Form 10-K have been condensed or omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, as amended.
 
Non-Controlling Interest in Consolidated Subsidiaries

The Company has consolidated Eureka Hunter Holdings, LLC ("Eureka Hunter Holdings") in which it owned 56.5% as of June 30, 2014 and 56.4% as of December 31, 2013. Eureka Hunter Holdings owns, directly or indirectly, 100% of the equity interests of Eureka Hunter Pipeline, LLC ("Eureka Hunter Pipeline"), TransTex Hunter, LLC ("TransTex Hunter"), and Eureka Hunter Land, LLC. On December 30, 2013, the Company's majority-owned subsidiary, PRC Williston, LLC ("PRC Williston"), in which the Company owned 87.5% as of June 30, 2014 and December 31, 2013, sold substantially all of its assets. The consolidated financial statements also reflect the interests of Magnum Hunter Production, Inc. ("MHP") in various managed drilling partnerships. The Company accounts for the interests in these managed drilling partnerships using the proportionate consolidation method.

Reclassification of Prior-Year Balances

Certain prior period balances have been reclassified to correspond with current-year presentation.  As a result of the Company's adoption of a plan in September 2013 to dispose of certain of its U.S. and Canadian properties, operating income and expenses related to these operations have been classified as discontinued operations for all periods presented. See "Note 2 - Divestitures and Discontinued Operations"

Regulated Activities

Energy Hunter Securities, Inc. is a 100%-owned subsidiary and 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. 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. As of June 30, 2014 and December 31, 2013, Energy Hunter Securities, Inc. had net capital of $84,919 and $77,953, respectively, and aggregate indebtedness of $7,289 and $16,657, respectively.


7



Sentra Corporation, a 100%-owned subsidiary, owns and operates distribution systems for retail sales of natural gas in south central Kentucky. Sentra Corporation's gas distribution billing rates are regulated by the Kentucky Public Service Commission based on recovery of purchased gas costs. The Company accounts for its operations based on the provisions of ASC 980-605, Regulated Operations-Revenue Recognition, which requires covered entities to record regulatory assets and liabilities resulting from actions of regulators. During the three and six months ended June 30, 2014, the Company had gas transmission, compression and processing revenue, reported in income from discontinued operations, which included gas utility sales from Sentra Corporation's regulated operations aggregating $274,827 and $445,899, respectively. During the three and six months ended June 30, 2013, the Company had no revenues related to Sentra Corporation's regulated operations.

Energy Hunter Securities, Inc. and Sentra Corporation are included in discontinued operations.

Recently Issued Accounting Standards
 
Accounting standards-setting organizations frequently issue new or revised accounting rules.  The Company regularly reviews all new pronouncements to determine their impact, if any, on its financial statements.

In March 2013, the FASB issued ASU 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, to provide guidance on whether to release cumulative translation adjustments ("CTA") upon certain derecognition events. ASU 2013-05 requires a parent company to apply the guidance in ASC Subtopic 830-30 when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Consequently, the CTA related to a foreign entity is released into net income only if the transaction results in complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resided; otherwise, no portion of the CTA is released.  The Company adopted this pronouncement prospectively on January 1, 2014. The adoption of this updated standard did not have a material impact on the Company’s consolidated financial statements.
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, an amendment to FASB Accounting Standards Codification ("ASC") Topic 740, Income Taxes ("FASB ASC Topic 740"). This update clarified that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company adopted this ASU prospectively on January 1, 2014. The adoption of this accounting standard update did not have a material impact on the Company's consolidated financial statements or its financial statement disclosures.

In April 2014, the FASB issued ASU 2014-08 , Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 updates the requirements for reporting discontinued operations in ASC Subtopic 205-20, Presentation of Financial Statements - Discontinued Operations, by requiring classification as discontinued operations of a component of an entity or a group of components of an entity if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when either 1) the component or group of components of an entity meet the criteria to be classified as held for sale, 2) are disposed of by sale, or 3) are disposed of other than by sale (e.g. abandonment or a distribution to owners in a spinoff). The amendments in this update expand the disclosure requirements related to discontinued operations and disposals of individually significant components that do not qualify for discontinued operations presentation in the financial statements. This ASU is effective prospectively for all disposals (or classification as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the revised standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from

8



contracts with customers. This amendment is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.
In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation: Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 clarifies that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. An entity should apply existing guidance in ASC Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. This amendment is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.

NOTE 2 - DIVESTITURES AND DISCONTINUED OPERATIONS
 
Discontinued Operations

In September 2013, the Company adopted a plan to divest all of its interests in (i) MHP, a wholly-owned subsidiary of the Company whose oil and natural gas operations are located primarily in the Southern Appalachian Basin in Kentucky and Tennessee, and (ii) the Canadian operations of Williston Hunter Canada, Inc. ("WHI Canada"), a wholly-owned subsidiary of the Company.

Planned Divestiture of Magnum Hunter Production

The Company is marketing its interests in MHP and its subsidiaries, and anticipates entering into a purchase and sale agreement for MHP by the end of 2014. The Company has classified the associated assets and liabilities of MHP to assets and liabilities held for sale and the operations are reflected as discontinued operations for all periods presented.

During the year ended December 31, 2013, the Company recorded an impairment expense of $18.5 million to record MHP at the estimated selling price less costs to sell. Based upon additional information on estimated selling prices obtained through active marketing of the assets, the Company recorded an additional impairment expense as of March 31, 2014 of $18.6 million to reflect the net assets at their estimated selling prices, less costs to sell, which is recorded in gain (loss) on disposal of discontinued operations for the six months ended June 30, 2014.

Williston Hunter Canada Asset Sale

On April 10, 2014, WHI Canada closed on the sale of certain oil and natural gas properties and assets located in Alberta, Canada for cash consideration of CAD $9.5 million in cash (approximately U.S. $8.7 million at the exchange rate as of the close of business on April 10, 2014). The effective date of the sale was January 1, 2014. The Company recognized a gain of $6.1 million which is recorded in gain (loss) on disposal of discontinued operations.

Sale of Williston Hunter Canada

On May 12, 2014, the Company closed on the sale of 100% of its ownership interest in the Company's Canadian subsidiary, WHI Canada, whose assets consisted primarily of oil and natural gas properties located in the Tableland Field in Saskatchewan, Canada, for a purchase price of CAD $75.0 million (approximately U.S. $68.8 million at the exchange rate as of the close of business on May 12, 2014), prior to customary purchase price adjustments, with an effective date of March 1, 2014, of which CAD $18.4 million was placed in escrow pending final approval from the Canadian Revenue Authority and included in accounts receivable- joint interests and other as of June 30, 2014. The Company subsequently received the cash held in escrow in early July 2014. The Company recognized a loss of $12.8 million which is recorded in gain (loss) on disposal of discontinued operations. The loss on disposal of WHI Canada for the three and six months ended June 30, 2014 includes $20.7 million in foreign currency translation adjustment which was reclassified out of accumulated other comprehensive income upon closing on the sale of our foreign operation.


