What: After shares surged more than 60% yesterday following its oil rally, shares of Magnum Hunter Resources sank by as much as 20% today following the announcement that it has signed a letter of intent to farm out some of its nondeveloped acreage in the Utica shale formation to a private equity.
So what: Magnum Hunter is one of the poster children for companies that take on too much debt to try to fuel massive oil and gas production when prices are high, only to find themselves strapped for cash when prices crash. Over the past year, shares of Magnum Hunter are down more than 80%. Now, the slightest change in oil and gas prices will swing Magnum Hunter's stock in wild directions.
On top of this immense oil and gas volatility, the company announced today that it is agreeing to farm out 9,500 acres of its undeveloped acreage in the Utica formation to a private equity company. Under the deal, Magnum Hunter will receive a small cash injection and the private equity company will retain the rights to drill up to $400 million worth of wells on that acreage. Once the private equity company generates a 12% internal rate of return, the wells will then be returned and any residual production will go to Magnum Hunter.
Now what: Chances are, today's movement is much more related to oil and gas prices rather than the announcement of this private equity deal, because this deal is likely a good thing for the company. It allows Magnum Hunter to monetize the asset and turn it into a producing asset further down the road once private equity gets its cut. It will likely be lower-production, but it's almost free development. Also, the $25 million in cash the company will get to complete this deal is much needed for a company that has only generated $14 million in operational cash flow over the past 12 months.
Per above, GE has started to bring in some much needed funds. Enjoy.
They will probably sell all the necessary stock and to avoid wash-sale wait at least 30 days before buying back in. Oil and gas should remain low for a while and may in fact spike up sharply once exports and the new utilities start coming on line. The gas companies have been buying more. Appears that Relational is trying to get this all in before year end and the possible pipeline sale, etc.