This is a big week in the world of energy preferred shares. Two companies that I have written about numerous times, are on the cusp of preferred dividend decisions.
According to multiple SEC filings, Magnum Hunter Resources (MHR) faces a deadline of this Friday, May 29, to raise $65 million in order to get the permission from its banking syndicate to pay its next preferred dividend. As is standard procedure, Magnum's board of directors declared these regular dividends on May 1, but the press release announcing the declaration did contain cautionary language regarding the necessary capital raise.
Meanwhile, Goodrich Petroleum's (GDP) Series C (GDP-C), Series D (GDP-D) and convertible preferreds all have their next scheduled payment on June 15. Again, though, these are dividends and must be declared by Goodrich's board of directors. As of this writing there has been no announcement.
Since Goodrich's dividend is a quarterly one, this - -again -- sets up a quick return of capital. The coupon on its Series C preferreds is 10%, so the quarterly payment on one $25 par value Series C share is $0.625. With the Series C trading at $10.46, that means if you buy GDP-C today and the board does indeed declare that dividend you would receive a payment equating to 6% of your investment in about 2 1/2 weeks.
Will they pay it? I attended the Iberia Capital conference two weeks ago and had the chance to ask Goodrich's President, Rob Turnham, that very question. His response, "I would vote to pay it."
Before I could even raise my hand for the necessary follow-up he conceded that since he is in fact on the board, his response was not purely hypothetical. Turnham stated that he was not speaking for the entire board, of course. He also described the company's balance sheet by saying, "We have plenty of liquidity."
So, to me, it seems unlikely that Goodrich's board would condemn themselves to the ash-heap of third-tier exploration and development (E&P) companies that are effectively in default. Turnham indicated Goodrich's board would be making a decision by month-end, so I would expect an announcement quite soon.
Magnum's case is more complex. The company's preferreds (MHR-C, MHR-D, MHR-E) pay monthly, so the dollar value is not as high, but clearly the banks wanted Magnum to create some liquidity.
To that end, Magnum announced Tuesday the sale of 5,210 "non-core" acres in West Virginia for $40.8 million. This was an easy way to raise cash on acreage Magnum was unlikely to drill, but still leaves the company short of the $65 million the banks told it to raise.
In addition, Magnum has been selling equity through its at-the-market facility with investment bank MLV. As of its last filing, in early May, Magnum had sold $6.5 million worth. It's impossible to tell how much is being sold on a daily basis, but I believe Magnum's recent stock price bounce -- from $1.55 to $1.94 in the last week -- is an indication that it is through selling equity. I would imagine the total equity the company sold was well in excess of the $6.5 million reported in its 10-Q filing, but, again, there's no way of knowing that until it files again.
Magnum also announced in its 10-Q the sale of its out-of-the-money hedges for proceeds of $12 million. It is unclear to me, though, whether that amount counts toward the $65 million bogey.
So, after all the bean-counting, I do believe Magnum will get to the $65 million target. Indeed, I would be surprised if Magnum didn't sell a portion of its stake (representing about 5% of the asset's total value) in the Eureka Hunter Pipeline for $50 million-55 million. I would expect an announcement on such a transaction soon.
That would put Magnum's proceeds from its liquidity initiative at greater than $100 million and retire the market's cash crunch concerns. The Eureka Hunter Pipeline is an incredibly valuable asset and Magnum's roughly 45% stake (before any further divestiture) is what ensures the company's survival in this low-hydrocarbon pricing environment.
Put another way, because of Eureka, Magnum is not just another E&P, and, believe me, I would not have spent as much time or as many column inches on Magnum if the company didn't have that jewel of an asset.