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FORM 10-Q
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
x      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015 
-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.)
 
909 Lake Carolyn Parkway, Suite 600, Irving, Texas 75039
(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 May 8, 2015, there were 208,300,253 shares of the registrant's common stock ($0.01 par value) outstanding.
 




QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2015
 
TABLE OF CONTENTS
 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (unaudited):
 
 
 
Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014
 
 
Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014
 
 
Consolidated Statement of Shareholders' Equity for the Three Months Ended March 31, 2015
 
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per-share data)
(unaudited)
 
March 31,
2015
 
December 31,
2014
ASSETS
 
 
 
CURRENT ASSETS
 

 
 

Cash and cash equivalents
$
13,653

 
$
53,180

Accounts receivable:
 
 
 
Oil and natural gas sales
6,718

 
16,319

Joint interests and other, net of allowance for doubtful accounts of $459 at March 31, 2015 and $308 at December 31, 2014
10,654

 
23,888

Derivative assets
15,376

 
16,586

Inventory
3,412

 
2,268

Investments
2,225

 
3,864

Prepaid expenses and other assets
2,750

 
4,091

Total current assets
54,788

 
120,196

 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 

 
 

Oil and natural gas properties, successful efforts method of accounting, net
1,066,623

 
1,098,235

Gas transportation, gathering and processing equipment and other, net
77,534

 
77,423

Total property, plant and equipment, net
1,144,157

 
1,175,658

 
 
 
 
OTHER ASSETS
 

 
 

Deferred financing costs, net of amortization of $15,906 at March 31, 2015 and $15,099 at December 31, 2014
22,093

 
22,856

Other assets
875

 
3,928

Investment in affiliates, equity method
346,912

 
347,191

Total assets
$
1,568,825

 
$
1,669,829


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)
 
March 31,
2015
 
December 31,
2014
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 

CURRENT LIABILITIES
 

 
 

Current portion of long-term debt
$
10,171

 
$
10,770

Accounts payable
112,459

 
130,502

Accounts payable to related parties
2,239

 
90

Accrued liabilities
35,204

 
20,277

Revenue payable
6,532

 
5,450

Other liabilities
2,377

 
1,356

Total current liabilities
168,982

 
168,445

 
 
 
 
Long-term debt, net of current portion
940,809

 
937,963

Asset retirement obligations, net of current portion
25,564

 
26,229

Other long-term liabilities
5,499

 
5,337

Total liabilities
1,140,854

 
1,137,974

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 14)


 


 
 
 
 
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 March 31, 2015 and December 31, 2014, with a liquidation preference of $25.00 per share
100,000

 
100,000

 
 
 
 
SHAREHOLDERS' EQUITY
 

 
 

Preferred stock, 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 March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014, 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 202,449,056 and 201,420,701 issued, and 201,534,104 and 200,505,749 outstanding as of March 31, 2015 and December 31, 2014, respectively
2,024

 
2,014

Additional paid in capital
912,957

 
909,783

Accumulated deficit
(899,313
)
 
(784,546
)
Accumulated other comprehensive loss
(66
)
 
(7,765
)
Treasury stock, at cost:
 
 
 
Series E Preferred Stock, 81 shares as of March 31, 2015 and December 31, 2014
(2,030
)
 
(2,030
)
Common stock, 914,952 shares as of March 31, 2015 and December 31, 2014
(1,914
)
 
(1,914
)
Total shareholders' equity
327,971

 
431,855

Total liabilities and shareholders' equity
$
1,568,825

 
$
1,669,829


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 
 March 31,
 
2015
 
2014
REVENUES AND OTHER
 
 
 
Oil and natural gas sales
$
49,391

 
$
75,965

Midstream natural gas gathering, processing, and marketing
458

 
31,723

Oilfield services
4,865

 
5,621

Other revenue
682

 
173

     Total revenue
55,396

 
113,482

OPERATING EXPENSES
 
 
 
Production costs
13,805

 
13,056

Severance taxes and marketing
2,823

 
4,975

Transportation, processing, and other related costs
20,337

 
12,033

Exploration
8,490

 
15,924

Impairment of proved oil and gas properties
13,854

 
16,754

Midstream natural gas gathering, processing, and marketing
494

 
29,999

Oilfield services
4,211

 
3,947

Depletion, depreciation, amortization and accretion
57,750

 
29,409

Loss (gain) on sale of assets, net
(1,652
)
 
4,075

General and administrative
12,772

 
16,072

     Total operating expenses
132,884

 
146,244

OPERATING LOSS
(77,488
)
 
(32,762
)
OTHER INCOME (EXPENSE)
 
 
 
Interest income
49

 
45

Interest expense
(23,465
)
 
(23,897
)
Gain on derivative contracts, net
3,102

 
347

Gain on dilution of interest in Eureka Hunter Holdings, LLC
2,390

 

Loss from equity method investments
(2,900
)
 
(246
)
Other expense
(7,607
)
 
(44
)
     Total other expense, net
(28,431
)
 
(23,795
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
(105,919
)
 
(56,557
)
Income tax benefit

 

LOSS FROM CONTINUING OPERATIONS, NET OF TAX
(105,919
)
 
(56,557
)
Income from discontinued operations, net of tax

 
3,369

Loss on disposal of discontinued operations, net of tax

 
(8,513
)
NET LOSS
(105,919
)
 
(61,701
)
Net loss attributed to non-controlling interests

 
109

LOSS ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
(105,919
)
 
(61,592
)
Dividends on preferred stock
(8,848
)
 
(14,896
)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
(114,767
)
 
$
(76,488
)
Weighted average number of common shares outstanding, basic and diluted
200,918,521

 
172,146,431

Loss from continuing operations per share, basic and diluted
$
(0.57
)
 
$
(0.41
)
Loss from discontinued operations per share, basic and diluted

 
(0.03
)
NET LOSS PER COMMON SHARE, BASIC AND DILUTED
$
(0.57
)
 
$
(0.44
)
 
 
 
 
AMOUNTS ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
 
 
 
Loss from continuing operations, net of tax
$
(105,919
)
 
$
(56,448
)
Loss from discontinued operations, net of tax

 
(5,144
)
Net loss
$
(105,919
)
 
$
(61,592
)

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 
 March 31,
 
2015
 
2014
NET LOSS
$
(105,919
)
 
$
(61,701
)
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Foreign currency translation gain (loss)
115

 
(2,348
)
Unrealized loss on available for sale securities
(1,408
)
 
(56
)
Amounts reclassified for other than temporary impairment of available for sale securities
8,992

 

Total other comprehensive income (loss)
7,699

 
(2,404
)
COMPREHENSIVE LOSS
(98,220
)
 
(64,105
)
Comprehensive loss attributable to non-controlling interests

 
109

COMPREHENSIVE LOSS ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
$
(98,220
)
 
$
(63,996
)
 
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
 
Total
Shareholders'
Equity
BALANCE, January 1, 2015
4,425

 
4

 
201,421

 
$
221,244

 
$
95,069

 
$
2,014

 
$
909,783

 
$
(784,546
)
 
$
(7,765
)
 
$
(3,944
)
 
$
431,855

Share-based compensation

 

 
1,028

 

 

 
10

 
3,481

 

 

 

 
3,491

Shares withheld for taxes

 

 

 

 

 

 
(307
)
 

 

 

 
(307
)
Dividends on preferred stock

 

 

 

 

 

 

 
(8,848
)
 

 

 
(8,848
)
Net loss

 

 

 

 

 

 

 
(105,919
)
 

 

 
(105,919
)
Foreign currency translation

 

 

 

 

 

 

 

 
115

 

 
115

Unrealized loss on available for sale securities, net

 

 

 

 

 

 

 

 
(1,408
)
 

 
(1,408
)
Amounts reclassified from accumulated other comprehensive income for other than temporary impairment of available for sale securities

 

 

 

 

 

 

 

 
8,992

 

 
8,992

BALANCE, March 31, 2015
4,425

 
4

 
202,449

 
$
221,244

 
$
95,069

 
$
2,024

 
$
912,957

 
$
(899,313
)
 
$
(66
)
 
$
(3,944
)
 
$
327,971


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)
 
Three Months Ended March 31,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(105,919
)
 
$
(61,701
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depletion, depreciation, amortization and accretion
57,750

 
29,408

Exploration
7,838

 
13,712

Impairment of proved oil and gas properties
13,854

 

Share-based compensation
3,185

 
1,061

Cash paid for plugging wells

 
(22
)
Loss (gain) on sale of assets
(1,652
)
 
31,238

Unrealized loss (gain) on derivative contracts
1,209

 
(2,631
)
Gain on dilution of interest in Eureka Hunter Holdings, LLC
(2,390
)
 

Loss from equity method investment
2,900

 
246

Other than temporary impairment of investment
8,992

 

Amortization and write-off of deferred financing costs and discount on Senior Notes included in interest expense
1,124

 
3,621

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
30,313

 
(7,828
)
Inventory
(1,144
)
 
3,246

Prepaid expenses and other current assets
1,585

 
(562
)
Accounts payable
14,616

 
(26,020
)
Revenue payable
446

 
4,841

Accrued liabilities
15,429

 
15,268

Net cash provided by operating activities
48,136

 
3,877

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures and advances
(84,255
)
 
(39,127
)
Change in deposits and other long-term assets
2,789

 
(107
)
Proceeds from sales of assets
580

 
16,415

Net cash used in investing activities
(80,886
)
 
(22,819
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net proceeds from sale of common shares

 
28,897

Proceeds from sale of Eureka Hunter Holdings Series A Preferred Units

 
3,920

Proceeds from exercise of warrants and options

 
3,983

Preferred stock dividend
(8,848
)
 
(10,770
)
Repayments of debt
(3,070
)
 
(84,683
)
Proceeds from borrowings on debt
5,000

 
101,616

Deferred financing costs
(44
)
 
(1,331
)
Change in other long-term liabilities
163

 
24

Net cash provided by (used in) financing activities
(6,799
)
 
41,656

Effect of changes in exchange rate on cash
22

 
25

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(39,527
)
 
22,739

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
53,180

 
41,713

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
13,653

 
$
64,452


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 ("Magnum Hunter" or the "Company"), is a Dallas, Texas based independent oil and gas company engaged primarily in the exploration for and the exploitation, acquisition, development and production of natural gas and natural gas liquids resources predominantly in shale plays in the United States, along with certain oil field service activities and a substantial equity method investment in midstream operations.