9



The following shows the Company's assets and liabilities held for sale at June 30, 2014 and December 31, 2013:
  
 
June 30,
2014
 
December 31,
2013
 
  
(in thousands)
Accounts receivable
 
$
927

 
$
4,362

Other current assets
 
711

 
1,004

Oil and natural gas properties, net
 
71,935

 
150,770

Gas transportation, gathering, and processing equipment and other, net
 
12,972

 
11,721

Other long-term assets
  
28

 
196

Total assets held for sale
  
$
86,573

 
$
168,053

 
 
 
 
 
Accounts payable
 
$
7,659

 
$
7,292

Accrued liabilities and other liabilities
 
10,302

 
5,573

Asset retirement obligations
 
6,975

 
8,678

Other long-term liabilities
  
4,335

 
5,845

Total liabilities held for sale
  
$
29,271

 
$
27,388


Sale of Eagle Ford Hunter

On April 24, 2013, the Company closed on the sale of all of its ownership interest in its wholly-owned subsidiary, Eagle Ford Hunter, Inc. ("Eagle Ford Hunter") to an affiliate of Penn Virginia Corporation for a total purchase price of approximately $422.1 million paid to the Company in the form of $379.8 million in cash (after estimated customary initial purchase price adjustments) and 10.0 million shares of common stock of Penn Virginia valued at approximately $42.3 million (based on the closing market price of the stock of $4.23 as of April 24, 2013). The effective date of the sale was January 1, 2013. At the date of closing, the Company initially recognized a preliminary gain on the sale of $172.5 million, net of tax, pending final working capital adjustments.

In the months that followed closing, the Company and Penn Virginia were unable to agree upon the final settlement of the working capital adjustments as called for in the purchase and sale agreement and the disagreement was subsequently submitted to arbitration. The determination by the arbitrator was received by the Company on July 25, 2014 and resulted in a downward adjustment of the cash portion of the purchase price of $33.7 million plus accrued interest of $1.3 million. The Company had previously reserved and recognized substantially all of this obligation in its financial statements as of December 31, 2013. For the three and six months ended June 30, 2014, the Company recorded a downward adjustment to the gain on sale of Eagle Ford Hunter of $2.7 million and $7.0 million, respectively. See "Note 20 - Subsequent Events" for additional information.

The Company included the results of operations of MHP for all periods presented, WHI Canada through May 12, 2014, and Eagle Ford Hunter through April 24, 2013, in discontinued operations as follows:
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Revenues
 
$
8,234

 
$
24,623

 
$
20,517

 
$
68,413

Expenses
 
(4,345
)
 
(30,013
)
 
(13,178
)
 
(58,238
)
Other income (expense)
 

 
1,893

 
(88
)
 
3,136

Income tax expense
 

 
(4,187
)
 

 
(4,232
)
Income (loss) from discontinued operations, net of tax
 
3,889

 
(7,684
)
 
7,251

 
9,079

Income (loss) on sale of discontinued operations, net of taxes
 
(5,212
)
 
172,452

 
(32,374
)
 
172,452

Income (loss) from discontinued operations, net of taxes
 
$
(1,323
)
 
$
164,768

 
$
(25,123
)
 
$
181,531



10



Other Divestitures

Sale of Certain Other Eagle Ford Shale Assets

On January 28, 2014, the Company, through its wholly-owned subsidiary Shale Hunter LLC ("Shale Hunter") and certain other affiliates, closed on the sale of certain of its oil and natural gas properties and related assets located in the Eagle Ford Shale in South Texas to New Standard Energy Texas LLC ("NSE Texas"), a subsidiary of New Standard Energy Limited ("NSE"), an Australian Securities Exchange-listed Australian company.

The assets sold consisted primarily of interests in leasehold acreage located in Atascosa County, Texas and working interests in five horizontal wells, of which four were operated by the Company. The effective date of the sale was December 1, 2013. As consideration for the assets sold, the Company received aggregate purchase price consideration of $15.5 million in cash, after customary purchase price adjustments, and 65,650,000 ordinary shares of NSE with a fair value of approximately $9.4 million at January 28, 2014 (based on the closing market price of $0.14 per share on January 28, 2014). These investment holdings represent approximately 17% of the total shares outstanding of NSE at January 28, 2014, and have been designated as available-for-sale securities, which are carried at fair value. The Company recognized a loss on the sale of the Shale Hunter assets of $4.5 million.

In connection with the closing of the sale, Shale Hunter and NSE Texas entered into a transition services agreement which provides that, during a specified transition period ending on July 28, 2015 unless otherwise extended or modified, Shale Hunter will provide NSE Texas with certain transitional services relating to the assets sold for which it is receiving a monthly fee.

Upon, and as a result of, the closing of the sale on January 28, 2014, the borrowing base under the Company’s asset-based, senior secured revolving credit facility was automatically reduced by $10.0 million to $232.5 million as of the closing date, but prior to the increase in the borrowing base discussed in "Note 10 - Debt".

NOTE 3 - OIL & NATURAL GAS SALES

During the three and six months ended June 30, 2014 and 2013, the Company recognized sales from oil, natural gas, and natural gas liquids ("NGLs") as follows:

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Oil
$
39,839

 
$
33,122

 
$
74,111

 
$
58,694

Natural gas
25,453

 
12,810

 
49,583

 
21,263

NGLs
12,898

 
3,651

 
24,668

 
4,267

Total oil and natural gas sales
$
78,190

 
$
49,583

 
$
148,362

 
$
84,224



NOTE 4 - PROPERTY, PLANT, & EQUIPMENT

Oil and Natural Gas Properties

The following sets forth the net capitalized costs under the successful efforts method for oil and natural gas properties as of:
 
June 30,
2014
 
December 31,
2013
 
(in thousands)
Mineral interests in properties:
 
 
 
Unproved leasehold costs
$
538,872

 
$
469,337

Proved leasehold costs
334,918

 
336,357

Wells and related equipment and facilities
615,998

 
536,023

Advances to operators for wells in progress
20,740

 
13,571

Total costs
1,510,528

 
1,355,288

Less accumulated depletion, depreciation, and amortization
(181,827
)
 
(130,629
)
Net capitalized costs
$
1,328,701

 
$
1,224,659


11




Proved oil and natural gas properties are reviewed for impairment on a field-by-field basis bi-annually or when events and circumstances indicate a possible decline in the recoverability of the carrying amount of such property. Impairments of proved property of $0.2 million and $10.0 million were recorded during each of the three and six months ended June 30, 2014 and 2013, respectively.

