This article was originally published by TheStreet on Oct. 14, 2014
NEW YORK (TheStreet) -- Magnum Hunter Resources (MHR) , an independent oil and gas company, has seen its stock fall by over 45% since January to around $4 a share due, in part, to concerns about the company's liquidity. But this could be a buying opportunity for patient investors.
Magnum Hunter plans to spend $400 million in capital expenditures this year, a large amount for a company with a market capitalization of less than $1 billion and debt levels that by one metric were 16 times greater than the industry's average.
But all is not lost. The Houston company is implementing a plan that "lifts the near-term liquidity concerns," said Gabriele Sorbara, analyst at Topeka Capital Markets, in a research report emailed to TheStreet. "We would take advantage of the recent selloff," Sorbara said, "given the company is sitting on one of the most economic dry gas shale plays in the country and we believe several liquidity events are coming."
One such event occurred last week when Magnum Hunter said it has started a process to obtain two new credit facilities, which will give a $115 million boost to its liquidity and refinance its existing revolving credit facility. In an email to TheStreet, Chad Mabry, director of exploration and production research at investment bank MLV & Co, said that this is a "positive development" as the company has directly addressed the liquidity-related fears.
To strengthen its cash reserves, Magnum Hunter agreed to sell some of its non-core properties in North Dakota's Bakken Shale for $84 million after announcing another sale of Bakken assets earlier in September for $23 million. The company's core operations that underpin its future are located in Marcellus and Utica Shales in Ohio and West Virginia.
To strengthen its cash reserves, Magnum Hunter agreed to sell some of its non-core properties in North Dakota's Bakken Shale for $84 million after announcing another sale of Bakken assets earlier in September for $23 million. The company's core operations that underpin its future are located in Marcellus and Utica Shales in Ohio and West Virginia.
Mabry said Magnum Hunter has generated net proceeds of more than $200 million from non-core asset sales in 2014 alone, a fact which is "perhaps overlooked" while discussing the company's high leverage.
By next year, Magnum Hunter will further strengthen its balance sheet by selling additional assets in Bakken, valued at between $325 million and $425 million, Sorbara said. Consequently, Magnum Hunter will become an Appalachian Basin pure-play company, Sorbara said, referring to a region which includes the Marcellus and Utica shale that is home to companies like Anadarko Petroleum (APC) , Cabot Oil and Gas (COG) and Chesapeake Energy (CHK) .
Besides the aforementioned sales, Magnum Hunter will also collect $65 million from Morgan Stanley Infrastructure by selling 6.5% interest in its pipeline subsidiary Eureka Hunter in mid-January, enhancing the company's balance sheet, Sorbara predicted. Furthermore, Mabry said that a potential spinoff of Eureka Hunter into a master limited partnership next year could be "another significant liquidity event."
The great thing about the asset sales, according to Mabry, is that it won't have any major negative impact on the company's strong growth projections. "While it's losing some oil production," Mabry elaborated, "those volumes are more than being replaced by very high rate wells in the Utica and its ongoing development program in the Marcellus."
Sorbara has warned that some operational problems could hit the company's production growth in the third quarter ending September. That said, the company's long-term growth story remains intact. Last year, Magnum Hunter posted a 92% increase in production to 14,831 barrels of oil equivalents a day and plans to exit the current year with 32,500 barrels of oil equivalents a day. In 2015, Mabry has forecast production growth of more than 80%, "inclusive of asset sales."
This year, Magnum Hunter intends to grow its revenue and earnings before interest, taxes, depreciation, amortization and exploration expenses, commonly referred to as Ebitdax in the oil and gas production industry, by 46.2% and 64.6% respectively. Although the company has been reporting operating losses, as per Sorbara's projections, it could become profitable by 2016.
MLV & Co. and Topeka Capital Markets have a buy rating on Magnum Hunter. Magnum Hunter did not respond to email and phone messages from TheStreet requesting comment by press time.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