Presentation of Consolidated Financial Statements
 
The accompanying unaudited interim consolidated financial statements of Magnum Hunter have been prepared in accordance with accounting principles generally accepted in the United States of America ("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 unless otherwise indicated) 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, 2014, as amended.

The consolidated financial statements also reflect the interests of our wholly-owned subsidiary, 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.
 
Non-Controlling Interest in Consolidated Subsidiaries

Prior to December 18, 2014, the Company consolidated Eureka Hunter Holdings, LLC ("Eureka Hunter Holdings") in which it owned 48.6% as of December 18, 2014 and December 31, 2014. 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. Following a series of transactions and capital contributions that occurred up to and including December 18, 2014, the Company no longer held a controlling financial interest in Eureka Hunter Holdings. Accordingly, the Company deconsolidated Eureka Hunter Holdings as of December 18, 2014 and accounts for its retained interest under the equity method of accounting with the Company's share of Eureka Hunter Holdings' earnings recorded in "loss from equity method investment" in the consolidated statements of operations. The Company owned 45.5% of the equity interests of Eureka Hunter Holdings as of March 31, 2015. See "Note 7 - Investments and Derivatives".

Prior to July 24, 2014, the Company owned 87.5% of the equity interests in PRC Williston, LLC ("PRC Williston"), which sold substantially all of its assets on December 30, 2013. On July 24, 2014, the Company executed a settlement and release agreement with Drawbridge Special Opportunities Fund LP and Fortress Value Recovery Fund I LLC f/k/a D.B. Zwirn Special Opportunities Fund, L.P. As a result of this settlement agreement, the Company now owns 100% of the equity interests in PRC Williston and has all rights and claims to its remaining assets and liabilities, which are not significant. Consequently, there is no longer any non-controlling interest in PRC Williston's equity reflected in the consolidated financial statements as of March 31, 2015.




7



Reclassification of Prior-Period Balances

Certain prior period balances have been reclassified to correspond with current-period presentation.  As a result of the Company's decision in September 2014 to withdraw its plan to divest MHP and cease all marketing efforts, the results of operations of MHP, which had previously been reported as a component of discontinued operations, have been reclassified to continuing operations for all periods presented, and all assets and liabilities of MHP that were previously reported as assets and liabilities held for sale in our consolidated balance sheet have been reclassified to assets and liabilities held for use effective September 2014. See "Note 2 - Acquisitions and Discontinued Operations"

The Company has separately classified transportation and processing expenses incurred to deliver gas to processing plants and/or to selling points, which were previously included as components of lease operating expenses and severance taxes and marketing, in the accompanying consolidated statements of operations for all periods presented. The Company has also renamed lease operating expenses as "Production costs" and presented transportation and processing expenses as "Transportation, processing, and other related costs" in order to provide more meaningful information on costs associated with production and development.

Regulated Activities

Sentra Corporation, a wholly-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 the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Subtopic 980-605, Regulated Operations-Revenue Recognition, which requires covered entities to record regulatory assets and liabilities resulting from actions of regulators. During the three months ended March 31, 2015, the Company had gas transmission, compression and processing revenue, which included gas utility sales from Sentra Corporation's regulated operations aggregating $378,261. During the three months ended March 31, 2014, the Company had revenues of $171,072 related to Sentra Corporation's regulated 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 April 2015, the FASB issued ASU 2015-03, Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this update. This amendment is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.

In April 2015, the FASB issued ASU 2015-04, Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Agreement. This update provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This update does not change GAAP for a customer's accounting for service contracts. This amendment is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for all entities, either prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.


8



NOTE 2 - ACQUISITIONS AND DISCONTINUED OPERATIONS
 
Acquisitions

Agreement to Purchase Utica Shale Acreage

On August 12, 2013, Triad Hunter, LLC ("Triad Hunter"), a wholly-owned subsidiary of the Company, entered into an asset purchase agreement with MNW Energy, LLC ("MNW"). MNW is an Ohio limited liability company that represents an informal association of various land owners, lessees and sub-lessees of mineral acreage who own or have rights in mineral acreage located in Monroe, Noble and/or Washington Counties, Ohio. Pursuant to the purchase agreement, Triad Hunter agreed to acquire from MNW up to 32,000 net mineral acres, including currently leased and subleased acreage, located in such counties, over a period of time, in staggered closings, subject to certain conditions. The maximum purchase price, if MNW delivers 32,000 acres with acceptable title, would be $142.1 million, excluding title costs. During the three months ended March 31, 2015, Triad Hunter purchased 2,665 net leasehold acres from MNW for an aggregate purchase price of $12.0 million. Triad Hunter made no purchases from MNW during the three months ended March 31, 2014. As of March 31, 2015, Triad Hunter had purchased a total of 25,044 net leasehold acres from MNW for an aggregate purchase price of $103.9 million.

The Company believes that MNW may not be able to provide Triad Hunter with satisfactory title to all of the remaining net leasehold acres subject to purchase under the asset purchase agreement, and therefore the Company anticipates that most of the remaining net leasehold acres will not be ultimately acquired by Triad Hunter.

Discontinued Operations

In September 2013, the Company adopted a plan to divest all of its interests in (i) MHP, 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"), which was a wholly-owned subsidiary of the Company. The Company closed on the sale of its interests in WHI Canada during the second quarter of 2014. Effective September 2014, the Company withdrew its plan to divest MHP. Consequently, the assets and liabilities of MHP are presented as held for use effective September 2014 and the results of MHP's operations are presented in continuing operations for all periods presented in these interim consolidated financial statements.

As of March 31, 2015 and December 31, 2014, the Company did not have any assets or liabilities associated with assets held for sale.

The Company included the results of operations of WHI Canada through May 12, 2014, the date of sale, in discontinued operations. The following presents the results of our discontinued operations for the three months ended March 31, 2014. There was no income or loss from discontinued operations or gain or loss from the disposal of discontinued operations for the three months ended March 31, 2015.
 
 
 
Three Months Ended 
 March 31,
 
 
2014
 
 
(in thousands)
Revenues
 
$
6,244

Expenses
 
(2,881
)
Other income
 
6

Income tax benefit
 

Income from discontinued operations, net of tax
 
3,369

Loss on disposal of discontinued operations, net of taxes of $0
 
(8,513
)
Loss from discontinued operations, net of taxes
 
$
(5,144
)


9



NOTE 3 - OIL & NATURAL GAS SALES

During the three months ended March 31, 2015 and 2014, the Company recognized sales from oil, natural gas, and natural gas liquids ("NGLs") as follows:

 
 
Three Months Ended 
 March 31,
 
 
2015
 
2014
 
 
(in thousands)
Oil
$
9,544

 
$
35,353

Natural gas
31,860

 
27,520

NGLs
7,987

 
13,092

Total oil and natural gas sales
$
49,391

 
$
75,965


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:
 
March 31,
2015
 
December 31,
2014
 
(in thousands)
Mineral interests in properties:
 
 
 
Unproved leasehold costs
$
450,530

 
$
481,643

Proved leasehold costs
284,253

 
257,185

Wells and related equipment and facilities
634,229

 
606,406

Advances to operators for wells in progress
1,297

 
1,411

Total costs
1,370,309

 
1,346,645

Less accumulated depletion, depreciation, and amortization
(303,686
)
 
(248,410
)
Net capitalized costs
$
1,066,623

 
$
1,098,235


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 properties of $13.9 million were recorded during the three months ended March 31, 2015, primarily related to Appalachian Basin properties. Impairments of proved properties of $16.8 million were recorded for the three months ended March 31, 2014, which were comprised entirely of impairments recorded on MHP's proved oil and natural gas properties.

Depletion, depreciation, and amortization expense for proved oil and natural gas properties was $55.3 million for the three months ended March 31, 2015 and $23.9 million for the three months ended March 31, 2014.

Exploration

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


10



During the three months ended March 31, 2015 and 2014, the Company recognized exploration expense as follows:

 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(in thousands)
Leasehold impairments
$
7,838

 
$
15,550

Geological and geophysical
652

 
374

     Total exploration expense
$
8,490

 
$
15,924


Leasehold impairment expense recorded by the Company during the three months ended March 31, 2015 consisted of $7.6 million in the U.S. upstream segment related to leases in the Williston Basin and $0.2 million related to leases in the Appalachian Basin. Leasehold impairment expense during the three months ended March 31, 2014 consisted of $11.1 million related to leases in the Williston Basin and $2.6 million related to leases in the Appalachian 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.

The Company also recognized $1.9 million in leasehold impairment expense related to fair value write-downs of MHP for the three months ended March 31, 2014.


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 March 31, 2015 and December 31, 2014 is summarized as follows:

 
March 31,
2015
 
December 31,
2014
 
(in thousands)
Gas transportation, gathering and processing equipment and other
$
102,639

 
$
100,436

Less accumulated depreciation
(25,105
)
 
(23,013
)
Net capitalized costs
$
77,534

 
$
77,423


Depreciation expense for gas transportation, gathering, and processing equipment and other property was $1.9 million for the three months ended March 31, 2015 and $4.7 million for the three months ended March 31, 2014.


11



NOTE 5 - ASSET RETIREMENT OBLIGATIONS
 
The following table summarizes the Company's asset retirement obligation ("ARO") activities during the three-month period ended March 31, 2015 and for the year ended December 31, 2014:
 
March 31, 2015
December 31, 2014
 
(in thousands)
Asset retirement obligation at beginning of period
$
26,524

$
16,216

Assumed in acquisitions
92


Liabilities incurred
4

218

Liabilities settled

(107
)
Liabilities sold

(2,598
)
Accretion expense
618

1,478

Revisions in estimated liabilities (1)
(862
)
3,208

Reclassified from liabilities associated with assets held for sale

8,109

Asset retirement obligation at end of period
26,376

26,524

Less: current portion (included in other liabilities)
(812
)
(295
)
Asset retirement obligation at end of period
$
25,564

$
26,229

________________________________
 (1) Revisions in estimated liabilities during 2014 relate to a change in assumptions used with respect to certain wells in the Appalachian Basin in Ohio and West Virginia.
 
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
GAAP defines 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.  GAAP also establishes 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 the three month periods ended March 31, 2015 and 2014.