Depletion, depreciation, and amortization expense for proved oil and natural gas properties was $30.1 million and $53.9 million for the three and six months ended June 30, 2014 and $21.5 million and $34.4 million for the three and six months ended June 30, 2013, respectively.

Exploration

Exploration expense consists primarily of abandonment charges and impairment expense for capitalized leasehold costs associated with unproved properties for which the Company has no further exploration or development plans, exploratory dry holes, and geological and geophysical costs.

During the three and six months ended June 30, 2014 and 2013, the Company recognized exploration expense as follows:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Leasehold impairments
$
8,834

 
$
3,272

 
$
22,489

 
$
32,625

Geological and geophysical
353

 
274

 
727

 
654

     Total exploration expense
$
9,187

 
$
3,546

 
$
23,216

 
$
33,279


Leasehold impairment expense recorded by the Company during the three and six months ended June 30, 2014 consisted of $8.8 million and $19.9 million, respectively, in the U.S. upstream segment related to leases in the Williston Basin and $2.6 million during the six months ended June 30, 2014 in the U.S. upstream segment related to leases in the Appalachian Basin. Leasehold impairment expense of $3.3 million and $32.6 million during the three and six months ended June 30, 2013 primarily related to leases in the Williston Basin. Impairments of leases in the Williston and Appalachian Basins for all periods presented related to leases that expired undrilled during the period or are expected to expire and that the Company does not plan to develop or extend.

Capitalized Costs Greater Than a Year

As of June 30, 2014, the Company had suspended exploratory well costs capitalized for periods greater than one year related to the Farley pad in Washington County, Ohio and the Farley #1305 H well. The Farley pad was constructed to drill multiple horizontal wells into a previously untested zone in the Utica formation. The Company spud the Farley #1305 H in April of 2013, and experienced well pressure instability during the fracture stimulation stage of completion. Further fracture stimulation and evaluation of this well will depend on the outcome of the drilling and completion of the Farley #1306 H and #1304 H wells, which were drilled in 2014 and are expected to be fracture stimulated and tested in early 2015 upon completion of a new natural gas pipeline. Aggregate cost incurred through June 30, 2014 for the Farley pad and the Farley #1305 H well were $1.1 million and $13.8 million, respectively.

Gas Transportation, Gathering, and Processing Equipment and Other

The historical cost of gas transportation, gathering, and processing equipment and other property, presented on a gross basis with accumulated depreciation, as of June 30, 2014 and December 31, 2013 is summarized as follows:

 
June 30,
2014
 
December 31,
2013
 
(in thousands)
Gas transportation, gathering and processing equipment and other
$
405,320

 
$
315,642

Less accumulated depreciation
(35,996
)
 
(26,222
)
Net capitalized costs
$
369,324

 
$
289,420



12



Depreciation expense for gas transportation, gathering, and processing equipment and other property was $5.0 million and $9.6 million for the three and six months ended June 30, 2014, respectively, and $3.6 million and $6.8 million for the three and six months ended June 30, 2013, respectively.

The Company sells and leases gas treating and processing equipment, classified as gas transportation, gathering, and processing equipment and other property and included in the table above, much of which is leased to third party operators for treating gas at the wellhead.  The leases generally have a term of three years or less.  The equipment under leases in place as of June 30, 2014 had a net carrying value of $11.9 million, and the terms of such leases provide for future lease payments to the Company extending up to August 2016.  As of June 30, 2014, primarily all the leases to third parties were non-cancelable, with future minimum aggregate base rentals payable to the Company of $3.4 million over the twelve months ending June 30, 2015 and $0.7 million, in the aggregate, thereafter.


NOTE 5 - INTANGIBLE ASSETS

Intangible assets consist primarily of gas gathering and processing contracts and customer relationships. The following table summarizes the Company's net intangible assets as of June 30, 2014 and December 31, 2013:
 
 
June 30,
 
December 31,
 
 
2014
 
2013
 
 
(in thousands)
Customer relationships
 
$
5,434

 
$
5,434

Trademark
 
859

 
859

Existing contracts
 
4,199

 
4,199

   Total intangible assets
 
10,492

 
10,492

Less: accumulated amortization
 
(4,965
)
 
(3,962
)
   Intangible assets, net of accumulated amortization
 
$
5,527

 
$
6,530


Amortization expense for intangible assets was $502,000 and $1.0 million for the three and six months ended June 30, 2014 and $200,000 and $1.4 million for the three and six months ended June 30, 2013, respectively.

The Company performed its annual impairment test of goodwill as of April 1, 2014. As a result of the Company's analysis no impairment of goodwill was indicated.



NOTE 6 - INVENTORY

The Company’s materials and supplies inventory is primarily comprised of frac sand used in the completion process of hydraulic fracturing. As of June 30, 2014 and December 31, 2013, the frac sand inventory is anticipated to be used in its entirety within the coming year, and is classified in current assets along with other inventory.

The following table shows the composition of the Company's inventory as of:

 
 
June 30,
2014
 
December 31,
2013
 
 
(in thousands)
Materials and supplies
 
$
3,440

 
$
6,790

Commodities
 
390

 
368

     Inventory
 
$
3,830

 
$
7,158



13



NOTE 7 - ASSET RETIREMENT OBLIGATIONS
 

The following table summarizes the Company’s asset retirement obligation ("ARO") activities during the six-month period ended June 30, 2014 and for the year ended December 31, 2013:
 
June 30, 2014
December 31, 2013
 
(in thousands)
Asset retirement obligation at beginning of period
$
16,216

$
30,680

Assumed in acquisitions

17

Liabilities incurred
216

253

Liabilities settled
(21
)
(98
)
Liabilities sold
(523
)
(7,614
)
Accretion expense
751

2,264

Revisions in estimated liabilities (1)

1,935

Reclassified as liabilities associated with assets held for sale

(11,148
)
Effect of foreign currency translation

(73
)
Asset retirement obligation at end of period
16,639

16,216

Less: current portion (included in other liabilities)
(71
)
(53
)
Asset retirement obligation at end of period
$
16,568

$
16,163

________________________________
 (1) $1.5 million of the revisions in estimated liabilities is related to change in assumptions used with respect to certain wells in the Williston Basin in North Dakota during 2013.
 

