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EX-32 - EXHIBIT 32 - MAGNUM HUNTER RESOURCES CORPmhr-2015630xex32.htm
EX-12.1 - EXHIBIT 12.1 - MAGNUM HUNTER RESOURCES CORPmhr-2015630xex121.htm
EX-31.2 - EXHIBIT 31.2 - MAGNUM HUNTER RESOURCES CORPmhr-2015630xex312.htm
EX-31.1 - EXHIBIT 31.1 - MAGNUM HUNTER RESOURCES CORPmhr-2015630xex311.htm
 
FORM 10-Q
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
x      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 6, 2015, there were 220,773,920 shares of the registrant's common stock ($0.01 par value) outstanding.
 




QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2015
 
TABLE OF CONTENTS
 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (unaudited):
 
 
 
Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014
 
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014
 
 
Consolidated Statement of Shareholders' Equity for the Six Months Ended June 30, 2015
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per-share data)
(unaudited)
 
June 30,
2015
 
December 31,
2014
ASSETS
 
 
 
CURRENT ASSETS
 

 
 

Cash and cash equivalents
$
8,818

 
$
53,180

Accounts receivable:
 
 
 
Oil and natural gas sales
14,561

 
21,514

Joint interests and other, net of allowance for doubtful accounts of $508 at June 30, 2015 and $308 at December 31, 2014
10,914

 
23,888

Derivative assets
27

 
16,586

Inventory
2,491

 
2,268

Investments
2,447

 
3,864

Prepaid expenses and other assets
2,106

 
4,091

Total current assets
41,364

 
125,391

 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 

 
 

Oil and natural gas properties, successful efforts method of accounting, net
1,049,370

 
1,098,235

Gas transportation, gathering and processing equipment and other, net
76,031

 
77,423

Total property, plant and equipment, net
1,125,401

 
1,175,658

 
 
 
 
OTHER ASSETS
 

 
 

Deferred financing costs, net of amortization of $16,747 at June 30, 2015 and $15,099 at December 31, 2014
21,252

 
22,856

Other assets
929

 
3,928

Assets of discontinued operations
345,318

 
347,191

Total assets
$
1,534,264

 
$
1,675,024


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

1



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and per-share data)
(unaudited)
 
June 30,
2015
 
December 31,
2014
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 

CURRENT LIABILITIES
 

 
 

Current portion of long-term debt
$
9,854

 
$
10,770

Accounts payable
95,090

 
135,697

Accounts payable to related parties
6,154

 
90

Accrued liabilities
21,588

 
20,277

Revenue payable
7,428

 
5,450

Derivative liabilities
490

 

Other liabilities
2,340

 
1,356

Total current liabilities
142,944

 
173,640

 
 
 
 
Long-term debt, net of current portion
938,685

 
937,963

Asset retirement obligations, net of current portion
25,944

 
26,229

Other long-term liabilities
5,465

 
5,337

Total liabilities
1,113,038

 
1,143,169

 
 
 
 
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 June 30, 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 June 30, 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 June 30, 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 213,963,234 and 201,420,701 issued, and 213,048,282 and 200,505,749 outstanding as of June 30, 2015 and December 31, 2014, respectively
2,140

 
2,014

Additional paid in capital
936,323

 
909,783

Accumulated deficit
(929,836
)
 
(784,546
)
Accumulated other comprehensive income (loss)
230

 
(7,765
)
Treasury stock, at cost:
 
 
 
Series E Preferred Stock, 81 shares as of June 30, 2015 and December 31, 2014
(2,030
)
 
(2,030
)
Common stock, 914,952 shares as of June 30, 2015 and December 31, 2014
(1,914
)
 
(1,914
)
Total shareholders' equity
321,226

 
431,855

Total liabilities and shareholders' equity
$
1,534,264

 
$
1,675,024


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

2



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per-share data)
(unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
REVENUES AND OTHER
 
 
 
 
 
 
 
Oil and natural gas sales
$
33,418

 
$
83,772

 
$
82,809

 
$
159,737

Midstream natural gas gathering, processing, and marketing
472

 
39,646

 
930

 
65,757

Oilfield services
5,393

 
5,954

 
10,258

 
11,575

Other revenue
243

 
276

 
925

 
449

     Total revenue
39,526

 
129,648

 
94,922

 
237,518

OPERATING EXPENSES
 
 
 
 
 
 
 
Production costs
9,351

 
10,186

 
23,156

 
23,242

Severance taxes and marketing
1,759

 
5,729

 
4,582

 
10,704

Transportation, processing, and other related costs
10,625

 
6,835

 
30,962

 
18,868

Exploration
1,479

 
9,186

 
9,969

 
25,110

Impairment of proved oil and gas properties
95

 
158

 
13,949

 
16,912

Midstream natural gas gathering, processing, and marketing
184

 
38,536

 
678

 
65,432

Oilfield services
4,678

 
4,089

 
8,889

 
8,036

Depletion, depreciation, amortization and accretion
22,313

 
32,026

 
80,063

 
57,756

Loss (gain) on sale of assets, net
(26,744
)
 
(687
)
 
(28,396
)
 
3,388

General and administrative
11,257

 
18,776

 
24,029

 
32,770

     Total operating expenses
34,997

 
124,834

 
167,881

 
262,218

OPERATING INCOME (LOSS)
4,529

 
4,814

 
(72,959
)
 
(24,700
)
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest income
49

 
41

 
98

 
86

Interest expense
(24,102
)
 
(19,876
)
 
(47,567
)
 
(37,891
)
Gain (loss) on derivative contracts, net
(325
)
 
(3,006
)
 
2,777

 
(8,595
)
Loss from equity method investments
(87
)
 
(135
)
 
(318
)
 
(357
)
Other income (expense)
(146
)
 
471

 
(7,753
)
 
427

     Total other expense, net
(24,611
)
 
(22,505
)
 
(52,763
)
 
