The market has gas today. Lost in the fawning over the non-farm payrolls report is the 5% move higher in natural-gas prices. The natural-gas contract for June delivery at the Henry Hub now sits at $2.87.
The weekly Baker Hughes (BHI) rig count data were benign for natural gas, as the figures showed 221 rigs operating last week, down one from the prior week. The market had been surprised by data two weeks ago that showed an increase in rigs in service, but individual weekly data can be misleading.
There is absolutely no doubt about the trend in natural-gas drilling. The latest figure of 221 rigs in service compares with 328 rigs at the beginning of this year and 323 rigs in service in the first week of May 2014, a 32% annual rate of decline.
So, the gas drillers are rallying today, with Rex Energy (REXX), Gulfport Energy (GPOR), Range Resources (RRC) and Eclipse Resources (ECR) all posting gains in excess of 4%. They are joined by mammoth Chesapeake Energy (CHK), the largest player in the Utica shale, whose shares are up 5%, and Gastar Exploration (GST), up almost 6% on strong earnings as well as on the sector boost.
The lone holdout is Magnum Hunter Resources (MHR), which is 3% lower on a downgrade from Citigroup this morning.
I have devoted many column inches to Magnum, and the company's three preferred series -- MHR-C, MHR-D and MHR-e -- if combined would represent my firm's largest holding
I noted in my April 27 column that Magnum needs to pull the trigger on its liquidity initiatives. Magnum's bank syndicate has set a deadline of May 29 for the company to raise at least $65 million as a condition for maintaining payments on those preferreds.
So, the stage is set for one of Magnum CEO Gary Evans' virtuoso performances on Monday's conference call (Magnum will report before the market opens Monday; the conference call is at 10 a.m.).
Evans has been talking about a broad-reaching joint venture for Magnum's Utica assets, and, in fact, the company already has three partnerships in the area, with Eclipse, Stone Energy (SGY) and privately held EM Energy.
The market would love to hear on the conference call firm details on that deal or on any other four potential cash-raisers.
Liquidity is key. While Evans is fond of touting the quality of the "rock" underlying Magnum's acreage in Ohio, as in the children's game, in finance paper covers rock. Magnum simply needs to raise cash now, and the market will expect some news on that front on Monday.
Magnum's preferreds are trading at depressed valuations, and with the potential of non-payment, a clear vision of monetizing assets will be needed to get these securities trading back at par.
- Series C--74 cents on the dollar; current yield 14.1%
- Series D--73 cents; 13.6%
- Series E--64 cents; 13.3%
I believe Evans has that vision, and I have been gobbling up Magnum's preferreds today. It's not just blind faith in Evans.
Why am I so bullish, then? Hours of number-crunching have convinced me that Magnum's stake in the Eureka Hunter pipeline (currently 48%) is worth more than the entire company's market capitalization of $380 million. Magnum's stake in Eureka could be worth double that currently depressed full-company valuation, by my calculations.
So, Magnum has saleable assets, a natural-gas pricing market that seems to be rising off a bottom and a huge increase in production occurring as new wells are turned on line.
Now it is up to Evans to demonstrate to the market that earnings power can be converted into cash on hand. I can't wait for Monday morning, and I'll post another column after Magnum conference call.