NOTE 8 - 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
 
Transfers between Levels 1 and 2 occur at the end of the reporting period in which it is determined that the observability of significant inputs has increased or decreased. There were no transfers between levels of the fair value hierarchy during 2014 and 2013. In January 2014, the Company acquired common shares of NSE in partial consideration of an asset sale. The significant inputs used in valuing the NSE common shares, which have a quoted market price in an active market, were designated as Level 1 as of June 30, 2014.

The Company used the following fair value measurements for certain of the Company's assets and liabilities at June 30, 2014 and December 31, 2013:
 
Level 1 Classification:
 
Available for Sale Securities
 
At June 30, 2014 and December 31, 2013, the Company held common and preferred stock of publicly traded companies with quoted prices in an active market.  Accordingly, the fair market value measurements of these securities have been classified as Level 1.
 

14



Level 2 Classification:
 
Commodity Derivative Instruments
 
The Company does not designate its derivative instruments as hedges and therefore does not apply hedge accounting.  The estimated fair value amounts of the Company’s commodity 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 commodity derivative instruments are valued using public indices, the instruments themselves are traded with unrelated counterparties and are not openly traded on an exchange. Although the Company is exposed to credit risk to the extent of nonperformance by the counterparties to these derivative contracts, the Company does not anticipate such nonperformance and monitors the credit worthiness of its counterparties on an ongoing basis.
 
Level 3 Classification:
 
Preferred Stock Embedded Derivative
 
At June 30, 2014 and December 31, 2013, the Company had a preferred stock embedded derivative liability resulting from its Eureka Hunter Holdings Series A Preferred Units, which contain certain conversion features, redemption options, and other features.

The fair value of the bifurcated conversion feature was valued using the "with and without" analysis in a simulation model based upon management's estimate of the expected life of the conversion feature. The key assumptions used in the model to determine fair value at June 30, 2014 were as follows:
 
June 30, 2014
Volatility
24
%
Credit spread
10.5
%
Expected term
1-2 years

Total enterprise value (in millions)
$
608.0


The selection of assumptions for expected term and total enterprise value were made based on a weighting of possible outcomes. The term of the conversion feature, which is linked to the terms of the Eureka Hunter Holdings Amended and Restated Limited Liability Company Agreement ("the Eureka Hunter Holdings LLC Agreement"), could range from zero to 6 years. The total enterprise value of Eureka Hunter Holdings is based upon a weighting of valuations ranging from $406 million to $1 billion based upon multiples of earnings before interest, taxes, depreciation, and amortization of comparable companies and precedent market transactions.

The fair value calculation is sensitive to movements in volatility, estimated remaining term, and the total enterprise value of Eureka Hunter Holdings. A decrease in the estimated term of the conversion feature results in a higher fair value of the conversion feature. During the three-month period ended June 30, 2014, the Company changed the estimated term to 1-2 years due to changes in the Company's intention with respect to the Eureka Hunter Holdings Series A Preferred Units. As the implied volatility of the instruments increases so too does the fair value of the derivative liability arising from the conversion and redemption features. Similarly, as the total enterprise value of Eureka Hunter Holdings increases, the fair value of the derivative liability increases. Decreases in volatility and total enterprise value would result in a reduction to the fair value of the derivative liability associated with these instruments.

Convertible Security Embedded Derivative
 
The Company recognized an embedded derivative asset resulting from the fair value of the bifurcated conversion feature associated with the convertible note it received in February 2012 as partial consideration upon the sale of Hunter Disposal, LLC ("Hunter Disposal") to GreenHunter Resources, Inc. ("GreenHunter"), a related party. The embedded derivative was valued using a Black-Scholes model valuation of the conversion option.
 

15



The key inputs used in the Black-Scholes option pricing model were as follows:
 
June 30, 2014
Life
2.6 years

Risk-free interest rate
0.85
%
Estimated volatility
40
%
Dividend

GreenHunter stock price at end of period
$
1.99

 
The sensitivity of the estimate of volatility used in determining the fair value of the convertible security embedded derivative would not have a significant impact to the Company's financial statements based on the value of the assets as compared to the financial statements as a whole.

The following tables present the fair value hierarchy levels of the Company's financial assets and liabilities which are measured and carried at fair value on a recurring basis:
 
Fair Value Measurements on a Recurring Basis
 
June 30, 2014
 
 (in thousands)
Assets
Level 1
 
Level 2
 
Level 3
Available for sale securities
$
10,661

 
$

 
$

Commodity derivative assets

 
123

 

Convertible security derivative assets

 

 
317

Total assets at fair value
$
10,661

 
$
123

 
$
317

Liabilities
 
 
 
 
 
Commodity derivative liabilities
$

 
$
6,129

 
$

Convertible preferred stock derivative liabilities

 

 
115,307

Total liabilities at fair value
$

 
$
6,129

 
$
115,307

 
Fair Value Measurements on a Recurring Basis
 
December 31, 2013
 
(in thousands)
Assets
Level 1
 
Level 2
 
Level 3
Available for sale securities
$
1,819

 
$

 
$

Commodity derivative assets

 
554

 

Convertible security derivative assets

 

 
79

Total assets at fair value
$
1,819

 
$
554

 
$
79

Liabilities
 
 
 
 
 
Commodity derivative liabilities
$

 
$
2,279

 
$

Convertible preferred stock derivative liabilities

 

 
75,934

Total liabilities at fair value
$

 
$
2,279

 
$
75,934

 
The following table presents a reconciliation of the financial derivative asset and liability measured at fair value using significant unobservable inputs (Level 3 inputs) for the six-month period ended June 30, 2014:
 
Preferred Stock Embedded
Derivative Liability
 
Convertible Security Embedded
Derivative Asset
 
(in thousands)
Fair value as of December 31, 2013
$
(75,934
)
 
$
79

Issuance of redeemable preferred stock
(5,479
)
 

Increase in fair value recognized in gain (loss) on derivative contracts, net
(33,894
)
 
238

Fair value as of June 30, 2014
$
(115,307
)
 
$
317


16




As of June 30, 2014, the valuation of the conversion feature embedded in the Eureka Hunter Holdings Series A Preferred Units increased the fair value of the embedded derivative liability by approximately $33.9 million as a result of changes in the total enterprise value of Eureka Hunter Holdings and the Company's estimate of the expected remaining term of the conversion feature. Management's estimate of the expected remaining term of the conversion option as of June 30, 2014 shortened the time horizon previously estimated by management, resulting in higher fair value of the conversion feature. Management's estimates are based upon several factors, including an estimate of the likelihood of each of the possible settlement options, which include redemption through a call or put option, or a liquidity event that triggers conversion to Class A Common Units of Eureka Hunter Holdings.