(46,330
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
(20,082
)
 
(17,691
)
 
(125,722
)
 
(71,030
)
Income tax

 

 

 

LOSS FROM CONTINUING OPERATIONS, NET OF TAX
(20,082
)
 
(17,691
)
 
(125,722
)
 
(71,030
)
Gain on dilution of interest in Eureka Hunter Holdings, LLC, net of tax

 

 
2,390

 

Loss from discontinued operations, net of tax
(1,594
)
 
(42,524
)
 
(4,263
)
 
(42,373
)
Loss on disposal of discontinued operations, net of tax

 
(5,212
)
 

 
(13,725
)
NET LOSS
(21,676
)
 
(65,427
)
 
(127,595
)
 
(127,128
)
Net loss attributed to non-controlling interests

 
780

 

 
889

LOSS ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
(21,676
)
 
(64,647
)
 
(127,595
)
 
(126,239
)
Dividends on preferred stock
(8,847
)
 
(8,848
)
 
(17,695
)
 
(17,668
)
Dividends on preferred stock of discontinued operations

 
(6,482
)
 

 
(12,558
)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
(30,523
)
 
$
(79,977
)
 
$
(145,290
)
 
$
(156,465
)
Weighted average number of common shares outstanding, basic and diluted
208,077,253

 
184,479,312

 
204,517,663

 
178,346,940

Loss from continuing operations per share, basic and diluted
$
(0.14
)
 
$
(0.14
)
 
$
(0.70
)
 
$
(0.49
)
Loss from discontinued operations per share, basic and diluted
(0.01
)
 
(0.29
)
 
(0.01
)
 
(0.39
)
NET LOSS PER COMMON SHARE, BASIC AND DILUTED
$
(0.15
)
 
$
(0.43
)
 
$
(0.71
)
 
$
(0.88
)
 
 
 
 
 
 
 
 
AMOUNTS ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
 
 
 
 
 
 
 
Loss from continuing operations, net of tax
$
(20,082
)
 
$
(16,911
)
 
$
(125,722
)
 
$
(70,141
)
Loss from discontinued operations, net of tax
(1,594
)
 
(47,736
)
 
(1,873
)
 
(56,098
)
Net loss
$
(21,676
)
 
$
(64,647
)
 
$
(127,595
)
 
$
(126,239
)

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

3



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
NET LOSS
$
(21,676
)
 
$
(65,427
)
 
$
(127,595
)
 
$
(127,128
)
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
(13
)
 
1,130

 
102

 
(1,218
)
Unrealized gain (loss) on available for sale securities
309

 
(549
)
 
(1,099
)
 
(605
)
Amounts reclassified for other than temporary impairment of available for sale securities

 

 
8,992

 

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

 
20,741

 

 
20,741

Total other comprehensive income
296

 
21,322

 
7,995

 
18,918

COMPREHENSIVE LOSS
(21,380
)
 
(44,105
)
 
(119,600
)
 
(108,210
)
Comprehensive loss attributable to non-controlling interests

 
780

 

 
889

COMPREHENSIVE LOSS ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
$
(21,380
)
 
$
(43,325
)
 
$
(119,600
)
 
$
(107,321
)
 
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

 

 
1,101

 

 

 
12

 
5,135

 

 

 

 
5,147

Shares withheld for taxes

 

 

 

 

 

 
(310
)
 

 

 

 
(310
)
Sale of common stock

 

 
11,441

 

 

 
114

 
21,715

 

 

 

 
21,829

Dividends on preferred stock

 

 

 

 

 

 

 
(17,695
)
 

 

 
(17,695
)
Net loss

 

 

 

 

 

 

 
(127,595
)
 

 

 
(127,595
)
Foreign currency translation

 

 

 

 

 

 

 

 
102

 

 
102

Unrealized loss on available for sale securities, net

 

 

 

 

 

 

 

 
(1,099
)
 

 
(1,099
)
Amounts reclassified from accumulated other comprehensive income for other than temporary impairment of available for sale securities

 

 

 

 

 

 

 

 
8,992

 

 
8,992

BALANCE, June 30, 2015
4,425

 
4

 
213,963

 
$
221,244

 
$
95,069

 
$
2,140

 
$
936,323

 
$
(929,836
)
 
$
230

 
$
(3,944
)
 
$
321,226


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

5



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(127,595
)
 
$
(127,128
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depletion, depreciation, amortization and accretion
80,063

 
65,361

Exploration
8,769

 
22,489

Impairment of proved oil and gas properties
13,949

 
158

Impairment of other operating assets

 
616

Share-based compensation
4,837

 
3,375

Cash paid for plugging wells

 
(27
)
Loss (gain) on sale of assets
(28,396
)
 
35,761

Loss (gain) on derivative contracts
(2,777
)
 
42,489

Cash proceeds (payment) on settlement of derivative contracts
19,826

 
(4,551
)
Gain on dilution of interest in Eureka Hunter Holdings, LLC
(2,390
)
 

Loss from equity method investments
4,581

 
403

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
2,313

 
7,740

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
18,240

 
(15,588
)
Inventory
(223
)
 
3,475

Prepaid expenses and other current assets
2,118

 
(1,147
)
Accounts payable
45,915

 
(23,817
)
Revenue payable
2,051

 
5,204

Accrued liabilities
1,687

 
3,934

Net cash provided by operating activities
51,960

 
18,747

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures and advances
(136,635
)
 
(257,469
)
Change in deposits and other long-term assets
2,745

 
(2,406
)
Proceeds from sales of assets
34,186

 
74,503

Net cash used in investing activities
(99,704
)
 
(185,372
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net proceeds from sales of common shares
21,829

 
178,575

Proceeds from sale of Eureka Hunter Holdings Series A Preferred Units

 
11,956

Proceeds from exercise of warrants and options

 
8,761

Preferred stock dividends
(17,695
)
 
(23,646
)
Repayments of debt
(5,860
)
 
(197,216
)
Proceeds from borrowings on debt
5,000

 
161,616

Deferred financing costs
(44
)
 
(6,042
)
Change in other long-term liabilities
128

 
(13
)
Net cash provided by financing activities
3,358

 
133,991

Effect of changes in exchange rate on cash
24

 
41

NET DECREASE IN CASH AND CASH EQUIVALENTS
(44,362
)
 
(32,593
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
53,180

 
41,713

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
8,818

 
$
9,120


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 an Irving, 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. In addition, the Company has a substantial equity method investment in midstream operations, which is classified as discontinued 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.