The Company used the following fair value measurements for certain of the Company's assets and liabilities at March 31, 2015 and December 31, 2014:
 
Level 1 Classification:
 
Available for Sale Securities
 
At March 31, 2015 and December 31, 2014, 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.
 

12



Level 2 Classification:
 
Commodity Derivative Instruments
 
At March 31, 2015 and December 31, 2014, the Company had commodity derivative financial instruments in place. The Company does not designate its derivative instruments as hedges and therefore does not apply hedge accounting.  Changes in fair value of derivative instruments subsequent to the initial measurement are recorded as gain (loss) on derivative contracts, in other income (expense). 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.

As of March 31, 2015 and December 31, 2014, the Company's derivative contracts were with financial institutions, many of which were either senior lenders to the Company or affiliates of such senior lenders, and some of which had investment grade credit ratings. Certain counterparties to the Company's commodity derivatives positions are no longer participants in the Company's credit facilities following the execution of new credit agreements on October 22, 2014. See "Note 8 - Debt". All of the counterparties are believed to have minimal credit risk. 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:
 
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.
 
The key inputs used in the Black-Scholes option pricing model were as follows:
 
March 31, 2015
Life
1.9
Risk-free interest rate
0.77%
Estimated volatility
85%
Dividend
GreenHunter stock price at end of period
$0.70
 
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.

13




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
 
March 31, 2015
 
 (in thousands)
Assets
Level 1
 
Level 2
 
Level 3
Available for sale securities
$
2,225

 
$

 
$

Commodity derivative assets

 
15,326

 

Convertible security derivative assets

 

 
50

Total assets at fair value
$
2,225

 
$
15,326

 
$
50

 
Fair Value Measurements on a Recurring Basis
 
December 31, 2014
 
(in thousands)
Assets
Level 1
 
Level 2
 
Level 3
Available for sale securities
$
3,864

 
$

 
$

Commodity derivative assets

 
16,511

 

Convertible security derivative assets

 

 
75

Total assets at fair value
$
3,864

 
$
16,511

 
$
75

 
The following table presents the changes in fair value of the derivative assets and liabilities measured at fair value using significant unobservable inputs (Level 3 inputs) for the three-month period ended March 31, 2015:
 
Convertible Security Embedded
Derivative Asset
 
(in thousands)
Fair value as of December 31, 2014
$
75

Decrease in fair value recognized in gain on derivative contracts, net
(25
)
Fair value as of March 31, 2015
$
50


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: 
 
 
 
 
March 31, 2015
 
December 31, 2014
 
 
Fair Value Hierarchy
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
 
 
 
 
(in thousands)
Senior Notes
 
Level 2
 
$
597,404

 
$
546,000

 
$
597,355

 
$
498,000

MHR Senior Revolving Credit Facility
 
Level 3
 
$
5,000

 
$
5,000

 
$

 
$

MHR Second Lien Term Loan
 
Level 3
 
$
328,559

 
$
319,584

 
$
329,140

 
$
329,140

Equipment Notes Payable
 
Level 3
 
$
20,017

 
$
19,957

 
$
22,238

 
$
22,150


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 identical or similar assets in markets that are not active).
 
The carrying value of the Company's senior revolving credit facility (the "MHR Senior Revolving Credit Facility") approximates fair value as the facility is subject to short-term floating interest rates that approximate the rates available to the Company at these dates.  The fair value hierarchy for the MHR Senior Revolving Credit Facility is Level 3.

14



 
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. 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. A reconciliation of the beginning and ending balances of the Company's ARO is presented in "Note 5 - Asset Retirement Obligations".

The Company recorded impairment charges of $13.9 million during the three months ended March 31, 2015 as a result of writing down the carrying value of certain proved properties to estimated fair value. The fair value of the properties impaired was $495.5 million as of March 31, 2015. In order to determine the amounts of the impairment charges, Magnum Hunter compares net capitalized costs of proved oil and natural gas properties to estimated undiscounted future net cash flows using management's expectations of economically recoverable proved, probable, and possible reserves. If the net capitalized cost exceeds the undiscounted future net cash flows, Magnum Hunter impairs the net cost basis down to the discounted future net cash flows, which is management's estimate of fair value. Significant inputs used to determine the fair value include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a discounted cash flow model utilizing a 10% discount rate. The underlying commodity prices embedded in the Company's estimated cash flows are the product of a process that begins with forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors that Magnum Hunter's management believes will impact realizable prices. The inputs used by management for the fair value measurements utilized in this review include significant unobservable inputs, and therefore, the fair value measurements employed are classified as Level 3 for these types of assets.

The Company recorded impairment charges of $16.8 million during the three months ended March 31, 2014 in order to record MHP at the estimated selling price less costs to sell, based on additional information on estimated selling prices obtained through active marketing of the assets. The fair value of these net assets was $60.0 million as of March 31, 2014. The Company has designated this valuation as Level 3. Effective September 2014, the Company withdrew its plan to divest MHP. Consequently, the assets and liabilities of MHP are presented as held for use as of September 2014 and the results of MHP's operations are presented in continuing operations for all periods presented in these interim consolidated financial statements.
 
NOTE 7 - INVESTMENTS AND DERIVATIVES
 
Investment Holdings - Available for Sale Securities

The Company's investment holdings in available for sale securities 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. At December 31, 2014, 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 period then ended. At March 31, 2015, the Company's investment in New Standard Energy Limited ("NSE"), an Australian Securities Exchange-listed Australian company, was in a gross unrealized loss position for greater than a year. The Company reviewed its investment for impairment and considered such factors as NSE's future business outlook, the prevailing economic environment and the overall market condition for the Company's investment. As a result of its review, the Company recorded an other-than-temporary impairment of $9.0 million which was reclassified from accumulated other comprehensive income into "Other expense" on the consolidated statements of operations during the period ended March 31, 2015, related to the decline in value of its investment in NSE.





15



Investment Holdings - GreenHunter

The Company holds an equity method investment in common shares of GreenHunter received as partial consideration for the sale by Triad Hunter of its equity ownership interest in Hunter Disposal to GreenHunter in 2012. The GreenHunter common stock investment had no carrying value at March 31, 2015 or December 31, 2014. The GreenHunter common shares are publicly traded and had a fair value of $1.3 million at March 31, 2015 and December 31, 2014, which is not reflected in the carrying value since the Company's investment is accounted for using the equity method.

Investment Holdings - Eureka Hunter Holdings

Following a series of transactions and capital contributions that occurred up to and including December 18, 2014, the Company determined it no longer held a controlling financial interest in Eureka Hunter Holdings. However, the Company exercises significant influence through its retained equity interest and through representation on Eureka Hunter Holdings' board of managers. As a result, the Company uses the equity method to account for its retained interest in Eureka Hunter Holdings.

On November 18, 2014, the Company entered into a letter agreement (the "November 2014 Letter Agreement") with Eureka Hunter Holdings and MSIP II Buffalo Holdings, LLC ("MSI"), an affiliate of Morgan Stanley Infrastructure II Inc. Pursuant to the November 2014 Letter Agreement, the parties agreed that, among other things, the Company would make a $13.3 million capital contribution (the "MHR 2015 Contribution") in cash to Eureka Hunter Holdings on or before March 31, 2015, in exchange for additional Series A-1 Units in Eureka Hunter Holdings.

On March 30, 2015, the Company, Eureka Hunter Holdings and MSI entered into an additional letter agreement (the "March 2015 Letter Agreement"), pursuant to which the parties agreed that, among other things, (i) the Company is no longer required to make the MHR 2015 Contribution and (ii) MSI would make certain additional capital contributions to Eureka Hunter Holdings in exchange for additional Series A-2 Units. Pursuant to the March 2015 Letter Agreement, MSI purchased additional Series A-2 Units of Eureka Hunter Holdings as follows:

i.
On March 31, 2015, MSI made a capital contribution in cash to Eureka Hunter Holdings of approximately $27.2 million (the "2015 Growth CapEx Projects Contribution") in exchange for additional Series A-2 Units in Eureka Hunter Holdings with the proceeds of such capital contribution to be used to fund certain of Eureka Hunter Pipeline's 2015 capital expenditures. The 2015 Growth CapEx Projects Contribution is subject to the Company's right to make an MHR Catch-Up Contribution (as defined in the Second Amended and Restated Limited Liability Company Agreement of Eureka Hunter Holdings (the "LLC Agreement")).

ii.
On March 31, 2015, MSI made an additional capital contribution in cash to Eureka Hunter Holdings of approximately $37.8 million (the "Additional Contribution") in exchange for additional Series A-2 Units in Eureka Hunter Holdings with the proceeds of such Additional Contribution to be used to fund certain of Eureka Hunter Pipeline's additional capital expenditures and for certain other uses.
 
Immediately after giving effect to these transactions, the Company and MSI owned 45.53% and 53.00%, respectively, of the equity interests of Eureka Hunter Holdings, with the Company's equity ownership consisting of Series A-1 Units and MSI's equity ownership consisting of Series A-2 Units.
 
Pursuant to the March 2015 Letter Agreement, the parties further agreed that the Company has the right, in its discretion, to fund as a capital contribution to Eureka Hunter Holdings, all or a portion (in specified minimum amounts) of its pro-rata share of the Additional Contribution, which pro-rata share equals approximately $18.7 million (the "MHR Additional Contribution Component"), before June 30, 2015 (the "MHR Contribution Deadline"), in exchange for additional Series A-1 Units in Eureka Hunter Holdings (the "MHR 2015 Make-up Contribution").  If the Company funds the full MHR Additional Contribution Component on or prior to the MHR Contribution Deadline, (but excluding any other capital contributions that may be made by the Company or MSI pursuant to the LLC Agreement), the Company and MSI will own 46.44% and 52.11%, respectively, of the Class A Common Units of Eureka Hunter Holdings.
 

