Gary Evans

“We want to book as many proven reserves as we can between now and the next upcycle.” Gary C. Evans, chairman and chief executive officer, Magnum Hunter Resources Corp.

The U.S. needs to foster a good marriage between traditional energy and so-called green energy, says Gary C. Evans. He speaks from experience, having dealt with both sides of the BTU issue as chairman and chief executive officer of an oil and gas producer and a diversified renewable fuels business.

From 1985 to 2005, he grew Magnum Hunter Resources Corp. via the acquire-and-exploit model so popular through the 1990s, racking up a string of deals and increased production growth and earnings. He sold the company to Cimarex Energy Co. for $2.2 billion in June 2005.

Next, he ventured over to the renewables side of the business. In 2006 he started GreenHunter Energy Inc., a public company based in Grapevine, a Dallas suburb. The company owns the largest biodiesel refinery in the U.S., situated on the Houston Ship Channel, as well as a biomass power-generation facility in southern California (cow-manure was the fuel supply there, but that is changing to wood waste). It also is pursuing a number of wind-power projects in four states.

But the biodiesel facility took a major hit last year from Hurricane Ike at the same time the biofuels industry was enduring a worse downturn than the oil and gas industry. Today GreenHunter Energy is coming out of survival mode, working to pay down debt and possibly completing several new deals, says Evans.

No matter. Evans is a board member of the Maguire Energy Institute at Southern Methodist University and lead director of a biotech firm involved with a vaccine for the pandemic flu, among other business interests.

But he’s caught the most attention for what he did in May 2009, taking over a small publicly traded E&P in Houston called Petro Resources Corp. The day it was announced he would assume the chairmanship, the stock moved up from 30 cents to 60 cents. In July, when he announced he had renamed the company Magnum Hunter Resources Corp., the stock rose again, to nearly 90 cents. The old stock symbol—MHR—is back too, trading on NYSE Amex with the same specialist on the exchange as before.

“Since I came on board, the stock has moved up more than 300%, but we have yet to announce anything material, even though we are quite busy on some significant transactions,” he says with a chuckle.

Wayne Hall remains vice chairman of the company, which at press time had production approaching 1,000 barrels of oil equivalent per day. Evans also brought in Ronald Ormand as chief financial officer and executive vice president and Bradley Davis as senior vice president of capital markets. Evans, Ormond and Davis are each former commercial and investment bankers or E&P analysts who know their way up and down Wall Street.

We met with Evans to catch up on his adventures in green energy and his plans for the “new” Magnum Hunter.

Investor: Why restart Magnum Hunter now?

Evans: My noncompete (after selling to Cimarex) was over a couple of years ago. This strictly has to do with the timing of the next commodity cycle. We started “old Magnum Hunter” in June 1985, the trough of the last cycle, and now we’re starting “new Magnum Hunter” at what I think is the bottom of this cycle. I never thought I’d see commodity prices come back down to this level; I should have known better. You can be the smartest geophysicist, geologist or petroleum engineer on planet earth, but in this cyclical business, it’s still all about timing.

Investor: Is the strategy any different this time?

Evans: Rather than start from scratch, we took control of an existing company with a solid asset base that was also undervalued. This allowed us to move much faster. Besides, we still have all the old Magnum Hunter tee-shirts, jackets and caps with our same logo in our closets. Why waste good merchandise! (Laughs.)

We will predominantly be an acquirer of distressed assets. We want to book as many proven reserves as we can between now and the next upcycle. There are two ways to increase value once you buy an asset, commodity prices aside: either cut costs or increase production, preferably both. So, we truly like operationally intensive assets. We can’t add value unless we operate. The old Petro Resources only operated two wells!

We don’t plan to be offshore at all. The Gulf of Mexico has changed dramatically over the last few years. In my opinion, you have to be a much larger company now than before, because of the increased bonding and insurance requirements. You can’t afford to go after something that depletes in two-and-a-half years. One of our board members, Gary Hall, has been out there more than 30 years, and he really knows what he’s doing. But he’s not drilling 2 Bcf (billion cubic feet) wells any more; he’s going after 20- or 30-Bcf wells.

Investor: Aren’t you worried that if you buy distressed assets, they won’t be good quality?