Adoption of New Accounting Policy

In April 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 updates the requirements for reporting discontinued operations in ASC Subtopic 205-20, Presentation of Financial Statements - Discontinued Operations, by requiring classification as discontinued operations of a component of an entity, a group of components of an entity, or a business (including equity method investments) if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when either 1) the component, group of components of an entity, or a business meet the criteria to be classified as held for sale, 2) are disposed of by sale, or 3) are disposed of other than by sale (e.g. abandonment or a distribution to owners in a spinoff). This ASU is effective prospectively for all disposals (or classification as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The adoption of ASU 2014-08 required the Company to reclassify the operations of Eureka Hunter Holdings, LLC ("Eureka Hunter Holdings") to discontinued operations for all periods presented. See "Note 2 - Acquisitions, Divestitures, and Discontinued Operations".

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 adoption of a plan in June 2015 to dispose of its equity investment in Eureka Hunter Holdings, operating losses and expenses related to these operations have been classified as discontinued operations and the equity investment has been reclassified to assets of discontinued operations in our consolidated balance sheets for all periods presented. See "Note 2 - Acquisitions, Divestitures, and Discontinued Operations".


7



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, Divestitures, 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.

The Company has reclassified approximately $5.2 million of oil and gas transportation, processing and production taxes payables from accounts receivable - oil and natural gas sales to accounts payable as of December 31, 2014.

Non-Controlling Interest in Consolidated Subsidiaries

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 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. The net loss attributable to non-controlling interest for PRC Williston is recorded through July 24, 2014.

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 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 and six months ended June 30, 2015, the Company had gas transmission, compression and processing revenue, which included gas utility sales from Sentra Corporation's regulated operations aggregating $82,969 and $461,230, respectively. During the three and six months ended June 30, 2014, the Company had revenues of $274,827 and $445,899, respectively, 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the revised standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. This amendment is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. The guidance allows for either a "full retrospective" adoption or a "modified retrospective" adoption, however early application is not permitted. In July 2015, the FASB voted to approve a one-year deferral of the effective date of ASU 2014-09. The Company is currently evaluating the adoption methods and the impact of this ASU on its consolidated financial statements and financial statement disclosures.


8



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. As of June 30, 2015, the Company had $21.3 million of debt issuance costs, which under this standard would be reclassified from an asset to a direct deduction from the related debt liability.

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 has several cloud computing arrangements and is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.

NOTE 2 - ACQUISITIONS, DIVESTITURES, 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 six months ended June 30, 2015 and 2014, Triad Hunter purchased 2,665 and 11,128 net leasehold acres, respectively, from MNW for an aggregate purchase price of $12.0 million and $45.9 million, respectively. As of June 30, 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.

Divestitures

Sale of Certain West Virginia Assets

On May 22, 2015, Triad Hunter entered into a Purchase and Sale Agreement with Antero Resources Corporation ("Antero") pursuant to which Triad Hunter agreed to sell to Antero all of Triad Hunter's right, title and interest in certain undeveloped and unproven leasehold acreage located in Tyler County, West Virginia. The sale transaction closed on June 18, 2015 and Triad Hunter received cash consideration of $33.6 million, subject to post-closing adjustments for any title defects and for remediation of asserted title defects. The properties sold consisted of ownership interests in approximately 5,210 net leasehold acres.

Pursuant to the Purchase and Sale Agreement, as amended, Antero had the right, up to the close of business on June 30, 2015, to assert or waive any title defects associated with the leasehold acres sold. Triad Hunter has the right, on or before August 19, 2015, to cure or remove any or all such title defects asserted by Antero, following which cure or removal the affected properties will be conveyed to Antero and Triad Hunter will receive additional consideration therefor. As of August 6, 2015, the Company received an additional $4.0 million of additional consideration for title defects cured or removed subsequent to June 30, 2015.

The Company recognized a preliminary gain on the sale of $26.2 million during the three and six month periods ended June 30, 2015.


9



Discontinued Operations

MHP and Williston Hunter Canada, Inc.

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.

Eureka Hunter Holdings

In June 2015, the Company adopted a plan to divest of its entire equity ownership interest in Eureka Hunter Holdings in order to improve its liquidity position. Based on early indications of interest, the Company believes that it could complete the divestiture within the next 60 to 90 days. Prior to December 18, 2014, Eureka Hunter Holdings was a consolidated subsidiary of the Company and its operations were included in the Midstream and Marketing operating segment. 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 and owned 45.53% of the outstanding membership interest of Eureka Hunter Holdings as of June 30, 2015. As a result, the Company uses the equity method to account for its retained interest in Eureka Hunter Holdings. The Company has reclassified its equity method investment in Eureka Hunter Holdings to assets of discontinued operations as of June 30, 2015 and December 31, 2014. All operations related to periods prior to December 18, 2014, and all subsequent equity method losses, are reflected as discontinued operations.

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.


10



Pursuant to the March 2015 Letter Agreement, the parties further agreed that the Company had 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").  On July 27, 2015, the Company entered into an additional letter agreement (the "July 2015 Letter Agreement") with Eureka Hunter Holdings and MSI pursuant to which the parties memorialized an agreement in principle which had been reached prior to June 30, 2015, to extend the MHR Contribution Deadline to the earlier of (i) September 30, 2015 or (ii) the day immediately preceding the date on which the Company disposes, in a sale transaction or otherwise, its equity ownership interest in Eureka Hunter Holdings. 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.