16



If the Company does not fund the full MHR Additional Contribution Component by the MHR Contribution Deadline, the Company's Series A-1 Units in Eureka Hunter Holdings will be adjusted downward by an amount equivalent to the unfunded portion of the MHR Additional Contribution Component divided by the purchase price per unit paid by MSI in connection with the 2015 Growth CapEx Projects Contribution and the Additional Contribution. If the Company does not fund any of the MHR Additional Contribution Component on or prior to the MHR Contribution Deadline, the Company and MSI will own 44.53% and 53.98%, respectively, of the Class A Common Units of Eureka Hunter Holdings. If the Company does not fund all or a portion of the MHR Additional Contribution, a downward adjustment of its capital account, as described above, could result in the Company recognizing a loss on its investment in Eureka Hunter Holdings. If the Company funds a portion (in specified minimum amounts), but not all of the MHR Additional Contribution Component, on or prior to the MHR Contribution Deadline, then the ownership percentages of the Company and MSI will be adjusted in a manner consistent with the first sentence of this paragraph but with the downward adjustment for the Company being proportionally reduced.

After the earlier to occur of (a) the Company having made contributions equal to the MHR Additional Contribution Component and (b) the MHR Contribution Deadline, the Company may make MHR Catch-Up Contributions (as defined in the LLC Agreement) in accordance with the LLC Agreement (as modified by the November 2014 Letter Agreement as to the applicable time and amount limitations) in respect of any MHR Shortfall Amounts (as defined in the LLC Agreement) that are eligible to be funded by the Company under the LLC Agreement.

The Company accounted for the March 31, 2015 MSI capital contributions and the issuance of additional Series A-2 Units by Eureka Hunter Holdings in accordance with the subsequent measurement provision of ASC Topic 323, Investments - Equity Method and Joint Ventures, which requires the Company to recognize a gain or loss on the dilution of its equity interest as if the Company had sold a proportionate interest in Eureka Hunter Holdings. The Company recognized a pre-tax gain of $2.4 million based on the difference between the carrying value of the Company's Series A-1 Units and the proceeds received by Eureka Hunter Holdings for the issuance of additional Series A-2 Units to MSI which resulted in permanent dilution of the Company's equity interest in Eureka Hunter Holdings. The gain included the Company's proportionate decrease in its equity method basis difference which was reduced by $3.9 million based on the change in the Company's ownership in the net assets of Eureka Hunter Holdings after giving effect to the dilution of the Company's interest as a result of the unit issuance.

As of March 31, 2015, the Company and MSI owned 45.53% and 53.00%, respectively, of the Class A Common Units of Eureka Hunter Holdings. The Company recorded its retained interest in Eureka Hunter Holdings initially at a fair value of $347.3 million in December 2014. The carrying value of the Company's equity interest in Eureka Hunter Holdings was $346.9 million and $347.2 million at March 31, 2015 and December 31, 2014, respectively.

The recognition of the Company's retained interest in Eureka Hunter Holdings at fair value upon deconsolidation resulted in a basis difference between the carrying value of the Company's investment in Eureka Hunter Holdings and its proportionate share in net assets of Eureka Hunter Holdings. The basis difference was accounted for using the acquisition method of accounting, which requires that the basis difference be allocated to the identifiable assets of Eureka Hunter Holdings at fair value and based upon the Company's proportionate ownership.  Determining the fair value of assets and liabilities is judgmental in nature and involves the use of significant estimates and assumptions. The Company recognized a basis difference of $201.8 million upon deconsolidation related to its investment in Eureka Hunter Holdings which has preliminarily been allocated to the following identifiable assets of Eureka Hunter Holdings:

 
Identifiable Assets
 
Ending Basis December 31, 2014
Basis Amortization
Basis Reduction
Ending Basis March 31, 2015
 
(in thousands)
Fixed assets
$
5,088

$
(70
)
$
(98
)
$
4,920

Intangible assets
155,189

(1,830
)
(2,705
)
150,654

Goodwill
41,597


(1,104
)
40,493

Total basis difference
$
201,874

$
(1,900
)
$
(3,907
)
$
196,067


The components of the Company's basis difference, excluding goodwill, are being amortized over their estimated useful lives ranging from 3 to 39 years.

The Company has estimated the identifiable assets to which the basis difference is attributable to and has recorded amortization based on this estimate for the period ended March 31, 2015.  The Company is currently finalizing the fair value estimates for Eureka Hunter Holdings and is expecting to finalize this valuation during the second quarter of 2015. 

17




Summarized income information for Eureka Hunter Holdings for the three months ended March 31, 2015 is as follows:

 
Three Months Ended 
 March 31, 2015
 
(in thousands)
Operating revenues
$
13,715

Operating loss
$
(472
)
Net loss
$
(1,582
)
 
 
Magnum Hunter's interest in Eureka Hunter Holdings net loss
$
(769
)
Basis difference amortization
$
(1,900
)
Magnum Hunter's equity in earnings, net
$
(2,669
)

Below is a summary of changes in investments for the three months ended March 31, 2015:

 
Available for Sale Securities
 
Equity Method Investments 
 
(in thousands)
Carrying value as of December 31, 2014
$
3,864

 
$
347,191

Gain on dilution of interest in Eureka Hunter Holdings

 
2,390

Loss from equity method investment(1)
(231
)
 
(2,669
)
Change in fair value recognized in other comprehensive loss
(1,408
)
 

Carrying value as of March 31, 2015
$
2,225

 
$
346,912


(1) As a result of the carrying value of the Company's investment in common stock of GreenHunter being reduced to zero from equity method losses, the Company is required to allocate any additional losses to its investment in the Series C preferred stock of GreenHunter. The Company recorded additional equity method loss against the carrying value of its investment in the Series C preferred stock of GreenHunter before recording any mark-to-market adjustments.

The Company's investments have been presented in the consolidated balance sheet as of March 31, 2015 as follows:
 
 
Available for Sale Securities
Equity Method Investments
Total
Investments - Current
$
2,225

$

$
2,225

Investments - Non-current

346,912

346,912

Carrying value as of March 31, 2015
$
2,225

$
346,912

$
349,137


The cost for equity securities and their respective fair values as of March 31, 2015 and December 31, 2014 are as follows:

 
 
March 31, 2015
 
 
(in thousands)
 
 
Cost
 
Gross Unrealized Losses
 
Fair Value
Securities available for sale, carried at fair value:
 
 
 
 
 
 
Equity securities
 
$
883

 
$
(346
)
 
$
537

Equity securities - related party (see "Note 13 - Related Party Transactions")
 
2,200

 
(512
)
 
1,688

Total Securities available for sale
 
$
3,083

 
$
(858
)
 
$
2,225



18



 
 
December 31, 2014
 
 
(in thousands)
 
 
Cost
 
Gross Unrealized Losses
 
Fair Value
Securities available for sale, carried at fair value:
 
 
 
 
 
 
Equity securities
 
$
9,876

 
$
(7,323
)
 
$
2,553

Equity securities - related party (see "Note 13 - Related Party Transactions")
 
2,200

 
(889
)
 
1,311

Total Securities available for sale
 
$
12,076

 
$
(8,212
)
 
$
3,864


The methods of determining the fair values of Magnum Hunter's investments in equity securities are described in "Note 6 - Fair Value of Financial Instruments".

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 March 31, 2015, the Company had the following commodity derivative instruments:
 
 
 
 
Weighted Average
Natural Gas
Period
MMBtu/day
Price per MMBtu
Swaps
Jan 2015 - Dec 2015
40,000

$4.09
 
 
 
Weighted Average
Crude Oil
Period
Bbl/day
Price per Bbl
Collars (1)
Jan 2015 - Dec 2015
259

$85.00 - $91.25
Ceilings sold (call)
Jan 2015 - Dec 2015
1,570

$120.00
Floors sold (put)
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.

As of March 31, 2015, Bank of America, Bank of Montreal, Citibank, N.A., and the Royal Bank of Canada are the only counterparties to the Company's commodity derivatives positions.  Collateral securing the MHR Senior Revolving Credit Facility is used as collateral for the Company's commodity derivatives with those counterparties participating in the MHR Senior Revolving Credit Facility, under which the Company had outstanding borrowings of $5.0 million as of March 31, 2015. Additionally, certain counterparties to the Company's commodity derivatives positions are no longer participants in the Company's credit facilities. The Company is exposed to credit losses in the event of nonperformance by the counterparties where the Company's open commodity derivative contracts are in a gain position. The Company does not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions. See "Note 8 - Debt".

At March 31, 2015, 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 6 - Fair Value of Financial Instruments" and "Note 13 - Related Party Transactions".
 

19



The following table summarizes the fair value of the Company's commodity and financial derivative contracts as of the dates indicated:
 
 
 
Derivatives not designated as hedging instruments
 
 
Derivative Assets
 
 
March 31, 2015
 
December 31, 2014
 
 
(in thousands)
Commodity
 
 
 
 
Derivative assets
 
$
15,326

 
$
16,511

Total commodity
 
$
15,326

 
$
16,511

 
 
 
 
 
Financial
 
 
 
 
Derivative assets
 
$
50

 
$
75

Total financial
 
$
50

 
$
75

Total derivatives
 
$
15,376

 
$
16,586


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:
 
March 31, 2015
 
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        
$
16,631

$
(1,305
)
$
15,326

Current liabilities:  Fair value of derivative contracts        
(1,305
)
1,305


 
$
15,326

$

$
15,326


 
December 31, 2014
 
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        
$
18,146

$
(1,635
)
$
16,511

Current liabilities:  Fair value of derivative contracts        
(1,635
)
1,635


 
$
16,511

$

$
16,511


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 months ended March 31, 2015 and 2014:
 
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(in thousands)
Gain (loss) on settled transactions
$
4,311

 
$
(2,284
)
Gain (loss) on open contracts
(1,209
)
 
2,631

Total gain, net
$
3,102

 
$
347


20



 
NOTE 8 - DEBT
 
Long-term debt at March 31, 2015 and December 31, 2014 consisted of the following: 
 
March 31,
2015
 
December 31,
2014
 
(in thousands)
Senior Notes payable due May 15, 2020, interest rate of 9.75%, net of unamortized net discount of $2.6 million at March 31, 2015 and December 31, 2014
$
597,404

 
$
597,355

Various equipment and real estate notes payable with maturity dates February 2015 - November 2017, interest rates of 4.25% - 7.94%
20,017

 
22,238

MHR Senior Revolving Credit Facility due October 22, 2018, interest rate of 2.93% at March 31, 2015 and 2.92% at December 31, 2014
5,000

 

MHR second lien term loan due October 22, 2019, interest rate of 8.5%, net of unamortized discount of $9.7 million and $10.0 million at March 31, 2015 and December 31, 2014, respectively
328,559

 
329,140

 
950,980

 
948,733

Less: current portion
(10,171
)
 
(10,770
)
Total long-term debt obligations, net of current portion
$
940,809

 
$
937,963



The following table presents the scheduled or expected approximate annual maturities of debt, gross of unamortized discount of $12.3 million
 
(in thousands)
2015
$
7,701

2016
12,127

2017
5,948

2018
8,958

2019
325,757

Thereafter
602,826

Total
$
963,317


MHR Senior Revolving Credit Facility and Second Lien Term Loan

Senior Revolving Credit Facility

On October 22, 2014, the Company entered into the Fourth Amended and Restated Credit Agreement by and among the Company, as borrower, Bank of Montreal, as administrative agent, the lenders party thereto and the agents party thereto (the "Credit Agreement").

