In January an idea for a trade with specific catalysts was put forth. Small cap oil and gas producer Magnum Hunter (MHR) was examined. Credence was given to CEO Gary Evans in taking him at his word he would be able to accomplish expectations he set. Certainly company management has been busy over this time.
Posited was the idea Magnum Hunter would adjust its 2012 capital spending budget away from natural gas toward more oil. On the conference call since management indicated this is occurring, yet has not released specifics. Presumably, management has been waiting for some of the other events to fall in line before giving details.
Also suggested was the idea production guidance would be raised as this year progressed. Twice this year Magnum Hunter has raised full-year 2012 production and exit rate guidance. The properties in the Eagle Ford, Bakken and Marcellus are performing well.
Noted also in January was the possibility of acreage acquisition in the Utica Shale, which too has occurred. Along with the Marcellus production, a position in the Utica allows Magnum Hunter to leverage its Eureka Hunter pipeline.
The partial monetization of the Eureka Hunter pipeline, however, was the chief catalyst expected and finally occurred this week. Magnum Hunter is realizing value and arbitraging the price investors will pay for income against high return investment opportunities in the portfolio. This $100 million deal allows its partner the right to invest another $100 million. Of the first $100 million, $40 million is going to Eureka Hunter for the pipeline business and $60 million is going to Magnum Hunter the parent.
Key to the Magnum Hunter bull and bear investment discussion is the liquidity position. The bulls take for granted the portfolio is rich in investment opportunities. Funding these opportunities is always the question. The Utica pipeline and oil drilling are competing for limited investment dollars. Meanwhile scaling back Marcellus natural gas drilling hurts the pipeline returns. For the great anticipation over the pipeline monetization, bringing home $60 million seems to be a disappointment.
Today Magnum Hunter announced the pipeline division made an acquisition. Deferring to management that this is a nice fit with synergies would be a good bet. Investors, however, may have different hopes of value creation. Investors are looking for liquid hydrocarbon growth.
Magnum Hunter shares have performed well since the trade idea was suggested. Small-cap oil and gas peers Kodiak (NYSE:KOG) and Samson (NYSEMKT:SSN) have risen, though not performed as well. The Arca Natural Gas Index is (^XNG) is higher too. Perhaps the strong stock market and price of oil have been a tailwind.
Magnum Hunter continues to have deep portfolio of opportunities and CEO Gary Evans ought to remain well regarded. The stock still trades at a discount valuation; perhaps it should. Small-cap operating companies do have higher risk. Magnum Hunter continues to need a higher level of liquidity for a company having grown to its current size. This was the condition the Eureka Hunter monetization was hoped to alleviate.
The trade idea was put forth and the catalysts were realized.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.