If the Company does not fund the full MHR Additional Contribution Component by the MHR Contribution Deadline, as amended by the July 2015 Letter Agreement, 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.

Pursuant to the July 2015 Letter Agreement, the Company agreed that neither the Company nor any of its affiliates will use, directly or indirectly, any proceeds received from the disposal of the Company's equity ownership interest in Eureka Hunter Holdings to fund the MHR Additional Contribution Component. In addition, pursuant to the July 2015 Letter Agreement, the Company will not have the right to fund the MHR Additional Contribution Component unless, at the time the Company would otherwise make such contribution, the Company (including any relevant affiliate of the Company) is current in respect of all of its payment obligations under all gas gathering agreements to which the Company (or any affiliate of the Company), on the one hand, and Eureka Hunter Holdings (or any subsidiary thereof), on the other hand, are party to or otherwise subject to.

After the earlier to occur of (a) the Company having made contributions equal to the MHR Additional Contribution Component or (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 June 30, 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 $345.3 million and $347.2 million at June 30, 2015 and December 31, 2014, respectively.


11



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 been allocated to the following identifiable assets of Eureka Hunter Holdings:
 
Identifiable Assets
 
Ending Basis December 31, 2014
Basis Amortization
Basis Reduction
Ending Basis June 30, 2015
 
(in thousands)
Fixed assets
$
5,088

$
(128
)
$
(98
)
$
4,862

Intangible assets
155,189

(3,750
)
(2,705
)
148,734

Goodwill
41,597


(1,104
)
40,493

Total basis difference
$
201,874

$
(3,878
)
$
(3,907
)
$
194,089


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 completed its valuation of the identifiable assets to which the basis difference is attributable to and has recorded amortization based on this valuation for the period ended June 30, 2015.  

Summarized income information for Eureka Hunter Holdings for the three and six months ended June 30, 2015 is as follows:

 
Three Months Ended 
 June 30, 2015
 
Six Months Ended 
 June 30, 2015
 
(in thousands)
Operating revenues
$
17,409

 
$
31,124

Operating income (loss)
$
1,790

 
$
1,318

Net income (loss)
$
736

 
$
(846
)
 
 
 
 
Magnum Hunter's interest in Eureka Hunter Holdings net income (loss)
$
384

 
$
(385
)
Basis difference amortization
$
(1,978
)
 
$
(3,878
)
Magnum Hunter's equity in earnings, net
$
(1,594
)
 
$
(4,263
)

As of June 30, 2015 and December 31, 2014, the Company had assets of discontinued operations of $345.3 million and $347.2 million, respectively, consisting of its equity method investment in Eureka Hunter Holdings.


12



The Company included the results of operations related to Eureka Hunter Holdings for all periods presented, and 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 and six months ended June 30, 2014 and June 30, 2015.
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Revenues
 
$

 
$
11,103

 
$

 
$
22,960

Depreciation, depletion, amortization and accretion
 

 
(3,929
)
 

 
(7,607
)
Other operating expenses
 

 
(9,238
)
 

 
(17,302
)
Interest expense
 

 
(605
)
 

 
(6,487
)
Loss on derivative contracts, net
 

 
(39,830
)
 

 
(33,894
)
Loss from equity method investments
 
(1,594
)
 

 
(4,263
)
 

Other expense
 

 
(25
)
 

 
(43
)
Loss from discontinued operations, net of tax
 
(1,594
)
 
(42,524
)
 
(4,263
)
 
(42,373
)
Gain on dilution of interest in Eureka Hunter Holdings, net of tax
 

 

 
2,390

 

Loss on disposal of discontinued operations, net of taxes of $0
 

 
(5,212
)
 

 
(13,725
)
Loss from discontinued operations, net of taxes
 
$
(1,594
)
 
$
(47,736
)
 
$
(1,873
)
 
$
(56,098
)

Total operating cash inflows related to Eureka Hunter Holdings for the three and six month periods ended June 30, 2014 were $31.6 million and $38.4 million, respectively, and total investing cash outflows related to Eureka Hunter Holdings for the three and six month periods ended June 30, 2014 were $46.0 million and $64.4 million, respectively.

NOTE 3 - OIL & NATURAL GAS SALES

During the three and six months ended June 30, 2015 and 2014, the Company recognized sales from oil, natural gas, and natural gas liquids ("NGLs") as follows:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Oil
$
15,087

 
$
41,506

 
$
24,631

 
$
76,859

Natural gas
13,023

 
28,264

 
44,883

 
55,784

NGLs
5,308

 
14,002

 
13,295

 
27,094

Total oil and natural gas sales
$
33,418

 
$
83,772

 
$
82,809

 
$
159,737



13



NOTE 4 - PROPERTY, PLANT, & EQUIPMENT

Oil and Natural Gas Properties

The following sets forth the net capitalized costs under the successful efforts method for oil and natural gas properties as of:
 
June 30,
2015
 
December 31,
2014
 
(in thousands)
Mineral interests in properties:
 
 
 
Unproved leasehold costs
$
444,692

 
$
481,643

Proved leasehold costs
284,185

 
257,185

Wells and related equipment and facilities
642,420

 
606,406

Advances to operators for wells in progress
1,283

 
1,411

Total costs
1,372,580

 
1,346,645

Less accumulated depletion, depreciation, and amortization
(323,210
)
 
(248,410
)
Net capitalized costs
$
1,049,370

 
$
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 $0.1 million and $13.9 million were recorded during the three and six months ended June 30, 2015, primarily related to Appalachian Basin properties. Impairments of proved properties of $0.2 million and $16.9 million were recorded for the three and six months ended June 30, 2014, which were comprised primarily 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 $19.6 million and $74.9 million for the three and six months ended June 30, 2015, respectively, and $30.1 million and $53.9 million for the three and six months ended June 30, 2014, respectively.