Evans: That’s always a concern when you are buying “broken” properties. We don’t want to buy them if we have to peel back the onion too much to find that little diamond. By distressed, I mean that we’ll be looking for good-quality properties that are perhaps in need of a new operational approach and are possibly over-levered. We are trying to focus on assets in shale plays as well. Problem areas, where we can buy from hedge funds, private-equity funds or banks, are where we have been concentrating most of our efforts.

Investor: It’s not just that GreenHunter Energy isn’t doing well? You’re still planning to head up that company?

Evans: Yes. I’m wearing two different hats. One thing I learned in the last several years is that the renewables business and the oil patch are tied at the hip. I truly believe higher commodity prices are on the way. I just can’t tell you exactly when. While most of my time will be spent building the new Magnum Hunter, GreenHunter is one of the few green companies not in bankruptcy, and it’s on the road to recovery.

Investor: Are you soured on renewables?

Evans: The green business has a future; no question. But like everything else in the commodity business, it’s all about timing. The biodiesel plant we own in Houston is the largest in the country, but with no renewable fuels standard, tax credits expiring at the end of this year, and undetermined operating economics, the future is still quite uncertain. Congress renewed the tax credits on solar, wind, biomass, geothermal and ethanol earlier this year, but nothing was provided to the biodiesel industry. And, there was a tariff initiated against U.S. refined biodiesel by the European Union earlier this year. Our industry needs a minimum of $75 to $85 crude oil prices to make this business economic. The overall biodiesel industry has just been decimated, not unlike ethanol.

We thought we were being smart by saying “no” to ethanol and getting into the biodiesel business instead—we can take up to 10 different types of feedstocks at the refinery, so we are feedstock-agnostic. We also constructed 700,000 barrels of bulk storage capacity. Hurricane Ike was probably a blessing in disguise—it made us shut down the refinery, and we were successful in obtaining some significant insurance proceeds.

The world is becoming more open to all forms of energy…it’s about BTUs. Is it wind? Is it solar? Is it biomass? Or more fossil fuels? The rest of the world thinks that way, but we here in America are slow to recognize the opportunity in alternative energy. We are so fortunate: cheap fossil fuel allowed us to build and prosper through the industrial revolution. Our energy source from a natural-gas perspective is only a third of the cost compared to the rest of the world. We’ve got it made, and yet we are complaining about expensive energy?

Investor: What do you notice about oil and gas, now that you are back?

Evans: I had no idea how fast technology has changed over the past four years. I am just blown away with the improvements in drilling techniques, frac techniques, and other novel completion methods. We meet with Halliburton almost every week and it is absolutely amazing how fast technology is changing.

Our company has a number of waterflood projects in North Dakota, and we’re looking heavily at different shale plays around the country. We already have ownership in the Haynesville through an industry partner, Goodrich Petroleum, and we’re somewhat involved in the Eagle Ford shale in South Texas. We are looking at the Marcellus as well. Also, people forget there are oil legs in many of these shale-gas plays.

I’m currently more bullish about oil prices than natural gas—short term. It may very well take longer for natural gas to rebound in price, but it most certainly will. Pipelines are already warning producers they may get shut in over the next few months. We are entering new territory and it could get ugly later this year.

Investor: What are your immediate plans?

Evans: My goal is to get us up to the $200- to $300-million asset range by year-end and then approach a billion in assets by year-end 2010. We’re probably going to have to do some corporate mergers to accomplish that. You definitely have to look at the risk vs. reward of these deals—there is a certain amount of brain damage associated with acquiring lots of little companies. At $2.80 gas, a lot of projects that looked good a year ago look horrible today.

But our team here at the new Magnum Hunter is predominantly ex-bankers who know the “hot buttons” at these financial institutions. That’s why I believe commercial bankers feel more comfortable talking to us. We’re in the process of filing a $100-million universal shelf registration statement. The E&P analysts at Cannacord Adams, Pritchard Capital and Rodman & Renshaw are following us now.

Investor: What’s your biggest challenge?

Evans: Making sure we bolt on these new acquisitions in a prudent and meaningful manner prior to the next cycle getting out of hand. As the various other smaller companies get their respective borrowing bases reviewed this fall, there could be a raft of problems and we want to be a consolidator.