PITTSBURGH ─ Hart Energy’s seventh annual DUG East Conference began with attendees and presenters discussing Williams Cos. Inc.’s rejection of a proposed $53.1 billion takeover bid from Energy Transfer Equity LP and ended with the announcement that Magnum Hunter Resources was selling its interest in the Eureka Hunter Pipeline in the Marcellus Shale.

“The big news is that Magnum Hunter has decided to sell [its interest] in Eureka Hunter…It is our plan to exit this business,” Magnum Hunter CEO Gary Evans said during a presentation at the conference on June 25.

That morning the company announced it intended to sell its 45.53% interest in the 182-mile natural gas pipeline for up to $700 million. This would equate to about a $1.3 billion evaluation of the system factoring in the remaining 53% interest held by Morgan Stanley Infrastructure Partners.

He explained that the timing was right for the sale as the midstream isn’t a core competency for the upstream company, which is also dealing with tight liquidity due to the downturn. In addition, Magnum Hunter executives felt the timing was right for a sale since it can now model the future growth of the system based on a recently secured customer contract. Evans described this agreement as “large” in scope, but declined to provide further details on the yet unannounced contract.

“This is one of our crown jewel assets. One of the reasons we wouldn’t sell [Eureka Hunter] a year or two ago was that we felt it was too important to stay in control of having this pipe laid to these wells. Now we have 180 miles of pipe laid in two states covering eight counties. The concern of getting pipe to our wells doesn’t exist like it did a few years ago,” he said.

Evans added that there were multiple offers from MLPs for the system and that none were solicited. “It’s a small group [of buyers] we’re talking to – it’s not a widespread auction. We’re choosing who we sell to because we want to be sure it’s someone that will work with us… This area is getting more competitive with more midstream companies coming to the Marcellus and Utica to secure growth. We believe the time is right to put this in the hands of a much larger and more capitalized player,” he said.

The Marcellus and Utica has more potential for growth for midstream companies compared to other regions of the country, which is working as an advantage for Magnum Hunter as it seeks to improve liquidity, according to Evans.

“Companies that thought we were in a squeeze and could get assets cheap – that’s been taken off the table. Our ability to negotiate other transactions we’re working on as a parent company got much easier because people know we have a lot of other options,” he added.

Magnum Hunter is hoping to complete the sale as quickly as possible while using the proceeds to pay down about $300 million to $400 million in debt and using the rest to fund its drilling operations again. Evans said that it was likely that the future buyer will seek to acquire some interest from Morgan Stanley.

“The buyers were are talking to typically look for control of their assets so there is likely to be some more moves that allows them to get to that level. Morgan Stanley very much wants this investment to grow and they only made the investment back in October and it’s a brand new fund. They’re looking for a 3-5 year horizon and aren’t really ready to bail out, but in order to accommodate a buyer that wants majority interest they’re willing to work with them,” he said.

Contact the author, Frank Nieto, at fnieto@hartenergy.com.