Other Fair Value Measurements
 
The following table presents the carrying amounts and fair values categorized by fair value hierarchy level of the Company's financial instruments not carried at fair value: 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
 
Fair Value Hierarchy
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
 
 
 
 
(in thousands)
Senior Notes
 
Level 2
 
$
597,279

 
$
666,000

 
$
597,230

 
$
651,300

MHR Senior Revolving Credit Facility
 
Level 3
 
$
164,500

 
$
164,500

 
$
218,000

 
$
218,000

Eureka Hunter Pipeline second lien term loan
 
Level 3
 
$

 
$

 
$
50,000

 
$
58,921

Eureka Hunter Pipeline Credit Agreement
 
Level 3
 
$
65,000

 
$
65,000

 
$

 
$

Equipment Notes Payable
 
Level 3
 
$
24,395

 
$
24,303

 
$
18,615

 
$
17,676


The fair value of the Company's Senior Notes is based on quoted market prices available for Magnum Hunter's Senior Notes.  The fair value hierarchy for the Company's Senior Notes is Level 2 (quoted prices for similar assets in active markets).
 
The carrying values of the Company's senior revolving credit facility (the "MHR Senior Revolving Credit Facility") and the outstanding borrowings under the Eureka Hunter Pipeline Credit Agreement approximate fair value as they are subject to short-term floating interest rates that approximate the rates available to the Company for those periods.  The fair value hierarchy for the MHR Senior Revolving Credit Facility and the Eureka Hunter Pipeline Credit Agreement is Level 3.
 
The fair value of Eureka Hunter Pipeline's second lien term loan as of December 31, 2013 is the estimated cost to acquire the debt, including a credit spread for the difference between the issue rate and the period end market rate.  The credit spread is the Company’s default or repayment risk.  The credit spread (premium or discount) is determined by comparing the Company’s fixed-rate notes and credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt.

The fair value of all fixed-rate notes and the credit facility is based on interest rates currently available to the Company.

Fair Value on a Non-Recurring Basis
The Company follows the provisions of ASC Topic 820, Fair Value Measurement, for non-financial assets and liabilities measured at fair value on a non-recurring basis. As it relates to the Company, ASC Topic 820 applies to certain non-financial assets and liabilities as may be acquired in a business combination and thereby measured at fair value, measurements of impairments, and the initial recognition of asset retirement obligations, for which fair value is used. These ARO estimates are derived from historical costs as well as management's expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, the Company has designated these measurements as Level 3.
 

17



NOTE 9 - FINANCIAL INSTRUMENTS AND DERIVATIVES
 
Investment Holdings
Below is a summary of changes in investments for the six months ended June 30, 2014:

 
Available for Sale Securities (1)
 
Equity Method Investments (2)
 
(in thousands)
Carrying value as of December 31, 2013
$
1,819

 
$
940

Securities received as consideration for assets sold
9,447

 

Equity in net loss recognized in other income (expense)

 
(403
)
Change in fair value recognized in other comprehensive loss
(605
)
 

Carrying value as of June 30, 2014
$
10,661

 
$
537


(1)
Available for sale securities includes $123,000 that has been classified as held for sale associated with the classification of MHP as a discontinued operation.
(2) Equity method investments includes $304,000 classified as long-term other assets.

The Company's investments have been presented in the consolidated balance sheet as of June 30, 2014 as follows:
 
 
Available for Sale Securities
Equity Method Investments
Total
Investments - Current
$
10,538

$
233

$
10,771

Investments - Long-Term

304

304

Investments - Held for Sale
123


123

Carrying value as of June 30,2014
$
10,661

$
537

$
11,198



The cost for equity securities and their respective fair values as of June 30, 2014 and December 31, 2013 are as follows:

 
 
June 30, 2014
 
 
(in thousands)
 
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Securities available for sale, carried at fair value:
 
 
 
 
 
 
 
 
Equity securities
 
$
9,875

 
$

 
$
(1,404
)
 
$
8,471

Equity securities - related party (see "Note 15 - Related Party Transactions")
 
2,200

 

 
(10
)
 
2,190

Total Securities available for sale
 
$
12,075

 
$

 
$
(1,414
)
 
$
10,661


 
 
December 31, 2013
 
 
(in thousands)
 
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Securities available for sale, carried at fair value:
 
 
 
 
 
 
 
 
Equity securities
 
$
428

 
$

 
$
(281
)
 
$
147

Equity securities - related party (see "Note 15 - Related Party Transactions")
 
2,200

 

 
(528
)
 
1,672

Total Securities available for sale
 
$
2,628

 
$

 
$
(809
)
 
$
1,819



18



The methods of determining the fair values of Magnum Hunter's investments in equity securities are described in "Note 8 - Fair Value of Financial Instruments".

The Company's investment holdings are concentrated in three issuers whose business activities are related to the oil and natural gas or minerals mining industries. These investments are ancillary to the Company's overall operating strategy and such concentrations of risk related to investment holdings do not pose a substantial risk to the Company's operational performance. The Company evaluates factors that it believes could influence the fair value of the issuers' securities such as management, assets, earnings, cash generation, and capital needs.

The fair values of equity securities fluctuate based upon changes in market prices. Gross unrealized losses on investments are considered for other-than-temporary impairment when such losses have continued for more than a 12-month period. However, security specific circumstances may arise where an investment is considered impaired when gross unrealized losses have been observed for less than twelve months. As of June 30, 2014 and December 31, 2013, the Company did not hold any equity securities which were in a gross unrealized loss position for greater than a year, and no impairments were recognized for the periods then ended.

Commodity and Financial Derivative Instruments

The Company periodically enters into certain commodity derivative instruments such as futures contracts, swaps, collars, and basis swap contracts, to mitigate commodity price risk associated with a portion of the Company's future monthly natural gas and crude oil production and related cash flows. The Company has not designated any commodity derivative instruments as hedges.

In a commodities swap agreement, the Company trades the fluctuating market prices of oil or natural gas at specific delivery points over a specified period, for fixed prices. As a producer of oil and natural gas, the Company holds these commodity derivatives to protect the operating revenues and cash flows related to a portion of its future natural gas and crude oil sales from the risk of significant declines in commodity prices, which is intended to help reduce exposure to price risk and improve the likelihood of funding its capital budget.  If the price of a commodity rises above what the Company has agreed to receive in the swap agreement, the amount that it agrees to pay the counterparty would theoretically be offset by the increased amount it received for its production.

