Storm Debt Clouds Gathering Over Magnum Hunter Resources Corp (NYSE:MHR)
Prior to 2015, the stock of Magnum Hunter Resources Corp (NYSE:MHR) had never fallen below the $2.00 mark, only to do it twice since trading resumed in January. What is more, the stock has lost a whopping 75% of its market value for the last 12 months alone. That is why, the most recent 10-Q report, which saw the light of day on Monday, had to live up to a lot of expectations. Has it succeeded, though?
If MHR’s chart run on Monday is anything to go by, the Q1 2015 results failed to move MHR. Not even in the least bit. MHR closed trade at its opening quote of $1.90 per share, up 2.15% from the preceding session, after 4.7 million shares changed hands. Having failed to give MHR a boost on day 1, it is no wonder that the stock had lost momentum by Tuesday, let alone today. This suggests that either the numbers are not huge enough to satisfy investors or there might be something else that is preventing MHR from regaining lost territories.
The most significant figure in Magnum Hunter’s 10-Q is the 73% increase of the company’s proven natural gas reserves. A 36% reduction in production costs for each one thousand cubic feet of natural gas also made it to the list. So far, so good. The combination of increasing reserves and decreasing costs is by all means most welcome to each investor interested in an E&P.
There are two implications, though. On the one hand, the major increase in reserves is largely based on PUD’s, i.e reserves that are undeveloped as of yet. MHR may have added 40+ new PUD locations, yet it will have to drill new wells in these locations, which implies that it will incur additional costs before these wells commence full-scale production. On the other hand, in the light of the company’s gargantuan debt, which is now dangerously close to surpassing the $1 billion threshold, every single penny should count. It only took the management 3 years to triple long-term debt (the company’s long-term debt at the end of 2011 amounted to $285 million).
By contrast, how long it will take to paid it all off is far from clear. What is clear, though, is the fact that CEO Gary Evans and his colleagues do intend to carry out a series of potential liquidity enhancing techniques including but not limited to at-the-market stock offering and sale of assets. Such offering seems very likely according to Magnum’s recently published prospectus for the potentials raise of up to $250 million through the sale of common stock. At MHR’s current quote, this would push the number of outstanding shares by more than 100 million, ultimately resulting in a 50% dilution for current stockholders.