Under the Credit Agreement, as amended as described below, the Company is required to satisfy certain financial covenants, including maintaining:

i.
commencing with the fiscal quarter ending June 30, 2015 and for each fiscal quarter ending thereafter, a current ratio (as defined in the Credit Agreement) of not less than 1.0 to 1.0;
ii.
a leverage ratio (secured net debt to EBITDAX (as defined in the Credit Agreement) with, beginning with the fiscal quarter ending March 31, 2016, a limitation on netting of up to $100,000,000 of unencumbered cash) of not more than (a) 2.5 to 1.0 as of the last day of the fiscal quarters ending December 31, 2014, March 31, June 30, September 30, and December 31, 2015 and (c) 2.0 to 1.0 as of the last day of each fiscal quarter ending thereafter; and
iii.
the proved reserves based asset coverage ratios contained in the Second Lien Term Loan Agreement described below.


21



On February 24, 2015, the Company entered into a First Amendment to Credit Agreement and Limited Waiver (the "First Amendment") that, among other things, (i) waived the then existing current ratio covenant requirement for the December 31, 2014 compliance period and (ii) lowered the current ratio requirement to 0.75 from 1.0 for the fiscal quarter ending March 31, 2015. The current ratio requirement increases to 1.0 to 1.0 for the fiscal quarter ending June 30, 2015 and each fiscal quarter ending thereafter. The First Amendment also modified the leverage ratio requirement to remain at not more than 2.5x beginning with the December 31, 2014 compliance period through the December 31, 2015 compliance period.

In addition, pursuant to the First Amendment, until such time as the Company can demonstrate a (i) current ratio of 1.0 to 1.0 as of the last day of a fiscal quarter or, if there is a proposed Liquidity Event (described below) or other arms-length liquidity event with a non-affiliate or unrestricted subsidiary, demonstrate a current ratio of 1.0 to 1.0 on a pro forma basis as of the last day of a calendar month assuming that the Liquidity Event (or other liquidity event) had occurred during such calendar month and (ii) in the case of a decrease of the Rates for ABR Loans and Eurodollar Loans, pro forma compliance with the other applicable financial covenants as of the last day of the fiscal quarter most recently ended, (such period, the "Adjusted Period"), then:

i.
neither the Company nor any of its restricted subsidiaries may make additional investments in excess of $2 million in the aggregate in oil and gas properties (other than acreage swaps and associated assets) and other applicable assets;
ii.
neither the Company nor any of its restricted subsidiaries may make additional capital contributions to or other investments in unrestricted subsidiaries in amounts in excess of $2 million in the aggregate; and
iii.
the Company cannot make any additional capital contributions to or other investments in Eureka Hunter Holdings.

For purposes of the First Amendment, a "Liquidity Event" means any event or events resulting in (i) an increase in Liquidity (as defined in the Credit Agreement) of at least $36,000,000 as a result of an arm's length transaction with a person or entity that is not an affiliate of the Company or (ii) the receipt by the Company or any restricted subsidiary of aggregate net cash proceeds of at least $73,000,000 as a result of one or more arm's length transactions with either (a) persons or entities who are not affiliates of the Company or (b) the Company's unrestricted subsidiaries.

The First Amendment also provided that effective March 31, 2015, if a Liquidity Event (described in clause (i) of the preceding paragraph) had not occurred prior to such date, or April 30, 2015 if a proposed Liquidity Event described in clause (ii) of the preceding paragraph for which a pro forma current ratio calculation was used had not occurred prior to such date, the rates for ABR Loans and Eurodollar Loans shall automatically increase by 1.00% and the commitment fee shall automatically increase by 0.25% and such elevated rates shall continue until the day immediately preceding the date on which the Adjusted Period ends. No Liquidity Event or proposed Liquidity Event for which a pro forma current ratio calculation was used had occurred as of April 30, 2015. Accordingly the rates for ABR Loans and Eurodollar Loans and the commitment fee were increased as described in the preceding sentence.

At March 31, 2015, the Company was not in compliance with its current ratio or its total secured net debt to EBITDAX ratio (as defined) financial covenants under the Credit Agreement, as amended. In addition, the Company failed to comply with certain provisions contained in the Credit Agreement related to the aging of payables. The Company has obtained a waiver from its lenders of the current ratio and total secured net debt to EBITDAX ratio (as defined) financial covenant requirements for the March 31, 2015 compliance period and entered into the Second Amendment to Credit Agreement and Limited Waiver (the "Second Amendment") on and effective as of April 17, 2015 by and among the Company, as borrower, Bank of Montreal, as administrative agent, and the several lenders and guarantors party thereto. The waiver requires that certain events and conditions be satisfied by May 29, 2015 as further described below. The Second Amendment amended the Credit Agreement to:

i.
Extend the amount of time the Company and its Restricted Subsidiaries (as defined in the Credit Agreement) may have accounts payable outstanding after the date of invoice from 90 days to 180 days for any day on or prior to May 29, 2015, after which the date the restriction will revert back to 90 days.
ii.
Condition the Company's ability to pay cash dividends on its three outstanding series of preferred stock as follows:
1.
Payment of the preferred stock dividends for the month of April 2015 was permitted provided the Company's previously filed shelf registration statement (the "Shelf Registration Statement"), providing for, among other things, at-the-market ("ATM") offerings of equity securities of the Company, had been declared effective by the Securities and Exchange Commission (the "SEC") and the Company had executed an agreement (a "Sales Agreement") with an underwriter or sales agent to proceed with any such ATM offerings. The Shelf Registration Statement was declared effective on April 22, 2015 and the Company entered into a Sales Agreement on April 23, 2015.

22



2.
Payment of the preferred stock dividends for the month of May 2015 will be permitted provided the Company has received, by May 29, 2015, at least $65.0 million of aggregate net cash proceeds from the issuance by the Company of equity securities, permitted asset sales by the Company or any Restricted Subsidiary or the entry into a joint venture by the Company or any Restricted Subsidiary (including the receipt of any contemplated upfront payments therefrom).
iii.
Increase the applicable interest rate margins under the First Lien Credit Agreement by a nominal amount of 25 basis points. The applicable interest rate margins will automatically revert back to the lower levels in effect immediately prior to the effective date of the First Amendment when the Company demonstrates full compliance with its financial covenants under the Credit Agreement or compliance with such covenants on a pro forma basis giving effect to one or more Liquidity
Events.

In addition, pursuant to the Second Amendment, the lenders agreed to waive (i) effective as of March 31, 2015, compliance with the current ratio and leverage ratio covenants under the Credit Agreement for the fiscal quarter ended March 31, 2015 (which covenants, prior to the waiver, required a current ratio of not less than 0.75 to 1.0, and leverage ratio of not more than 2.5 to 1.0, for such fiscal quarter) and (ii) any default or event of default that may have occurred as a result of non-compliance with the accounts payable aging limitation in effect prior to the effective date of the Second Amendment, as described above. These waivers are subject to the Company having received, by May 29, 2015, at least $65.0 million of aggregate net cash proceeds from one or more of the issuance by the Company of equity securities, permitted asset sales by the Company or any Restricted Subsidiary or the entry into a joint venture by the Company or any Restricted Subsidiary (including the receipt of upfront payments therefrom). The failure by the Company to satisfy this waiver condition will constitute an event of default under the Credit Agreement.

As of March 31, 2015, the borrowing base under the Senior Revolving Credit Facility was $50.0 million, and outstanding borrowings were $5.0 million. The Company also posted letters of credit for $39.3 million using availability under the Company's Senior Revolving Credit Facility. As of March 31, 2015, the borrowing capacity under the Senior Revolving Credit Facility was $5.7 million.

Second Lien Term Loan

On October 22, 2014, the Company entered into a Second Lien Credit Agreement (the "Second Lien Term Loan Agreement"), by and among the Company, as borrower, Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, the lenders party thereto and the agents party thereto.

The Second Lien Term Loan Agreement also requires the Company to satisfy certain financial covenants, including maintaining:

i.
a ratio of the present value of proved reserves using five year strip pricing to secured debt of not less than 1.5 to 1.0 and a ratio of the present value of proved developed and producing reserves using five year strip pricing to secured debt of not less than 1.0 to 1.0, each as of the last day of any fiscal quarter commencing with the fiscal quarter ending December 31, 2014; and
ii.
commencing with the fiscal quarter ending March 31, 2016, a leverage ratio (secured net debt to EBITDAX (as defined in the Second Lien Term Loan Agreement) with a limitation on netting of up to $100,000,000 of unencumbered cash) of not more than 2.5 to 1.0 as of the last day of any fiscal quarter for the trailing four-quarter period then ended.

At March 31, 2015, the Company was in compliance with the proved reserves and proved developed and producing reserves coverage ratio financial covenants applicable for the period, contained in the Second Lien Term Loan Agreement; however, the Company failed to comply with certain provisions contained in the Second Lien Term Loan Agreement related to the aging of payables.

On and effective as of April 17, 2015, the Company entered into a First Amendment to Credit Agreement and Limited Waiver (the "Second Lien Amendment"), by and among the Company, as borrower, Credit Suisse AG Cayman Islands Branch, as administrative agent and collateral agent, and the several lenders and guarantors party thereto. The Second Lien Amendment amended the Second Lien Term Loan Agreement by permanently extending the amount of time the Company and its Restricted Subsidiaries (as defined in the Second Lien Term Loan Agreement) may have accounts payable outstanding after the date of invoice from 90 days to 180 days. In addition, pursuant to the Second Lien Amendment, the lenders waived any default or event of default that may have occurred in connection with any non-compliance with the accounts payable aging limitation in effect prior to the effective date of the Second Lien Amendment.


