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Magnum Hunter: The Natural Gas Threat And Preferred Valuations

Series D preferred shares are junior to the Series C preferred shares. Magnum Hunter didn't mention this explicitly in its 10-K, but the Series D prospectus mentions it.

Common shares offer poor value since the Series D shares are trading at 3% of par, making it a better option for a long shot bet.

The continued deterioration of natural gas prices may result in the fulcrum moving to the unsecured bonds from the preferred shares.

Valuing the reserves based on current oil and gas prices would result in the land needing to reach 25% to 30% of MHR's estimated low value to cover the bonds.

Pay careful attention to the natural gas market since that matters much more than oil for Magnum Hunter.

The outlook for Magnum Hunter Resources (NYSE:MHR) is becoming dimmer due to falling natural gas prices. I did expect natural gas prices to touch $2 per MMBtu at some point before summer, but the speed of the recent decline threatens to push natural gas to significantly lower levels. This affects the value of Magnum Hunter's assets and its level of cash burn. Thus the fulcrum may end up being with its unsecured bonds rather than its preferred shares, especially if the valuation is done in the midst of $2 or lower natural gas. Aside from that, the common shares are a particularly poor value right now, as the Series D shares have much better upside if one wanted a high risk bet.

There has been some confusion about whether the Series C and Series D preferred shares rank equal in priority or whether the Series C shares are senior to the Series D shares. I think this confusion was created by Magnum Hunter's mentioning in its 10-K that the Series E shares rank junior to the Series C and Series D shares, while no mention or priority was made between the Series C and Series D shares.

However, the...


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