As of June 30, 2014, the Company had the following commodity derivative instruments:
 
 
 
 
Weighted Average
Natural Gas
Period
MMBtu/day
Price per MMBtu
Collars (1)
July 2014- Dec 2014
15,000

$4.27 - $5.23
Swaps
July 2014 - Dec 2014
31,000

$4.23
 
Jan 2015 - Dec 2015
20,000

$4.18
Ceilings purchased (call)
July 2014 - Dec 2014
16,000

$5.91
Ceilings sold (call)
July 2014 - Dec 2014
16,000

$5.91
 
 
 
Weighted Average
Crude Oil
Period
Bbl/day
Price per Bbl
Collars (1)
July 2014 - Dec 2014
663

$85.00 - $91.25
 
Jan 2015 - Dec 2015
259

$85.00 - $91.25
Traditional three-way collars (2)
July 2014 - Dec 2014
4,000

$64.94 - $85.00 - $102.50
Ceilings sold (call)
Jan 2015 - Dec 2015
1,570

$120.00
Floors sold (put)
July 2014 - Dec 2014
663

$65.00
 
Jan 2015 - Dec 2015
259

$70.00
________________________________    
(1) A collar is a sold call and a purchased put. Some collars are "costless" collars with the premiums netting to approximately zero.
(2) These three-way collars are a combination of three options: a sold call, a purchased put and a sold put.
    
Currently, Bank of America, Bank of Montreal, KeyBank National Association, Credit Suisse Energy, LLC, Citibank, N.A., ABN AMRO, the Royal Bank of Canada, and J. Aron & Company are the only counterparties to the Company's commodity derivatives positions.  The Company is exposed to credit losses in the event of nonperformance by the counterparties; however, it does not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.  All counterparties, or their affiliates, are participants in the MHR Senior Revolving Credit Facility, and the collateral for the outstanding borrowings under the MHR Senior Revolving Credit Facility is used as collateral for its commodity derivatives with those counterparties.

19




At June 30, 2014, the Company had preferred stock derivative liabilities resulting from certain conversion features, redemption options, and other features of its Eureka Hunter Holdings Series A Preferred Units. See "Note 8 - Fair Value of Financial Instruments" and "Note 13 - Redeemable Preferred Stock".

At June 30, 2014, the Company also had a convertible security embedded derivative asset primarily due to the conversion feature of the promissory note received as partial consideration for the sale of Hunter Disposal. See "Note 8 - Fair Value of Financial Instruments," "Note 2 - Divestitures and Discontinued Operations," and "Note 15 - Related Party Transactions".
 
The following table summarizes the fair value of the Company's commodity and financial derivative contracts as of the dates indicated:
 
 
 
 
 
Derivative Assets
 
Derivative Liabilities
Derivatives not designated as hedging instruments
 
Balance Sheet Classification
 
June 30, 2014
 
December 31, 2013
 
June 30, 2014
 
December 31, 2013
 
 
 
 
(in thousands)
Commodity
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$

 
$
529

 
$

 
$

 
 
Derivative assets - long-term
 
123

 
25

 

 

 
 
Derivative liabilities
 

 

 
(5,709
)
 
(1,903
)
 
 
Derivative liabilities - long-term
 

 

 
(420
)
 
(376
)
Total commodity
 
 
 
$
123

 
$
554

 
$
(6,129
)
 
$
(2,279
)
Financial
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
317

 
$
79

 
$

 
$

 
 
Derivative liabilities - long-term
 

 

 
(115,307
)
 
(75,934
)
Total financial
 
 
 
$
317

 
$
79

 
$
(115,307
)
 
$
(75,934
)
Total derivatives
 
 
 
$
440

 
$
633

 
$
(121,436
)
 
$
(78,213
)

Certain of the Company's derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Company and a counterparty in the event of default or upon the occurrence of certain termination events.  The tables below summarize the Company's commodity derivatives and the effect of master netting arrangements on the presentation in the Company's consolidated balance sheets as of:
 
June 30, 2014
 
Gross Amounts of Recognized Assets and Liabilities
Gross Amounts Offset on the Consolidated Balance Sheet
Net Amount
 
(in thousands)
Current assets:  Fair value of derivative contracts        
$
565

565

$

Long-term assets:  Fair value of derivative contracts        
239

116

123

Current liabilities:  Fair value of derivative contracts        
(6,274
)
(565
)
(5,709
)
Long-term liabilities:  Fair value of derivative contracts        
(536
)
(116
)
(420
)
 
$
(6,006
)

$
(6,006
)


20



 
December 31, 2013
 
Gross Amounts of Assets and Liabilities
Gross Amounts Offset on the Consolidated Balance Sheet
Net Amount
 
(in thousands)
Current assets:  Fair value of derivative contracts        
$
4,034

3,505

$
529

Long-term assets:  Fair value of derivative contracts        
516

491

25

Current liabilities:  Fair value of derivative contracts        
(5,408
)
(3,505
)
(1,903
)
Long-term liabilities:  Fair value of derivative contracts        
(867
)
(491
)
(376
)
 
$
(1,725
)

$
(1,725
)


The following table summarizes the net gain (loss) on all derivative contracts included in gain (loss) on derivative contracts, net on the consolidated statements of operations for the three and six months ended June 30, 2014 and 2013:
 
 
Three Months Ended June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Gain (loss) on settled transactions
$
(2,267
)
 
$
(1,261
)
 
$
(4,551
)
 
$
(305
)
Gain (loss) on open contracts
(40,569
)
 
7,661

 
(37,938
)
 
(786
)
Total gain (loss)
$
(42,836
)
 
$
6,400

 
$
(42,489
)
 
$
(1,091
)
 

NOTE 10 - DEBT
 
Long-term debt at June 30, 2014 and December 31, 2013 consisted of the following: 
 
June 30, 2014
 
December 31, 2013
 
(in thousands)
Senior Notes payable due May 15, 2020, interest rate of 9.75%, net of unamortized net discount of $2.7 million at June 30, 2014 and December 31, 2013
$
597,279

 
$
597,230

Various equipment and real estate notes payable with maturity dates January 2015 - April 2021, interest rates of 4.25% - 7.94%(1)
24,395

 
18,615

Eureka Hunter Pipeline Credit Agreement due March 28, 2018, interest rate of 3.66%
65,000

 

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

 
50,000

MHR Senior Revolving Credit Facility due April 13, 2016, interest rate of 3.57% at June 30, 2014 and 3.56% at December 31, 2013
164,500

 
218,000

 
851,174

 
883,845

Less: current portion
(10,005
)
 
(3,967
)
Total long-term debt obligations, net of current portion
$
841,169

 
$
879,878

 _________________________________
(1)  
Includes notes classified as liabilities associated with assets held for sale of which $4.6 million is current and $2.2 million is long-term at June 30, 2014, and $0.2 million is current and $3.8 million is long-term at December 31, 2013.