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.

During the three and six months ended June 30, 2015 and 2014, the Company recognized exploration expense as follows:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Leasehold impairments
$
931

 
$
8,833

 
$
8,769

 
$
24,383

Geological and geophysical
548

 
353

 
1,200

 
727

     Total exploration expense
$
1,479

 
$
9,186

 
$
9,969

 
$
25,110


Leasehold impairment expense recorded by the Company during the three and six months ended June 30, 2015 consisted of $0.9 million and $1.2 million, respectively, in the U.S. upstream segment related to leases in the Appalachian Basin and $7.6 million during the six months ended June 30, 2015 related to leases in the Williston Basin. Leasehold impairment expense during the three and six months ended June 30, 2014 consisted of $8.8 million and $19.9 million, respectively, related to leases in the Williston Basin and $2.6 million during the six months ended June 30, 2014 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 $0.0 million and $1.9 million in leasehold impairment expense related to fair value write-downs of MHP for the three and six months ended June 30, 2014.


14



Gas Transportation, Gathering, and Processing Equipment and Other

The historical cost of gas transportation, gathering, and processing equipment and other property, presented on a gross basis with accumulated depreciation, as of June 30, 2015 and December 31, 2014 is summarized as follows:

 
June 30,
2015
 
December 31,
2014
 
(in thousands)
Gas transportation, gathering and processing equipment and other
$
102,817

 
$
100,436

Less accumulated depreciation
(26,786
)
 
(23,013
)
Net capitalized costs
$
76,031

 
$
77,423


Depreciation expense for gas transportation, gathering, and processing equipment and other property was $2.1 million and $3.9 million for the three and six months ended June 30, 2015, respectively, and $1.6 million and $3.1 million for the three and six months ended June 30, 2014, respectively.

NOTE 5 - ASSET RETIREMENT OBLIGATIONS
 
The following table summarizes the Company's asset retirement obligation ("ARO") activities during the six-month period ended June 30, 2015 and for the year ended December 31, 2014:
 
June 30, 2015
December 31, 2014
 
(in thousands)
Asset retirement obligations at beginning of period
$
26,524

$
16,216

Assumed in acquisitions
92


Liabilities incurred
2

218

Liabilities settled
(55
)
(107
)
Liabilities sold
(74
)
(2,598
)
Accretion expense
1,281

1,478

Revisions in estimated liabilities (1)
(859
)
3,208

Reclassified from liabilities associated with assets of MHP

8,109

Asset retirement obligation at end of period
26,911

26,524

Less: current portion (included in other liabilities)
(967
)
(295
)
Asset retirement obligations at end of period
$
25,944

$
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
 

15



Transfers between levels of the fair value hierarchy 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 six month periods ended June 30, 2015 and 2014.

The Company used the following fair value measurements for certain of the Company's assets and liabilities at June 30, 2015 and December 31, 2014:
 
Level 1 Classification:
 
Available for Sale Securities
 
At June 30, 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.
 
Level 2 Classification:
 
Commodity Derivative Instruments
 
At June 30, 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 June 30, 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 and an amendment on July 10, 2015. 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:
 
June 30, 2015
Life (in years)
1.6
Risk-free interest rate
0.75%
Estimated volatility
84%
Dividend
GreenHunter stock price at end of period
$0.67
 
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 its assets as compared to the financial statements as a whole.

16




The following tables present the fair value hierarchy levels of the Company's financial assets and liabilities which are measured and carried at fair value on a recurring basis:
 
Fair Value Measurements on a Recurring Basis
 
June 30, 2015
 
 (in thousands)
Assets
Level 1
 
Level 2
 
Level 3
Available for sale securities
$
2,447

 
$

 
$

Convertible security derivative assets

 

 
27

Total assets at fair value
$
2,447

 
$

 
$
27

Liabilities
 
 
 
 
 
Commodity derivative liabilities
$

 
$
490

 
$

Total liabilities at fair value
$

 
$
490

 
$

 
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 six-month period ended June 30, 2015:
 
Convertible Security Embedded
Derivative Asset
 
(in thousands)
Fair value as of December 31, 2014
$
75

Decrease in fair value recognized in gain (loss) on derivative contracts, net
(48
)
Fair value as of June 30, 2015
$
27


Other Fair Value Measurements
 
The following table presents the carrying amounts and fair values categorized by fair value hierarchy level of the Company's financial instruments not carried at fair value: 
 
 
 
 
June 30, 2015
 
December 31, 2014
 
 
Fair Value Hierarchy
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
 
 
 
 
(in thousands)
Senior Notes
 
Level 2
 
$
597,459

 
$
540,000

 
$
597,355

 
$
498,000

MHR Senior Revolving Credit Facility
 
Level 3
 
$
5,000

 
$
5,000

 
$

 
$

MHR Second Lien Term Loan
 
Level 3
 
$
328,002

 
$
319,769

 
$
329,140

 
$
329,140

Equipment Notes Payable
 
Level 3
 
$
18,078

 
$
18,041

 
$
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).
 

17



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.
 
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 six months ended June 30, 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 $487.3 million as of June 30, 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 first quarter of 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 had 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 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 first quarter of 2015, related to the decline in value of its investment in NSE.


18



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 June 30, 2015 or December 31, 2014. The GreenHunter common shares are publicly traded and had a fair value of $1.3 million at June 30, 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.

Below is a summary of changes in investments for the six months ended June 30, 2015:

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

Loss from equity method investment(1)
(318
)
Change in fair value recognized in other comprehensive loss
(1,099
)
Carrying value as of June 30, 2015
$
2,447


(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 in available for sale securities have been presented in current assets as "Investments" in the consolidated balance sheet as of June 30, 2015 and December 31, 2014.
 
