If you cannot read a balance sheet you should not be investing in MHR. The balance sheet tells you their asset value based on the SEC pv10 formula. MHR is a company built for 4-5 dollar nat gas and pricing in the appalachian basin is 1.5-2 dollar gas. They cannot survive in their current capital structure if gas stays at these levels and they are not in control of how fast PA and TN and VA allow pipelines to be built.
Gastar has 50K acres in the Marcellus and Utica and their Utica/Marcellus pads are in some of the most attractive zones on the ohio river. It has taken a few years to figure out where the monster wells will be and almost all of Gastar's Utica properties are in this zone. Five years from now when the US is exporting LNG to Poland, Spain, S. Korea, Japan, etc., monster dry gas wells in the utica will be worth 3-4 times what they are worth today. The fact that MHR is selling such acreage shows how bad their liquidity position is.
Gastar is in a better position since they have a large 100K acreage position in a profitable oil play while MHR still has some Bakken property that is not that economic. So Gastar can spend their money drilling wells with costs of 20 dollars per BOE and selling liquids at 60 BOE and make decent money. MHR doesn't have that option so will have a hard time weathering the storm if they need to wait 2-3-4 years. Just pull a 10Q and look at the numbers. The math doesn't lie.
Magnum Hunter is worth no more than a $1. Why. Magnum Hunter's stock price is not discounting the nearly $400 million in preferred stock, which is essentially unsecured debt as far a common stock holders are concerned.
Gastar, which is the closest comparator for MHR trades at around book value minus preferred stock. Therefore, if you assume they can sell the pipeline interest for 500-600 million, the common stock will have a net, net book value of about 1 dollar per share.
Given that MHR is still outspending cash flow so heavily, the TETCO M2 pricing is a disaster, and they are not likely to sell the pipeline interest for more than 400-450 million in the current distressed environment, trading at 1x net book is more than reasonable.
A pair trade buying one and selling the other makes sense, especially given the fact that GST is getting most of its revenues selling mid continent oil in Oaklahoma in the high 50s while unhedged methane is selling at about 13 bucks on a BOE basis in the appalachian basin.
BK is not in the cards since the Maersk contract is worth 420 million and a filing would allow them out of the contract. The North Sea requires rigs with alot of customization, and the field is too important for Maersk to mess around with a generic replacement, that is why the Highlander was built in the first place. BK would destroy the bondholders value, so in reality Hercules Management has leverage. The question is, at what price do they eventually swap debt for equity. The reality is that this deal needs to get done at a price well over a dollar for 30-40 percent of the outstanding debt or the management won't do it.
according to banker talk. Paragon did a similar transaction last week. Such a deal will send the to the 3dollar level and will get the trading desks short out of the stock.
Talk of a sale leaseback transaction in banking circles. The two near new Kfell Super A's could be sold for north of 300 million and leased back on a 5-7 year term at 50 million per year. There is also room for continued cold staking, rig sales, and reduced SG&A.
As the bankers talk the trading desks get nervous about holding short positions and this is drying up quotes in the spread. An announced deal would send this stock to the 3 dollar range in an hour....that is why you are getting such quotes.
There was a major sale lease back deal on jack up rigs last week as well
hd's back, that tells you everything you need to know...the stock is going much higher. The market is telling us 60-65 dollar WTI-BRENT is the price range...and we know what OPEC is doing so they obviously are comfortable with 60ish. By Oct., this price will bring the SEC PV10 proved reserves way down for those that are not drilling and adding heavily to reserves, Like Gastar is. This will crimp financing for frackers and Gastar will have less competition and OPEC will have reached an objective. In the mean time, we will get closer to the first LNG export load from the Gulf and the market will start to take a hard look at the massive amount of infrastructure being built to take methane, ethane and other natural gas liquids out of the Appallacian basin....as well as the chemical plants and nat gas electric plants, etc..
Bottom line, at
Chapter 11 allows Maersk out of its contract, worth 420 million dollars to Hercules. Maersk will then try to negotiate to take over the rig and maybe Hercules Aberdeen operations on an IRR basis that appeals to them. This is why the non secured debt is trading so low and why a filing is unlikely. It is in the best interest of unsecured debt holders to come to some terms and preserve value until the secular cycle turns. Chevron today indicated that one project, the 100K BOE per day Big Foot in the GOM will be pushed back another year. We are going to get to 2018 with a problem for reserves.
The sale of acreage in West Virginia by MHR shows how levered they are. Given Gastar's much healthier fiscal position, better EUR's in OK vs. ND and the fact that MHR common stock is worthless on a book value basis net preferred stock while GASTAR has a net, net positive book value of 225 million...the entire market cap of MHR is a premium greater than the entire net, net BV for Gastar. Given that MS will control Eureka Hunter this gap is unjustified and will not last in the current WTI price range.
Count how many times they use the word liquidity...strange they don't talk about the company selling non utilized acreage for 46 million. Assuming growth in proved reserves outpaces any potential write down in the third quarter and the net, net book value for Gastar will be 4 dollars per share.
Now differentials and pricing in the Marcellus and Utica for dry nat gas and liquids couldn't be any worse and we will have a better view of the OPEC plans in less than two weeks. So why would they issue this today instead of waiting to see what transpires in June via OPEC and the IRAN deal...Interesting, as we know that these decisions could create great volatillity in the spot prices. Also, everybody knows that WV, PA and OH will be ground zero for production of exported hydrocarbons and natural gas liquids over the next quarter century, primarily to EU, Korea and Japan, etc. This is also what the free trade deals are about.
Their are overlevered players, like MHR, in this space but Gastar is not one since they have plenty of cash flow and liquidity to get to the next presidency. Gastars cash costs per barrell in OK are less than 25 bucks...so they have profitable oil production and are sitting on a gold mine when pricing for nat gas, ethane, propane, etc., etc. recovers due to export and industrial use.
I can thank Moody's for the opportunity, but it seems fairly clear that their paying customers get early wind...
based on crude oil and condensate prices. Production is increasing as oil prices rise. The lack of NGL egress in the west virginia region is a problem but like West Hampton location is a constant and access can always change. Plus this price environment is killing competitors in the region and may allow them to pick up some good acreage. Their are very few players operating and growing so close to cash flow BE.