21




The following table presents the scheduled or expected approximate annual maturities of debt, gross of unamortized discount of $2.7 million
 
(in thousands)
2014
$
3,142

2015
9,989

2016
173,047

2017
2,358

2018
65,360

Thereafter
600,000

Total
$
853,896


MHR Senior Revolving Credit Facility

On December 13, 2013, the Company entered into a Third Amended and Restated Credit Agreement (the "Credit Agreement") by and among the Company, Bank of Montreal, as Administrative Agent, the lenders party thereto and the agents party thereto. The Credit Agreement amended and restated that certain Second Amended and Restated Credit Agreement, dated as of April 13, 2011, by and among such parties, as amended (the "Prior Credit Agreement"). The terms of the Credit Agreement are substantially similar to the Prior Credit Agreement.

On May 6, 2014, the Company and the other parties to the Credit Agreement entered into the First Amendment to Third Amended and Restated Credit Agreement (the "Amendment"). The Amendment increased the borrowing base from $232.5 million to $325.0 million in connection with the regular semi-annual redetermination of the Company's borrowing base derived from the Company's proved crude oil and natural gas reserves. The borrowing base may be increased or decreased in connection with such redeterminations up to a maximum commitment level of $750.0 million. The Amendment provides that such increased borrowing base shall be reduced (i) by the lesser of $25.0 million or 50% of the net proceeds from issuances by the Company of common equity on or before July 1, 2014 (other than common equity issued pursuant to any stock incentive or stock option plan or any other compensatory arrangements); (ii) by certain specified reductions in connection with certain proposed asset dispositions; (iii) on July 1, 2014 by $25.0 million less any prior adjustment of the borrowing base due to an equity issuance as contemplated by clause (i); and (iv) by $0.25 for each $1.00 of any additional Senior Notes issued by the Company. The Amendment further provides that from May 6, 2014 through July 1, 2014 the Applicable Margin (as defined in the Credit Agreement) component of the interest charged on revolving borrowings under the Credit Agreement shall be 2.75% for ABR Loans (as defined in the Credit Agreement) and 3.75% for Eurodollar Loans (as defined in the Credit Agreement). From and after July 1, 2014 through the date of the Company’s delivery of a certificate for the quarter ended June 30, 2014, with respect to, among other things, the Company’s compliance with the covenants in the Credit Agreement (the "Compliance Certificate"), the Applicable Margin component of interest charged on revolving borrowings under the Credit Agreement will range from 1.50% to 2.25% for ABR Loans and from 2.50% to 3.25% for Eurodollar Loans. From and after the Company’s delivery of the Compliance Certificate, the Applicable Margin component of interest charged on revolving borrowings under the Credit Agreement will range from 1.00% to 1.75% for ABR Loans and from 2.00% to 2.75% for Eurodollar Loans.
In addition, the Amendment modified certain of the Credit Agreement’s financial covenants, including:
(i)
permitting the Company to take into account the borrowing base increase as though it occurred on March 31, 2014 for purposes of maintaining a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0;
(ii)
providing for a ratio of EBITDAX to Interest Expense of not less than (A) 2.00 to 1.0 for the fiscal quarter ended March 31, 2014, (B) 2.25 to 1.0 for the fiscal quarters ending June 30, 2014 and September 30, 2014, and (C) 2.50 to 1.0 for the fiscal quarter ending December 31, 2014 and for each fiscal quarter ending thereafter; and
(iii)
beginning with the fiscal quarter ended June 30, 2014, providing for a ratio of total Debt to EBITDAX of not more than (A) 4.75 to 1.0 for the fiscal quarters ending June 30, 2014 and September 30, 2014, (B) 4.50 to 1.0 for the fiscal quarter ending December 31, 2014, and (C) 4.25 to 1.0 for the fiscal quarter ending March 31, 2015 and for each fiscal quarter ending thereafter.
The Amendment also (i) amends the definition of EBITDAX and provides that certain acquisitions and dispositions be given pro forma effect in the calculation of EBITDAX; (ii) increases the letter of credit commitment from $10.0 million to $50.0 million

22



and provides that outstanding letter of credit exposure not be included in certain determinations of Debt; (iii) requires the total value of the Company’s oil and gas properties included in the reserve reports for the borrowing base determinations in which the lenders under the Credit Agreement have perfected liens be increased from 80% to 90%; and (iv) modifies certain covenants in the Credit Agreement with respect to permitted investments by the Company to increase flexibility.
The Company incurred direct financing costs associated with entering into the Amendment to the Credit Agreement in the amount of $3.1 million, which will be deferred and amortized over the remaining term of the Credit Agreement.
As of June 30, 2014, the borrowing base under this facility was $272.5 million, and $164.5 million of borrowings were outstanding ($218.0 million outstanding as of December 31, 2013). The borrowing base as of June 30, 2014 reflects reductions in the borrowing base of $25 million and $27.5 million related to the issuance of equity and the sale of our 100% equity interest in WHI Canada, respectively, both of which closed in May 2014. The borrowing base is subject to further automatic reductions upon the issuance of additional Senior Notes and in certain other circumstances.

At June 30, 2014, the Company was in compliance with all of its covenants, as amended, contained in the MHR Senior Revolving Credit Facility. 

Eureka Hunter Pipeline Credit Agreement

On March 28, 2014, Eureka Hunter Pipeline entered into a credit agreement (the "Eureka Hunter Pipeline Credit Agreement"), by and among Eureka Hunter Pipeline, as borrower, ABN AMRO Capital USA, LLC, as a lender and as administrative agent, and the other lenders party thereto.

The credit agreement, which has a maturity date of March 28, 2018, provides for a revolving credit facility in an aggregate principal amount of up to $117.0 million (with the potential to increase the aggregate commitment under the credit agreement to an aggregate principal amount of up to $150.0 million, subject to the consent of the lender parties and the satisfaction of certain conditions), secured by a first lien on substantially all of the assets of Eureka Hunter Pipeline and its subsidiaries, which include TransTex Hunter, LLC, as well as by Eureka Hunter Pipeline’s pledge of the equity in its subsidiaries. The subsidiaries of Eureka Hunter Pipeline also guarantee Eureka Hunter Pipeline’s obligations under the credit agreement. The credit agreement is non-recourse to Magnum Hunter. The Company incurred deferred financing costs directly associated with entering into the Eureka Hunter Pipeline Credit Agreement in the amount of $1.2 million which will be amortized straight-line over the term of the revolving credit facility. The straight-line method of amortization results in substantially the same periodic amortization as the effective interest method.