The cost for equity securities and their respective fair values as of June 30, 2015 and December 31, 2014 are as follows:

 
 
June 30, 2015
 
 
(in thousands)
 
 
Cost
 
Gross Unrealized Losses
 
Fair Value
Securities available for sale, carried at fair value:
 
 
 
 
 
 
Equity securities
 
$
883

 
$
(174
)
 
$
709

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

 
(462
)
 
1,738

Total Securities available for sale
 
$
3,083

 
$
(636
)
 
$
2,447


 
 
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".


19



Commodity and Financial Derivative Instruments

The Company periodically enters into certain commodity derivative instruments such as futures contracts, swaps, collars, and basis swap contracts. 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. The commodity derivative contracts held by the Company as of June 30, 2015 are contracts which were in a net liability position at the time of termination of the majority of its commodity derivative contracts during May 2015. The Company has not designated any commodity derivative instruments as hedges.

As of June 30, 2015, the Company had the following commodity derivative instruments:
 
Crude Oil
Period
Bbl/day
Price per Bbl
Ceilings sold (call)
Jan 2015 - Dec 2015
1,570

$120.00
Floors sold (put)
Jan 2015 - Dec 2015
259

$70.00


On May 7, 2015, the Company obtained consent under the MHR Senior Revolving Credit Facility to terminate the Company's open commodity derivative positions, so long as all such terminations occur prior to the November 1, 2015 borrowing base redetermination. See "Note 8 - Debt". The Company received approximately $11.8 million in cash proceeds from the termination of the majority of its open commodity derivative positions that were terminated on May 7, 2015.

As of June 30, 2015, Citibank, N.A. is the only counterparty 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, currently or at the time the commodity derivative position was entered into, in the MHR Senior Revolving Credit Facility, under which the Company had outstanding borrowings of $5.0 million as of June 30, 2015. Effective as of July 10, 2015, Citibank, N.A. is no longer a participant 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 June 30, 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".
 
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
 
Derivative Liabilities
 
 
June 30,
2015
 
December 31,
2014
 
June 30,
2015
 
December 31,
2014
 
 
(in thousands)
Commodity
 
 
 
 
 
 
 
 
Derivative assets
 
$

 
$
16,511

 
$

 
$

Derivative liabilities
 

 

 
490

 

Total commodity
 
$

 
$
16,511

 
$
490

 
$

 
 
 
 
 
 
 
 
 
Financial
 
 
 
 
 
 
 
 
Derivative assets
 
$
27

 
$
75

 
$

 
$

Total financial
 
$
27

 
$
75

 
$

 
$

Total derivatives
 
$
27

 
$
16,586

 
$
490

 
$



20



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 of those derivatives in the Company's consolidated balance sheets as of:
 
June 30, 2015
 
Gross Amounts of Recognized Assets and Liabilities
Gross Amounts Offset on the Consolidated Balance Sheet
Net Amount
 
(in thousands)
Current liabilities:  Fair value of derivative contracts        
(490
)

(490
)
 
$
(490
)
$

$
(490
)

 
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 and six months ended June 30, 2015 and 2014:
 
 
Three Months Ended June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Gain (loss) on settled transactions
$
(1,117
)
 
$
(2,267
)
 
$
3,194

 
$
(4,551
)
Gain (loss) on open contracts
792

 
(739
)
 
(417
)
 
(4,044
)
Total gain (loss), net
$
(325
)
 
$
(3,006
)
 
$
2,777

 
$
(8,595
)
 
NOTE 8 - DEBT
 
Long-term debt at June 30, 2015 and December 31, 2014 consisted of the following: 
 
June 30,
2015
 
December 31,
2014
 
(in thousands)
Senior Notes payable due May 15, 2020, interest rate of 9.75%, net of unamortized net discount of $2.5 million and $2.6 million at June 30, 2015 and December 31, 2014, respectively
$
597,459

 
$
597,355

Various equipment and real estate notes payable with maturity dates February 2015 - November 2017, interest rates of 4.25% - 7.94%
18,078

 
22,238

MHR Senior Revolving Credit Facility due October 22, 2018, interest rate of 4.19% at June 30, 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 $9.4 million and $10.0 million at June 30, 2015 and December 31, 2014, respectively
328,002

 
329,140

 
948,539

 
948,733

Less: current portion
(9,854
)
 
(10,770
)
Total long-term debt obligations, net of current portion
$
938,685

 
$
937,963



21




The following table presents the scheduled or expected approximate annual maturities of debt, gross of unamortized discount of $12.0 million as of June 30, 2015
 
(in thousands)
2015
$
4,912

2016
12,127

2017
5,948

2018
8,958

2019
325,757

Thereafter
602,826

Total
$
960,528


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").

First Amendment to Credit Agreement and Limited Waiver

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. Pursuant to the First Amendment, the current ratio requirement would have increased 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, the First Amendment provided that, 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 were permitted to 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 were permitted to 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 could not 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, as amended by the First Amendment) 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.


22



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 would automatically increase by 1.00% and the commitment fee would automatically increase by 0.25% and such elevated rates would continue until the day immediately preceding the date on which the Adjusted Period ended. 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 second preceding sentence.

Second Amendment to Credit Agreement and Limited Waiver

The Company 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 required 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 invoice date from 90 days to 180 days for any day on or prior to May 29, 2015, after which the date the restriction would have reverted 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.
2.
Payment of the preferred stock dividends for the month of May 2015 was permitted provided the Company had 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 were 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 "Waiver Condition").

On May 7, 2015, the Company obtained consent under the MHR Senior Revolving Credit Facility to terminate the Company's open commodity derivative positions, so long as all such terminations occurred prior to the November 1, 2015 borrowing base redetermination. Such terminations have been contemplated and are reflected in the May 1, 2015 borrowing base redetermination. Following the May 1, 2015 borrowing base redetermination, the Company's borrowing base under the MHR Senior Revolving Credit Facility was maintained at $50 million. The Company terminated the majority of its open commodity derivative positions on May 7, 2015. See "Note 7 - Investments and Derivatives".




