Tuesday, March 26, 2013

Magnum Hunter Resources (MHR) After NuLoch

I should have noticed Magnum Hunter Resources (MHR) back in 2011 when it announced its intent to acquire NuLoch Resources in an all-stock deal valued at $327M.  I attended one of NuLoch's road shows back in early 2010 and wasn't particularly impressed, so I wonder what Magnum Hunter saw in NuLoch that I didn't see.  Well, I need not wonder very much.  MHR traded at $7.63/share when the acquisition was announced and today it trades at $4.21.  Any former NuLoch shareholders who have hung on since then are probably disappointed, and longtime MHR owners probably didn't like the dilution they experienced from over 42M new shares.

Dilution isn't bad as long as EPS rises to surpass its pre-acquisition level, presumably through whatever added value the new assets bring.  A quick look at Magnum Hunter's income statement shows continuing net losses since 2009, jumping to -$76.7M in 2011 and -$57M up through September 2012.  In other words, losses got a lot worse since the acquisition.  What went wrong?  They have plenty of leaders with experience in geology, petroleum engineering, and the energy sector.  Maybe part of their problem is that their balance sheet blew up with long term debt climbing to over $286M in 2011 and over $680M last year!  Their deferred long term liabilities are also going to bite at some point if they can't bring more producing wells online.

I'm glad I didn't jump after NuLoch when I had the chance.  Not every hard asset play is an inflation hedge and not every acquisition is destined to add value.

Full disclosure:  No position in MHR at this time.