The terms of the credit agreement provide that the borrowings thereunder may be used, among other specified purposes, (1) to refinance existing indebtedness of Eureka Hunter Pipeline outstanding on the credit agreement closing date, including the term loan of $50.0 million in principal amount owed under the Second Lien Term Loan Agreement, dated August 16, 2011, by and among Eureka Hunter Pipeline and Pennant Park Investment Corporation, as a lender, the other lenders party thereto and U.S. Bank National Association, as collateral agent, (2) to finance future expansion activities related to Eureka Hunter Pipeline’s gathering system in West Virginia and Ohio, (3) to finance acquisitions by Eureka Hunter Pipeline and its subsidiaries permitted under the terms of the credit agreement, (4) to refinance from time to time certain letters of credit of Eureka Hunter Pipeline and its subsidiaries, (5) to provide working capital for their operations, and (6) for their other general business purposes.

The Eureka Hunter Pipeline Credit Agreement provides for a commitment fee based on the unused portion of the commitment under the credit agreement of 0.50% per annum when the consolidated leverage ratio is greater than or equal to 3.0 to 1.0 and a commitment fee of 0.375% when the consolidated leverage ratio is less than 3.0 to 1.0.

In general terms, borrowings under the credit agreement will, at Eureka Hunter Pipeline’s election, bear interest:

on base rate loans, at the per annum rate equal to the sum of (A) the base rate (defined as the highest of (i) the per annum rate of interest established by JPMorgan Chase Bank, N.A. as its prime rate for U.S. dollar loans, (ii) the Adjusted Eurodollar Rate (as defined in the credit agreement) for an interest period of one-month, plus 1.0%, or (iii) the federal funds rate, plus 0.50% per annum), and (B) a margin of 1.0% to 2.50% per annum; or
on Eurodollar Loans, at the per annum rate equal to the sum of (A) the Eurodollar Rate (as defined in the credit agreement) adjusted for certain statutory reserve requirements for Eurocurrency liabilities, and (B) a margin of 2.0% to 3.50% per annum.

If an event of default occurs under the credit agreement, generally, the applicable lenders may increase the interest rate then in effect by an additional 2.0% per annum for the period that the default exists.


23



The credit agreement contains customary affirmative covenants and negative covenants that, among other things, restrict the ability of each of Eureka Hunter Pipeline and its subsidiaries to, with certain exceptions: (1) incur indebtedness; (2) grant liens; (3) enter into hedging transactions; (4) enter into a merger or consolidation or sell, lease, transfer or otherwise dispose of all or substantially all of its assets or the stock of any of its subsidiaries; (5) issue equity; (6) dispose of any material assets or properties; (7) pay or declare dividends or make certain distributions; (8) invest in, extend credit to or make advances or loans to any person or entity; (9) engage in material transactions with any affiliate; (10) enter into any agreement that restricts or imposes any condition upon the ability of (a) any of Eureka Hunter Pipeline or its subsidiaries to create, incur or permit any lien upon any of its assets or properties, or (b) any such subsidiary to pay dividends or other distributions, to make or repay loans or advances, to guarantee indebtedness or to transfer any of its property or assets to Eureka Hunter Pipeline or its subsidiaries; (11) change the nature of its business; (12) amend its organizational documents or material agreements; (13) change its fiscal year; (14) enter into sale and leaseback transactions; (15) make acquisitions; (16) make certain capital expenditures; or (17) take any action that could result in regulation as a utility.

The credit agreement requires Eureka Hunter Pipeline to satisfy certain financial covenants, including maintaining:

a maximum leverage ratio (defined as the ratio of (i) consolidated funded debt to (ii) annualized consolidated EBITDA), as of the end of each fiscal quarter, not greater than (A) 4.75 to 1.00 for the fiscal quarters ending March 31, 2014 through September 30, 2014, and (B) 4.50 to 1.00 for the fiscal quarter ending December 31, 2014 and each fiscal quarter ending thereafter; and
a minimum interest coverage ratio (defined as the ratio of (i) annualized consolidated EBITDA to (ii) annualized consolidated interest charges for such period), as of the end of each fiscal quarter, not less than (A) 2.75 to 1.00 for the fiscal quarters ending March 31, 2014 through September 30, 2014, and (B) 2.50 to 1.00 for the fiscal quarter ending December 31, 2014 and each fiscal quarter ending thereafter.

The obligations of Eureka Hunter Pipeline under the credit agreement may be accelerated upon the occurrence of an event of default. Events of default include customary events for these types of financings, including, among other things, payment defaults, defaults in the performance of affirmative or negative covenants, the inaccuracy of representations or warranties, material defaults under or termination of certain material contracts, defaults relating to judgments, certain bankruptcy proceedings, a change in control and any material adverse change.

As of June 30, 2014 the maximum amount available under the credit agreement was $72.2 million, and the Company had $65.0 million in borrowings outstanding. The borrowing capacity is subject to certain upward or downward reductions during the term of the credit agreement.
 
As of June 30, 2014, Eureka Hunter Pipeline was in compliance with all of its covenants contained in the Eureka Hunter Pipeline Credit Agreement.

Eureka Hunter Pipeline Credit Facilities

Upon executing the new Eureka Hunter Pipeline Credit Agreement on March 28, 2014, Eureka Hunter Pipeline terminated its revolving credit agreement with SunTrust Bank and the term loan agreement with Pennant Park (the "Original Eureka Hunter Credit Facilities"). Eureka Hunter Pipeline used proceeds from the Eureka Hunter Pipeline Credit Agreement to pay in full all outstanding obligations related to the termination of the Original Eureka Hunter Credit Facilities, which included the principal outstanding amount of $50.0 million, a prepayment penalty of $2.2 million, and accrued, unpaid interest of $1.5 million.

Equipment Note Payable

On January 21, 2014, the Company's wholly owned subsidiary, Alpha Hunter Drilling, LLC, entered into a master loan and security agreement with CIT Finance LLC to borrow $5.6 million at an interest rate of 7.94% over a term of forty-eight months. The note is collateralized by field equipment, and the Company is a guarantor on the note.


24



Interest Expense

The following table sets forth interest expense for the three and six month periods ended June 30, 2014 and 2013, respectively:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014