23



Third Amendment to Credit Agreement and Limited Consent

On and effective as of May 28, 2015, the Company entered into the Third Amendment to Credit Agreement and Limited Consent (the "Third Amendment") by and among the Company, as borrower, Bank of Montreal, as administrative agent, and the several lenders and guarantors party thereto. The Third Amendment amended the Credit Agreement to:

i.
Extend the amount of time the Company and its Restricted Subsidiaries may have accounts payable outstanding after the invoice date from 90 days to 180 days for any day on or prior to June 19, 2015 (rather than May 29, 2015, as provided in the Second Amendment), after which June 19, 2015 date the restriction would have reverted back to 90 days; and
ii.
Remove the condition, previously added by the Second Amendment, on the Company's ability to pay cash dividends on its three outstanding series of preferred stock for the month of May 2015, so that the Company may pay such dividends as scheduled on June 1, 2015 without regard to such condition.

In addition, pursuant to the Third Amendment, the lenders agreed to extend the deadline for Magnum Hunter to satisfy the Waiver Condition from May 29, 2015 to June 19, 2015.

Fourth Amendment to Credit Agreement and Limited Consent

On and effective as of June 19, 2015, the Company entered into the Fourth Amendment to Credit Agreement and Limited Consent (the "Fourth Amendment") by and among the Company, as borrower, Bank of Montreal, as administrative agent, and the several lenders and guarantors party thereto. The Fourth Amendment amended the Credit Agreement to extend the amount of time the Company and its Restricted Subsidiaries may have accounts payable outstanding after the invoice date from 90 days to 180 days for any day on or prior to July 10, 2015, after which July 10, 2015 date the restriction would have reverted back to 90 days. In addition, pursuant to the Fourth Amendment, the lenders agreed to extend the deadline for Magnum Hunter to satisfy the Waiver Condition from June 19, 2015 to July 10, 2015.

Fifth Amendment to Credit Agreement and Limited Waiver

On and effective as of July 10, 2015, the Company entered into the Fifth Amendment to Credit Agreement and Limited Waiver (the "Fifth Amendment") by and among the Company, as borrower, Bank of Montreal, as administrative agent, and the several lenders and guarantors party thereto. The Fifth Amendment amended the Credit Agreement to, among other things:

i.
Permanently eliminate the Company's obligation to raise $65.0 million in 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);

ii.
Extend the amount of time the Company and its Restricted Subsidiaries may have accounts payable outstanding after the invoice date from 90 days to 180 days for any day on or prior to the earlier of (a) December 31, 2015 or (b) the date that is ten business days following the date on which the Company consummates the sale of all or substantially all of the Company's equity ownership interest in Eureka Hunter Holdings (the date of such sale, the "Trigger Date"), after which earlier date the restriction will revert back to 90 days; and

iii.
Permit certain lenders to sell and assign their rights and obligations under the Credit Agreement to the Bank of Montreal.

In addition, the Fifth Amendment includes a waiver of compliance by the Company with the current ratio and leverage ratio covenants for the fiscal quarter ended June 30, 2015 (which covenants, prior to the waiver, required a current ratio of not less than 1.0 to 1.0 and a leverage ratio of not more than 2.5 to 1.0) and for each fiscal quarter ending thereafter until the earlier of (i) the fiscal quarter ending December 31, 2015 or (ii) the fiscal quarter in which the Trigger Date occurs, at which time the waiver of these financial covenants will no longer be in effect commencing with the earlier of the fiscal quarters referred to in clauses (i) and (ii) of this sentence. Upon expiration of the waiver of these financial covenants, the Company will be required to maintain (i) a current ratio of not less than 1.0 to 1.0 for the fiscal quarter during which the waiver expired and each quarter ending thereafter and (ii) a leverage ratio of not more than (a) 2.5 to 1.0 for the fiscal quarters ending September 30, 2015 (if the Trigger Date occurs during such fiscal quarter) and December 31, 2015 and (b) 2.0 to 1.0 for the fiscal quarter ending March 31, 2016 and for each fiscal quarter ending thereafter.


24



As of June 30, 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 $39.0 million using availability under the Company's Senior Revolving Credit Facility. As of June 30, 2015, the borrowing capacity under the Senior Revolving Credit Facility was $6.0 million.

On July 27, 2015, the Company became aware of a technical default under the Credit Agreement, as amended. In accordance with the terms of the Credit Agreement, as amended, the Company may not have accounts payable outstanding in excess of 180 days from the invoice date for any day on or prior to the earlier of (a) December 31, 2015 or (b) the Trigger Date, after which earlier date the restriction will revert back to 90 days. As of August 7, 2015, the Company had approximately $8.8 million in accounts payable, in excess of permissible amounts provided for in the Credit Agreement, which were outstanding in excess of 180 days from the invoice date. Under the Credit Agreement, the Company has 30 days to cure this technical default and expects to cure the technical default within the 30 day deadline, on or before August 26, 2015. Between July 27, 2015 and August 7, 2015, the Company realized net proceeds of $6.0 million from the sale of the Company's common stock through an ATM sales program, which proceeds were used to reduce the amount of accounts payable outstanding in excess of 180 days from the invoice date, as well as proceeds from the final settlement of the sale of unproved, undeveloped leasehold acreage to Antero and cash on hand. The Company plans to continue utilizing proceeds from non-core asset sales and a limited amount of ATM offerings of its equity securities to cure the technical default and to maintain these minimum credit requirements in the future.

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.

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 invoice date 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.

At June 30, 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.