23



Interest Expense

The following table sets forth interest expense for the three month periods ended March 31, 2015 and 2014, respectively:

 
Three Months Ended 
 March 31,
 
2015

2014
 
(in thousands)
Interest expense incurred on debt, net of amounts capitalized
$
22,658

 
$
20,276

Amortization and write-off of deferred financing costs
807

 
3,621

Total interest expense
$
23,465

 
$
23,897


The Company capitalizes interest on expenditures for significant construction projects that last more than six months while activities are in progress to bring the assets to their intended use. The Company capitalized interest of $0.6 million during the three months ended March 31, 2014 as part of the construction of Eureka Hunter Holdings' gas gathering system, prior to the deconsolidation of Eureka Hunter Holdings on December 18, 2014. The Company capitalized no interest during the three months ended March 31, 2015.

For the three-month period ended March 31, 2014, interest expense incurred on debt includes a $2.2 million prepayment penalty incurred by Eureka Hunter Pipeline as a result of its early termination of the Original Eureka Hunter Credit Facilities on March 28, 2014, which penalty represents an additional cost of borrowing for a period shorter than contractual maturity. In addition, amortization and write-off of deferred financing costs for the three-month period ended March 31, 2014 includes the write-off of $2.7 million in unamortized deferred financing costs related to those terminated agreements, which costs were expensed at the time of early extinguishment.

NOTE 9 - SHARE-BASED COMPENSATION
 
Employees, officers, directors, and other persons who contribute to the success of Magnum Hunter are eligible for grants of unrestricted common stock, restricted common stock, common stock options, and stock appreciation rights under the Company's Amended and Restated Stock Incentive Plan.  At March 31, 2015, 27,500,000 shares of the Company's common stock are authorized to be issued under the plan, and 11,728,837 shares had been issued under the plan as of March 31, 2015, of which 1,821,470 shares remained unvested at March 31, 2015. Additionally, 12,466,231 options to purchase shares and stock appreciation rights were outstanding as of March 31, 2015, of which 2,977,557 remained unvested at March 31, 2015.

The Company recognized share-based compensation expense of $3.2 million for the three months ended March 31, 2015 and $1.1 million for the three months ended March 31, 2014.

A summary of common stock option activity for the three months ended March 31, 2015 and 2014 is presented below:

 
Three Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands of shares)
 
Weighted Average Exercise Price per Share
Outstanding at beginning of period
13,195

 
16,891

 
$
5.92

 
$
5.69

Granted

 

 
$

 
$

Exercised

 
(597
)
 
$

 
$
6.67

Forfeited
(729
)
 
(902
)
 
$
5.93

 
$
6.37

Outstanding at end of period
12,466

 
15,392

 
$
5.92

 
$
5.61

Exercisable at end of period
9,489

 
10,003

 
$
6.04

 
$
5.74

 

24


A summary of the Company's non-vested common stock options and stock appreciation rights for the three months ended March 31, 2015 and 2014 is presented below:

 
Three Months Ended March 31,
 
2015
 
2014
 
(in thousands of shares)
Non-vested at beginning of period
4,055

 
6,908

Granted

 

Vested
(725
)
 
(805
)
Forfeited
(353
)
 
(714
)
Non-vested at end of period
2,977

 
5,389

 
Total unrecognized compensation cost related to the non-vested common stock options and stock appreciation rights was $1.6 million and $7.9 million as of March 31, 2015 and 2014, respectively.  The unrecognized compensation cost at March 31, 2015 is expected to be recognized over a weighted-average period of 0.54 years. At March 31, 2015, the weighted average remaining contract life of outstanding options was 4.5 years.

On March 30, 2015, the Company granted 535,274 shares of common stock for 2014 bonuses to executives and officers of the Company. The shares had a fair value at the time of grant of $1.4 million based on the stock price on grant date. During the three months ended March 31, 2015, the Company also granted an additional 105,000 restricted shares of common stock to certain newly hired officers which vest over a 3-year period, and which had a fair value at the time of grant of $0.3 million based on the stock price on grant date and estimated forfeiture rate of 5.6%.

Total unrecognized compensation cost related to non-vested, restricted shares amounted to $7.7 million and $9.3 million as of March 31, 2015 and 2014, respectively.  The unrecognized cost at March 31, 2015, is expected to be recognized over a weighted-average period of 1.76 years.

NOTE 10 - SHAREHOLDERS' EQUITY

Common Stock
 
During the three months ended March 31, 2015, the Company issued 1,028,355 shares of the Company's common stock in connection with share-based compensation which had fully vested to senior management and directors of the Company.

Preferred Dividends Incurred

A summary of the Company's preferred dividends for the three months ended March 31, 2015 and 2014 is presented below:

 
Three Months Ended March 31,
 
2015
 
2014
 
(in thousands)
Dividend on Eureka Hunter Holdings Series A Preferred Units
$

 
$
4,028

Accretion of the carrying value of the Eureka Hunter Holdings Series A Preferred Units

 
2,048

Dividend on Series C Preferred Stock
2,562

 
2,562

Dividend on Series D Preferred Stock
4,424

 
4,424

Dividend on Series E Preferred Stock
1,862

 
1,834

 Total dividends on Preferred Stock
$
8,848

 
$
14,896



25


Net Income or Loss per Share Data

Basic income or loss per common share is computed by dividing the income or loss attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income or loss per common share considers the impact to net income and common shares for the potential dilution from stock options and stock appreciation rights, common stock purchase warrants and any outstanding convertible securities.

The Company has issued potentially dilutive instruments in the form of restricted common stock of Magnum Hunter granted and not yet issued, common stock warrants, common stock options granted to the Company's employees and directors, and the Company's Series E Preferred Stock. The Company did not include any of these instruments in its calculation of diluted loss per share during the periods presented, because to include them would be anti-dilutive due to the Company's loss from continuing operations during those periods.

The following table summarizes the types of potentially dilutive securities outstanding as of March 31, 2015 and 2014:

 
March 31,
 
2015
 
2014
 
(in thousands of shares)
Series E Preferred Stock
10,946

 
10,946

Warrants
19,173

 
17,071

Unvested restricted shares
1,768

 
1,453

Common stock options and stock appreciation rights
12,466

 
15,392

     Total
44,353

 
44,862


NOTE 11 - REDEEMABLE PREFERRED STOCK

Eureka Hunter Holdings Series A Preferred Units
 
On March 21, 2012, Eureka Hunter Holdings entered into a Series A Convertible Preferred Unit Purchase Agreement (the "Unit Purchase Agreement") with Magnum Hunter and Ridgeline Midstream Holdings, LLC ("Ridgeline"). Pursuant to this Unit Purchase Agreement, Ridgeline had purchased $200.0 million of Eureka Hunter Holdings Series A Preferred Units as of September 16, 2014.

On September 16, 2014, the Company entered into an agreement (the "Transaction Agreement") with MSI and Eureka Hunter Holdings relating to a separate purchase agreement between MSI and Ridgeline providing for the purchase by MSI of all the Eureka Hunter Holdings Series A Preferred Units and Class A Common Units owned by Ridgeline. The Transaction Agreement also provided for the execution of the LLC Agreement to be entered into by Magnum Hunter, MSI and the minority interest members of Eureka Hunter Holdings contingent upon and contemporaneously with the closing of MSI's purchase of Ridgeline's equity interests in Eureka Hunter Holdings, which occurred on October 3, 2014.

In accordance with the terms of the LLC Agreement, all of the Eureka Hunter Holdings Series A Preferred Units and Class A Common Units of Eureka Hunter Holdings acquired by MSI from Ridgeline were converted into Series A-2 Common Units, a new class of equity interests of Eureka Hunter Holdings, which were subsequently derecognized by the Company and included in the gain on deconsolidation of Eureka Hunter Holdings on December 18, 2014.

NOTE 12 - TAXES

The Company did not recognize an income tax benefit or expense from continuing operations for the three months ended March 31, 2015 and 2014 as a result of its large net operating losses and corresponding valuation allowance.


26



The Company recognizes deferred income taxes for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax basis and net operating loss and credit carry forwards. The Company maintains a full valuation allowance on deferred tax assets where the realization of those deferred tax assets is not more likely than not. The valuation allowance will continue to be recognized until the realization of future deferred tax benefits is more likely than not to be utilized. The Company files income tax returns in the United States, various states and Canada. As of March 31, 2015, no adjustments have been proposed by any tax jurisdiction that would have a significant impact on the Company's liquidity, future results of operations or financial position.

NOTE 13 - RELATED PARTY TRANSACTIONS

The following table sets forth the related party balances as of March 31, 2015 and December 31, 2014:

 
March 31, 2015
 
December 31, 2014
 
(in thousands)
GreenHunter (1)
 
 
 
     Accounts payable - net
$
(373
)
 
$
(228
)
     Derivative assets (2)
$
50

 
$
75

     Investments (2)
$
1,688

 
$
1,311

     Notes receivable (2)
$
1,226

 
$
1,224

     Prepaid expenses
$
461

 
$
1,000

Eureka Hunter Holdings (3)
 
 
 
Accounts receivable (payable) - net
$
(1,596
)
 
$
122

Equity method investment
$
352,354

 
$
347,191

Pilatus Hunter
 
 
 
Accounts receivable - net
$
12

 
$
12

Classic Petroleum, Inc. (5)
 
 
 
Accounts payable
$
(282
)
 
$


The Company holds investments in a related party consisting of 1,846,722 shares of common stock of GreenHunter with no carrying value as of March 31, 2015 and 88,000 shares of Series C preferred stock of GreenHunter with a carrying value of $1.7 million as of March 31, 2015.

