Forging Ahead

 | Jun 18, 2013 | 9:00 AM EDT  | Comments
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Well, Magnum Hunter Resources' (MHR) long nightmare is over. On Friday, the company finally filed its 10-K for the year ended Dec. 31, 2012. Clearly, firing the auditors at PricewaterhouseCoopers LLP (PwC) and replacing them with BDO had the desired effect.

On management's conference call, they indicated that the first quarter's 10-Q -- also in arrears -- would be filed within 30 days. During the Q&A, they noted that they expected it be filed before that 30-day mark. They also noted that the second quarter's 10-Q would be filed on time, with a deadline of Aug. 10.

So, preferred dividend payments (MHR is prohibited under debt covenants from paying preferred dividends until the 10-K and 10-Q are filed) should begin to flow again in July, and we would expect that management would announce a redemption of the Series C preferreds (MHR-C) when the resumption of dividend payments is announced.

While MHR management hinted that the company did not have a great first quarter, they said that is history at this point. They also noted that issues regarding a drilling pad in Appalachia are being resolved in the second quarter.

Management also noted that as of May 1, the company had $380 million in current liquidity, with $265 million in availability under their revolver, and the rest in cash on hand. Plus, as a result of its recent asset divestiture, MHR now owns about 10 million shares of Penn Virginia. As of Monday's close, this stake was valued at $46 million. Therefore, short-term funding is clearly not a problem for Magnum Hunter Resources.

MHR CEO Gary Evans said they would likely reach agreement on a sale of the Eureka Hunter pipeline assets by the end of 2013, although closing could leak into 2014. Management still believes the valuation of this asset will be north of $700 million (MHR owns a 60% share) and even hinted at a valuation of $1 billion on the call. We'll see if they can get that, but, ultimately, with the pipeline divestiture and $100 million to $150 million of non-core asset disposals, MHR management believes they can be at or near zero net debt by the end of this year.

It's a very long 10-K, and I am still working through it. At times, management seemed frazzled on the call (their explanation was sleep-deprivation caused by pulling an all-nighter to get the document filed) and clearly getting this thing out has been a huge task. Reading it isn't that easy either, but I'll continue to dig through it for nuggets.

For now, though the company's balance sheet looks fine -- and MHR's common stock has recovered nicely from its plunge in April after the termination of PwC -- near-term upside may be capped by the lack of a strong first quarter and the wait for the pipeline sale.

In terms of the preferreds, MHR-C is trading at or slightly above par and will likely be called for redemption in July. So the real value here is still in MHR-D, which is not callable until March 21, 2014 and is trading at a 10% discount with an 8.9% current yield.

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