On July 27, 2015, the Company became aware of a technical default under the Second Lien Term Loan Agreement, as amended. In accordance with the terms of the Second Lien Term Loan Agreement, as amended, the Company may not have accounts payable outstanding in excess of 180 days from the invoice date. As of August 7, 2015, the Company had approximately $8.8 million in accounts payable, in excess of permissible amounts provided for in the Credit Agreement, which were outstanding in excess of 180 days from the invoice date. The Company has 30 days to cure this technical default and expects to cure the technical default within the 30 day deadline, on or before August 26, 2015. Between July 27, 2015 and August 7, 2015, the Company realized net proceeds of $6.0 million from the sale of shares of its common stock through the ATM program, which proceeds were used to reduce the amount of accounts payable outstanding in excess of 180 days from the invoice date, as well as proceeds from the final settlement of the sale of unproved, undeveloped leasehold acreage to Antero and cash on hand. The Company plans to continue utilizing proceeds from non-core asset sales and a limited amount of ATM offerings of its equity securities to cure the technical default and to maintain these minimum credit requirements in the future.


25



Interest Expense

The following table sets forth interest expense for the three and six month periods ended June 30, 2015 and 2014, respectively:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Interest expense incurred on debt, net of amounts capitalized
$
23,262

 
$
15,937

 
$
45,920

 
$
33,084

Amortization and write-off of deferred financing costs
840

 
3,939

 
1,647

 
4,807

Total interest expense
$
24,102

 
$
19,876

 
$
47,567

 
$
37,891


For the six-month period ended June 30, 2014, interest expense incurred on debt includes $1.7 million in unamortized deferred financing costs related to the amendment of the MHR Senior Revolving Credit Facility.

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 June 30, 2015, 27,500,000 shares of the Company's common stock are authorized to be issued under the plan, and 12,399,175 shares had been issued under the plan as of June 30, 2015, of which 2,308,084 shares were unvested at June 30, 2015. Additionally, 10,747,306 options to purchase shares and stock appreciation rights were outstanding as of June 30, 2015, of which 2,314,793 were unvested at June 30, 2015.

The Company recognized share-based compensation expense of $1.7 million and $4.8 million for the three and six months ended June 30, 2015, respectively, and $2.3 million and $3.4 million for the three and six months ended June 30, 2014, respectively.

A summary of common stock option activity for the six months ended June 30, 2015 and 2014 is presented below:

 
Six Months Ended June 30,
 
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

 
(2,115
)
 
$

 
$
4.14

Forfeited
(2,448
)
 
(932
)
 
$
6.43

 
$
6.32

Outstanding at end of period
10,747

 
13,844

 
$
5.81

 
$
5.88

Exercisable at end of period
8,433

 
9,478

 
$
5.91

 
$
6.20

 
A summary of the Company's non-vested common stock options and stock appreciation rights for the six months ended June 30, 2015 and 2014 is presented below:

 
Six Months Ended June 30,
 
2015
 
2014
 
(in thousands of shares)
Non-vested at beginning of period
4,055

 
6,908

Granted

 

Vested
(1,356
)
 
(1,801
)
Forfeited
(385
)
 
(741
)
Non-vested at end of period
2,314

 
4,366

 

26


Total unrecognized compensation cost related to the non-vested common stock options and stock appreciation rights was $1.1 million and $6.3 million as of June 30, 2015 and 2014, respectively.  The unrecognized compensation cost at June 30, 2015 is expected to be recognized over a weighted-average period of 0.68 years. At June 30, 2015, the weighted average remaining contract life of outstanding options was 4.56 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 Company's stock price on the grant date. On June 18, 2015, the Company granted 600,000 restricted shares of common stock to non-employee members of the board of directors of the Company which vest two years from the date of grant, or if earlier, (i) upon the death or disability of the director or (ii) upon a change in control of the Company that occurs at least six months following the date of grant. The shares had a fair value at the time of grant of $0.7 million based on the Company's stock price on the grant date and an estimated forfeiture rate of 5.6%. During the six months ended June 30, 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 Company's stock price on the grant date and an estimated forfeiture rate of 5.6%.

Total unrecognized compensation cost related to non-vested, restricted shares amounted to $6.8 million and $8.3 million as of June 30, 2015 and 2014, respectively.  The unrecognized cost at June 30, 2015 is expected to be recognized over a weighted-average period of 1.64 years.

NOTE 10 - SHAREHOLDERS' EQUITY

Common Stock
 
During the six months ended June 30, 2015, the Company issued 1,100,937 shares of the Company's common stock in connection with share-based compensation which had fully vested to senior management and directors of the Company.

On March 13, 2015, the Company filed a universal shelf Form S-3 Registration Statement to register the sale by the Company of a maximum aggregate amount of up to $500 million of debt and equity securities. The Company filed amendments to this Form S-3 Registration Statement on April 15, 2015 and April 20, 2015 and the Form S-3 Registration Statement became effective on April 22, 2015. On April 23, 2015, the Company entered into an "At the Market" Sales Agreement with a sales agent to conduct ATM offerings of its equity securities. As of June 30, 2015, the Company had sold an aggregate of 11,441,596 shares of its common stock for aggregate proceeds of $21.8 million net of $0.6 million in sales commissions and other fees through this ATM offering under the Form S-3 Registration Statement.


Preferred Dividends Incurred

A summary of the Company's preferred dividends for the three and six months ended June 30, 2015 and 2014 is presented below:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
(in thousands)
Dividend on Series C Preferred Stock
$
2,562

 
$
2,562

 
$
5,124

 
$
5,124

Dividend on Series D Preferred Stock
4,425

 
4,425

 
8,849

 
8,849

Dividend on Series E Preferred Stock
1,860

 
1,861

 
3,722

 
3,695

 Total dividends on Preferred Stock
$
8,847

 
$
8,848

 
$
17,695

 
$
17,668

 
 
 
 
 
 
 
 
Dividend on Eureka Hunter Holdings Series A Preferred Units
$

 
$
4,253

 
$

 
$
8,281

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

 
2,229

 

 
4,277

Total dividends on Preferred Stock of discontinued operations
$

 
$
6,482

 
$