27




The following table sets forth the related party transaction activities for the three months ended March 31, 2015 and 2014, respectively:


Three Months Ended 
 March 31,


2015

2014
 
 
(in thousands)
GreenHunter




Salt water disposal (1)
$
1,339


$
322


Equipment rental (1)
$
45


$
122


Gas gathering-trucking (1)
$
6

 
$

 
Office space rental
$
4

 
$
22


Interest income from note receivable (2)
$
31


$
45


Dividends received from Series C shares
$
55


$
55


Unrealized gain on investments (2)
$
376


$
235

Pilatus Hunter, LLC




Airplane rental expenses (4)
$
11


$
70

Eureka Hunter Holdings (3)




Transportation costs
$
5,606

 
$

 
Disposal services
$
369

 
$

 
Equipment rental
$
10

 
$

 
Land usage fee
$
3

 
$

Classic Petroleum, Inc. (5)
 
 
 
 
Land services
$
162

 
$
312


_________________________________
(1)  
GreenHunter is an entity of which Gary C. Evans, the Company's Chairman and CEO, is the Chairman and a major shareholder. Triad Hunter and Viking International Resources Co., Inc., wholly-owned subsidiaries of the Company, receive services related to brine water and rental equipment from GreenHunter and certain affiliated companies. The Company believes that such services were and are provided at competitive market rates and were and are comparable to, or more attractive than, rates that could be obtained from unaffiliated third party suppliers of such services.

(2) 
On February 17, 2012, the Company sold its wholly-owned subsidiary, Hunter Disposal, to GreenHunter Water, LLC ("GreenHunter Water"), a wholly-owned subsidiary of GreenHunter.  The Company recognized an embedded derivative asset resulting from the conversion option under the convertible promissory note it received as partial consideration for the sale.  See "Note 6 - Fair Value of Financial Instruments" for additional information. The Company has recorded interest income as a result of the note receivable from GreenHunter. Also as a result of this transaction, the Company has an equity method investment in GreenHunter that is included in derivatives and investment in affiliates - equity method and an available for sale investment in GreenHunter included in investments. 

(3) 
Following a sequence of transactions up to and including, December 18, 2014, the Company no longer held a controlling financial interest in Eureka Hunter Holdings. The Company deconsolidated Eureka Hunter Holdings and accounts for its retained interest as of December 31, 2014 under the equity method of accounting. See "Note 7 - Investments and Derivatives".

(4) 
The Company rented an airplane for business use for certain members of Company management at various times from Pilatus Hunter, LLC, an entity 100% owned by Mr. Evans. Airplane rental expenses are recorded in general and administrative expense.

(5) 
Classic Petroleum, Inc. is an entity owned by the brother of James W. Denny, III, the Company's Executive Vice President and President of the Company's Appalachian Division. Triad Hunter receives land brokerage services from Classic Petroleum, Inc., including courthouse abstracting, contract negotiations, GIS mapping and leasing services.

In connection with the sale of Hunter Disposal, Triad Hunter entered into agreements with Hunter Disposal and GreenHunter Water for wastewater hauling and disposal capacity in Kentucky, Ohio, and West Virginia and a five-year tank rental agreement with GreenHunter Water.  On December 22, 2014, Triad Hunter entered into an Amendment to Produced Water Hauling and Disposal Agreement with GreenHunter Water to secure long-term water disposal at reduced rates through December 31, 2019. To ensure disposal capacity, in connection with the amendment on December 29, 2014 Triad Hunter made a prepayment of $1.0 million towards services to be provided under the Produced Water Hauling and Disposal Agreement. GreenHunter Water is providing a 50% credit for all services performed under the agreement until the prepayment amount is utilized in full, which is anticipated to occur during the first half of 2015. As of March 31, 2015, the prepayment amount had been reduced to $461 thousand.


28



As of March 31, 2015, the Company had a note receivable from GreenHunter with an outstanding principal balance of approximately $1.2 million.  Under the terms of the promissory note, GreenHunter is required to make quarterly payments to the Company  comprised of principal of $137,500 and accrued interest through the maturity of the note in February 2017. Under the terms of the note, failure to pay timely is considered an event of default. As of March 31, 2015, GreenHunter was past due on principal and interest payments in aggregate of $168,437, which were due on February 17, 2015. On May 4, 2015, GreenHunter made this past due principal and interest payment of $168,437.

As of March 31, 2015, Mr. Evans, the Company's Chairman and Chief Executive Officer, held 27,641 Series A-1 Common Units of Eureka Hunter Holdings.

Triad Hunter and Eureka Hunter Pipeline are parties to an Amended and Restated Gas Gathering Services Agreement, which was executed on March 21, 2012, and amended on October 3, 2014 in contemplation of the LLC Agreement. Under the terms of the gathering agreement, Triad Hunter reserved throughput capacity in the gas gathering pipeline system of Eureka Hunter Holdings for which Triad Hunter has committed to minimum reservation fees of approximately $0.75 per MMBtu.

Upon the deconsolidation of Eureka Hunter Holdings on December 18, 2014, Eureka Hunter Holdings and its subsidiaries became related parties of the Company. The Company and Eureka Hunter Holdings entered into a Services Agreement on March 20, 2012, and amended on September 15, 2014, under which the Company agreed to provide administrative services to Eureka Hunter Holdings related to its operations. The terms of the Services Agreement provide that the Company will receive an administrative fee of $500,000 per annum and a personnel services fee equal to the Company's employee cost plus 1.5% subject to mutually agreed upon increases from time to time. Under the terms of the LLC Agreement, certain specified employees of the Company that perform services for Eureka Hunter Holdings and its subsidiaries and for whom the Company previously billed a personnel services fee, are expected to become employees of Eureka Hunter Holdings or a subsidiary of Eureka Hunter Holdings.

On July 18, 2014, the Company entered into a consulting agreement with Kirk J. Trosclair, a former executive of Alpha Hunter Drilling, LLC, a wholly-owned subsidiary of the Company. Mr. Trosclair ceased employment with the Company on July 18, 2014 and is currently the Chief Operating Officer of GreenHunter. The agreement has a term of 12 months and provides that Mr. Trosclair will receive monthly compensation of $10,000, and Mr. Trosclair is eligible to continue vesting in previously granted stock options and unvested restricted stock awards, subject to continued service under the consulting agreement. In connection with this agreement, for the three months ended March 31, 2015, the Company paid Mr. Trosclair $31,000, which includes reimbursement of expenses incurred on behalf of the Company, and recognized $49,000 in stock compensation expense.

NOTE 14 - COMMITMENTS AND CONTINGENCIES

Agreement to Purchase Utica Shale Acreage

On August 12, 2013, Triad Hunter entered into an asset purchase agreement with MNW. Pursuant to the purchase agreement, Triad Hunter has agreed to acquire from MNW up to 32,000 net mineral acres, including currently leased and subleased acreage, located in such counties, over a period of time, in staggered closings, subject to certain conditions. On January 14, 2015, Triad Hunter closed on the acquisition of 2,665 net leasehold acres for $12.0 million from MNW. To date, under the asset purchase agreement, Triad Hunter has now acquired a total of approximately 25,044 net leasehold acres from MNW, or approximately 78.3% of the approximately 32,000 total net leasehold acres anticipated under the asset purchase agreement.

Drilling Rig Purchase

During June 2014, the Company, through its wholly-owned subsidiary, Alpha Hunter Drilling, LLC, executed an agreement to purchase a new drilling rig for a total purchase price of approximately $6.5 million, including a $1.3 million deposit due on July 1, 2014 with the remainder due upon delivery, which was expected to be on or about January 15, 2015. In February 2015, the Company was notified that the rig was complete and available for delivery. However, the Company has not taken delivery of the rig and and has initiated negotiations to apply the deposit towards a trade on a different drilling rig or associated equipment.

Legal Proceedings

Securities Cases

On April 23, 2013, Anthony Rosian, individually and on behalf of all other persons similarly situated, filed a class action complaint in the United States District Court, Southern District of New York, against the Company and certain of its officers, two of whom, at that time, also served as directors, and one of whom continues to serve as a director. On April 24, 2013, Horace Carvalho, individually and on behalf of all other persons similarly situated, filed a similar class action complaint in the United States District Court, Southern District of Texas, against the Company and certain of its officers. Several substantially similar putative class

29


actions were filed in the Southern District of New York and in the Southern District of Texas. All such cases are collectively referred to as the Securities Cases. The cases filed in the Southern District of Texas have since been dismissed. The cases filed in the Southern District of New York were consolidated and have since been dismissed. The plaintiffs in the Securities Cases had filed a consolidated amended complaint alleging that the Company made certain false or misleading statements in its filings with the SEC, including statements related to the Company's internal and financial controls, the calculation of non-cash share-based compensation expense, the late filing of the Company's 2012 Form 10-K, the dismissal of Magnum Hunter's previous independent registered accounting firm, the Company's characterization of the auditors' position with respect to the dismissal, and other matters identified in the Company's April 16, 2013 Form 8-K, as amended. The consolidated amended complaint asserted claims under Sections 10(b) and 20 of the Exchange Act based on alleged false statements made regarding these issues throughout the alleged class period, as well as claims under Sections 11, 12, and 15 of the Securities Act based on alleged false statements and omissions regarding the Company's internal controls made in connection with a public offering that Magnum Hunter completed on May 14, 2012. The consolidated amended complaint demanded that the defendants pay unspecified damages to the class action plaintiffs, including damages allegedly caused by the decline in the Company's stock price between February 22, 2013 and April 22, 2013. In January 2014, the Company and the individual defendants filed a motion to dismiss the Securities Cases. On June 23, 2014, the United States District Court for the Southern District of New York granted the Company's and the individual defendants' motion to dismiss the Securities Cases and, accordingly, the Securities Cases have now been dismissed. The plaintiffs have appealed the decision to the U.S. Court of Appeals for the Second Circuit. The Company intends to continue vigorously defending the Securities Cases. It is possible that additional investor lawsuits could be filed over these events.

