Decisions on Magnum Hunter

 | Jul 30, 2013 | 1:00 PM EDT  | Comments
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Magnum Hunter Resources (MHR) finally announced on Monday the details of the resumption of payment of dividends on its Preferred Series C, D and E shares.

I've covered MHR and its trials and tribulations before, but Monday's press release marked the end of the saga. The company is current with all its Securities and Exchange Commission filings and dividends will now flow -- including the "catch-up" payment.

Remember that MHR's preferreds are cumulative, meaning that dividends were accruing in arrears while the company was unable to pay them due to debt covenants.

MHR is paying a "Declared Accumulated Dividend" on September 3 to holders of record as of August 15. This payment will encompass the "catch- up" for the missed payments (April to July) and the regular timing for August's payment (the first business day of the next month.)

At Portfolio Guru, LLC, we have many clients who have been patiently waiting for preferred dividend payments from Magnum Hunter. We added to their MHR-C and MHR-D positions when the market panicked on first realization that dividends would not be paid on time.

Remember this was an accounting/reporting/firing PwC as auditors issue, not a cash- flow situation. Since the beginning of this "crisis" MHR also sold South Texas assets to Penn Virginia. That action caused deleveraging of MHR's balance sheet significantly, and made them a better credit.

Patience is being rewarded, but given the DAD payment structure, you don't have to be a long-term shareholder of MHR's preferred shares to get the "five-months' worth" payment.

Anyone who buys the shares by the close of trading on August 12 (the shares will trade ex-dividend on August 13) will get the full DAD payment. MHR has also indicated that dividends will resume on a normal schedule starting with September's payment.

So, this can be traded much like a corporate special dividend. Buy between now and August 12 and you'll get a payment on September 3 that represents 10.3% of the purchase price (as of Monday). Normally, you'd have to wait five months for that cash flow.

It's not a silver bullet, since the specialist will reduce the price of MHR's preferreds by the amount of the larger-than-normal DAD payment on the ex-date of August 13.

This is a trade for you if:

1. You think the stock market is overvalued and are concerned about return of capital here;
2. You want to be exposed to Magnum Hunter's attractive footprint in the Marcellus/Utica and Bakken shales and potential divestiture of its very valuable pipeline asset;
3. You want to build a longer-term position in MHR's preferreds (by reinvesting the abnormally large DAD payment into more of the MHR preferreds).

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