In the first of my company-specific recaps from the OGIS energy conference in New York, I'll discuss Magnum Hunter Resources (MHR). It issued an 8-K last Monday morning, standard practice ahead of CEO Gary Evans' presentation.
The 8-K explained amendments to MHR's agreements with its lenders on its first and second lien credit facilities.
The market had little reaction in the first part of the week, but Magnum's preferreds fell sharply Friday because of some of the language contained in the preferreds and possibly some confusion over MHR's ability to pay preferred dividends.
It's complex, but MHR's lending group laid down some strict guidelines for its continued payment of dividends on their preferreds.
To pay April's dividend (which had been declared at the beginning of the month) MHR had to:
- Have an updated S-3 registration statement declared effective by the SEC (which happened Wednesday) and then file for an actual offering, which MHR did last night. The S-3 covers an offering of up to $250 million of common equity in an at-the-market offering, the specialty of investment bank MLV
So, with those two steps taken, MHR is free to pay April's preferred dividends and we shareholders will receive those payments April 30.
To pay May's preferred dividends, Magnum will have to raise $65 million by May 29. This appears to have spooked the market, with MHR-C, MHR-D and MHR-E all falling in Friday's trading.
On the surface it's scary and, believe me, no preferred investor wants to think about covenants in bank facilities that can restrict a company's ability to make future dividend payments. But they exist in almost all cases.
Essentially the May 29 deadline for raising $65 million puts a clock on several liquidity-maximization efforts that Evans had mentioned in the last few months. The time is now for Magnum to pull the trigger on these deals and the 8-K listed potential sources of liquidity, which, in toto, Magnum management valued at $260 million:
- Gaining a release from letters of credit that back MHR's takeaway deals with gas pipeline companies. As of year-end these totaled $39 million.
- Partial sale of MHR's interest in the Eureka Hunter Pipeline. Evans noted to me that he doesn't want to sell down MHR's current 48% interest in Eureka below 40%, due to control issues. The valuation given to Eureka in MHR's December transaction was $1 billion, so MHR could sell 8% and raise $80 million.
- Issuance of common stock. This is the unknown, the plug in the model, if you will. Obviously, Evans wants to issue as little equity as possible, especially with MHR shares getting pounded down to $2.25 in Friday's trading. At that level it would take 28.9 million shares to raise $65 million in gross proceeds and that would be a punishing 14.4% dilution based on MHR's year-end share count of 201 million. So, let's think of equity issuance as a last resort and assume $0. Clearly, though, the banks wanted that option on the table.
- Joint venture of Utica Shale assets. Evans noted to me that final JV proposals had been received and that MHR was now negotiating among the high bidders. He pegged the upfront cash to MHR in such a "drilling carry" arrangement at $50 million to $100 million.
All of those initiatives had been previously noted, but Evans also noted Monday that MHR was exploring:
- The sale of non-core assets in MHR's Utica shale leasehold, which the company estimated would fetch $40 million to $65 million.