On May 10, 2013, Steven Handshu filed a stockholder derivative suit in the 151st Judicial District Court of Harris County, Texas on behalf of the Company against the Company's directors and senior officers. On June 6, 2013, Zachariah Hanft filed another stockholder derivative suit in the Southern District of New York on behalf of the Company against the Company's directors and senior officers. On June 18, 2013, Mark Respler filed another stockholder derivative suit in the District of Delaware on behalf of the Company against the Company's directors and senior officers. On June 27, 2013, Timothy Bassett filed another stockholder derivative suit in the Southern District of Texas on behalf of the Company against the Company's directors and senior officers. On September 16, 2013, the Southern District of Texas allowed Joseph Vitellone to substitute for Mr. Bassett as plaintiff in that action. On March 19, 2014 Richard Harveth filed another stockholder derivative suit in the 125th District Court of Harris County, Texas.  These suits are collectively referred to as the Derivative Cases. The Derivative Cases assert that the individual defendants unjustly enriched themselves and breached their fiduciary duties to the Company by publishing allegedly false and misleading statements to the Company's investors regarding the Company's business and financial position and results, and allegedly failing to maintain adequate internal controls. The complaints demand that the defendants pay unspecified damages to the Company, including damages allegedly sustained by the Company as a result of the alleged breaches of fiduciary duties by the defendants, as well as disgorgement of profits and benefits obtained by the defendants, and reasonable attorneys', accountants' and experts' fees and costs to the plaintiff. On December 20, 2013, the United States District Court for the Southern District of Texas granted the Company's motion to dismiss the stockholder derivative case maintained by Joseph Vitellone and entered a final judgment of dismissal. The court held that Mr. Vitellone failed to plead particularized facts demonstrating that pre-suit demand on the Company's board was excused. In addition, on December 13, 2013, the 151st Judicial District Court of Harris County, Texas dismissed the lawsuit filed by Steven Handshu for want of prosecution after the plaintiff failed to serve any defendant in that matter. On January 21, 2014, the Hanft complaint was dismissed with prejudice after the plaintiff in that action filed a voluntary motion for dismissal. On February 18, 2014, the United States District Judge for the District of Delaware granted the Company's supplemental motion to dismiss the Derivative Case filed by Mark Respler. All of the Derivative Cases have now been dismissed, except the Derivative Case filed by Richard Harveth, for which the Company is presently seeking dismissal. It is possible that additional stockholder derivative suits could be filed over these events.

In addition, the Company has received several demand letters from stockholders seeking books and records relating to the allegations in the Securities Cases and the Derivative Cases under Section 220 of the Delaware General Corporation Law. On September 17, 2013, Anthony Scavo, who is one of the stockholders that made a demand, filed a books and records action in the Delaware Court of Chancery pursuant to Section 220 of the Delaware General Corporation Law ("Scavo Action"). The Scavo Action seeks various books and records relating to the claims in the Securities Cases and the Derivative Cases, as well as costs and attorneys' fees. The Company has filed an answer in the Scavo Action, which has now been dismissed. It is possible that additional similar actions may be filed and that similar stockholder demands could be made.

In April 2013, the Company also received a letter from the staff of the SEC's Division of Enforcement (the "Staff") stating that the Staff was conducting an inquiry regarding the Company's internal controls, change in outside auditors and public statements to investors and asking the Company to preserve documents relating to these matters. The Company is complying with this request. On December 30, 2013, the Company received a document subpoena relating to the issues identified in the April 2013 letter. In 2014, the SEC issued additional subpoenas for documents and testimony and has taken testimony from certain individuals. The Company intends to cooperate with the subpoenas. In connection with the Staff's inquiry, on March 24, 2015, the Company received a "Wells Notice" from the Staff, stating that the Staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company. On that date, the Staff issued similar Wells Notices to Gary C. Evans, the Company's

30


Chairman and Chief Executive Officer, J. Raleigh Bailes, Sr., a director of the Company and former Chairman of the Company's Audit Committee, the former chief financial officer of the Company who was in office at the time of the Company's decision to dismiss its prior independent registered public accounting firm and the former chief accounting officer of the Company who had resigned from that position with the Company in October 2012. The Wells Notice issued to the Company states that the proposed action against the Company would allege violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 13a-l, 13a-13, and 13a-15(a) thereunder. The proposed actions against the individuals would allege violations of those same provisions, as well as violations of Section 13(b)(5) of the Securities Exchange Act of 1934 and Rules 13a-14 and 13a-15(c) thereunder. The proposed actions described in the Wells Notices do not include any claims for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 or Rule 10b-5 thereunder or under Section 17(a)(1) of the Securities Act of 1933. The Wells Notices state that the Staff's recommendation may involve a civil injunctive action, public administrative proceeding, and/or cease-and-desist proceeding, and may seek remedies that might include, among other things, a cease-and-desist order, injunctions, disgorgement with pre-judgment interest and civil money penalties, as well as potential administrative remedies against Mr. Bailes under Rule 102(e)(1)(iii) of the SEC's Rules of Practice. A Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows the recipient the opportunity, through a "Wells Submission", to provide the recipient's reasons of law, policy or fact as to why the proposed enforcement action should not be filed and to address the issues raised by the Staff before any decision is made by the SEC on whether to authorize the commencement of an enforcement proceeding. The Company submitted a response to the Wells Notice in the form of a Wells Submission and continues to engage with the Staff regarding the issues raised in the Wells Notice.

Any potential liability, if any, from these claims cannot currently be estimated.

Twin Hickory Matter

On April 11, 2013, a flash fire occurred at Eureka Hunter Pipeline's Twin Hickory site located in Tyler County, West Virginia. The incident occurred during a pigging operation at a natural gas receiving station. Two employees of third-party contractors received fatal injuries. Another employee of a third-party contractor was also injured.

In mid-February 2014, the estate of one of the deceased third-party contractor employees sued Eureka Hunter Pipeline and certain other parties in a case styled Karen S. Phipps v. Eureka Hunter Pipeline, LLC et al., Civil Action No. 14-C-41, in the Circuit Court of Ohio County, West Virginia. In October 2014, in a case styled Exterran Energy Solutions, LP v. Eureka Hunter Pipeline, LLC and Magnum Hunter Resources Corporation, Civil Action No. 2014-63353, in the District Court of Harris County, Texas, Exterran Energy Solutions, LP, one of the co-defendants in the Phipps lawsuit, filed suit against the Company and Eureka Hunter Pipeline seeking a declaratory judgment that Eureka Hunter Pipeline is obligated to indemnify Exterran with respect to the Phipps lawsuit. In April 2014, the estate of the other deceased third-party contractor employee sued the Company, Eureka Hunter Pipeline and certain other parties in a case styled Antoinette M. Miller v. Magnum Hunter Resources Corporation et al, Civil Action No. 14-C-111, in the Circuit Court of Ohio County, West Virginia. The plaintiffs allege that Eureka Hunter Pipeline and the other defendants engaged in certain negligent and reckless conduct which resulted in the wrongful death of the third-party contractor employees. The plaintiffs have demanded judgment for an unspecified amount of compensatory, general and punitive damages. Various cross-claims have also been asserted. In May 2014, the injured third-party contractor employee sued Magnum Hunter Resources Corporation and certain other parties in a case styled Jonathan Whisenhunt v. Magnum Hunter Resources Corporation et al, Civil Action No. 14-C-135, in the Circuit Court of Ohio County, West Virginia. The claim filed by the injured third-party contractor employee, Jonathan Whisenhunt, has been resolved and dismissal of this case is anticipated in the near term. A portion of the settlement was paid by an insurer of Eureka Hunter Pipeline, and the remainder paid by the co-defendants or their insurers. The cross-claims among the defendants in the Whisenhunt litigation have not been resolved. Investigation regarding the incident is ongoing. It is not possible to predict at this juncture the extent to which, if at all, Eureka Hunter Pipeline or any related entities will incur liability or damages because of this incident. However, the Company believes that its insurance coverage will be sufficient to cover any losses or liabilities it may incur as a result of this incident, subject to the retention amounts under the insurance policies.

General

We are also a defendant in several other lawsuits that have arisen in the ordinary course of business. While the outcome of these lawsuits cannot be predicted with certainty, management does not expect any of these to have a material adverse effect on our consolidated financial condition or results of operations.

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NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION

The following table summarizes cash paid (received) for interest and income taxes, as well as non-cash investing transactions:
 
Three Months Ended March 31,
 
2015
 
2014
 
(in thousands)
Cash paid for interest
$
7,408

 
$
3,050

Non-cash transactions
 

 
 
Non-cash consideration received from sale of assets
$

 
$
9,400

Change in accrued capital expenditures
$
(35,152
)
 
$
55,396

Non-cash additions to asset retirement obligation
$
(766
)
 
$
52

Eureka Hunter Holdings Series A Preferred Unit dividends paid in kind
$

 
$
1,900


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NOTE 16 - SEGMENT REPORTING

U.S. Upstream, Midstream, and Oilfield Services represent the operating segments of the Company.  Beginning September 30, 2013, the Canadian Upstream segment, comprised of the WHI Canada operations, was classified as assets held for sale and discontinued operations. The Company sold 100% of the equity in WHI Canada in May 2014.

The following tables set forth operating activities and capital expenditures by segment for the three months ended, and segment assets as of March 31, 2015 and 2014, respectively.

 
As of and for the Three Months Ended March 31, 2015
 
U.S. Upstream
 
Canadian Upstream
 
Midstream and Marketing
 
Oilfield Services
 
Corporate Unallocated (1)
 
Inter-segment Eliminations
 
Total
 
(in thousands)
Total revenue
$
50,213

 
$

 
$
318

 
$
6,674

 
$

 
$
(1,809
)
 
$
55,396

Depletion, depreciation, amortization and accretion
56,897

 

 

 
1,006

 

 
(153
)
 
57,750

Gain on sale of assets, net
(1,640
)
 

 

 
(12
)
 

 

 
(1,652
)
Other operating expenses
61,659

 

 
404

 
5,277

 
11,034

 
(1,588
)
 
76,786

Other income (expense)
(8,213
)
 

 

 
(166
)
 
(20,052
)
 

 
(28,431
)
Net income (loss)
$
(74,916
)
 
$

 
$
(86
)
 
$
237

 
$
(31,086
)
 
$
(68
)
 
$
(105,919
)
 
 
 
 
 
 
 
 
 
 
 
 
 


Total assets
$
1,113,179

 
$

 
$
149

 
$
44,323

 
$
412,596

 
$
(1,422
)
 
$
1,568,825

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital expenditures
$
47,318

 
$

 
$

 
$
421

 
$
1,448

 
$

 
$
49,187


 
As of and for the Three Months Ended March 31, 2014
 
U.S. Upstream
 
Canadian Upstream
 
Midstream and Marketing (2)
 
Oilfield Services
 
Corporate Unallocated
 
Inter-segment Eliminations
 
Total
 
(in thousands)
Total revenue
$
76,212

 
$

 
$
34,735

 
$
7,911

 
$

 
$
(5,376
)
 
$
113,482

Depletion, depreciation, amortization and accretion
24,940

 

 
3,678

 
791

 

 

 
29,409

Loss on sale of assets, net
4,073