“Don’t Worry, It’s Just Bankruptcy! We’ll Still Be A Leader in Shale!”

Sean O’Reilly: Moving on to, another one bites
the dust. Magnum Hunter Resources files for Chapter 11. I think this company was a penny
stock? Tyler Crowe: It was close. Taylor Muckerman: There’s a few of those penny
stocks out there in energy parts. Crowe: They’re not the only one, yeah. Muckerman: It was a $2.5 billion company in
2014, at its peak. O’Reilly: Yeah, so, was this just, was their
cashflow that bad? A lot of people are doing a lot of finagling right now, and these guys
just couldn’t? Was it that bad? Muckerman: Well, if you look at their balance
sheet over the last three of four years, you can see that debt to equity, debt to capital
creeping up and up. It was like, 40%, 60%, 100%, 170%, and now it’s just too late. They
can’t survive. Their income was decent, they suffered this year. But, interest and coverage
ratios just weren’t there. This was a darling of the shale patch for quite a while. O’Reilly: Where were they operating? Crowe: Marcellus and Utica. In terms of an
attractive place to be– O’Reilly: Yeah. They weren’t in western Pennsylvania
or Michigan or something. Crowe: No, they were. Muckerman: Yeah. O’Reilly: I should have guessed. Crowe: They were in Ohio, right near home
state. You don’t have one of their rigs in your backyard? Muckerman: Not anymore. It’s owned by some
bank now. Crowe: Also, on a small side note, I find,
there are certain CEOs in the energy industry who are very good cheerleaders for their stock,
for their industry, or whatever. And the CEO of Magnum Hunter Resources, I’m sorry, I don’t
have his name in front of me right now, he is an amazing cheerleader, and can find — he
can put lipstick on the ugliest pig. One of the statements that he made was, “This is
going to be an unprecedented move that’s going to make Magnum Hunter Resources–” O’Reilly: Gary Evans? Crowe: Yes. “It’s going to make Magnum Hunter
Resources a stronger company, they’re going to re-emerge as one of the leaders in the
shale patch again.” And I was like, your company just filed for Chapter 11, and you’re talking
about how wonderful this is going to be. Muckerman: Above all hope. O’Reilly: It’s just a re-organization, Tyler. Muckerman: What a great organization. O’Reilly: Did he get a golden anything? Crowe: No, he’s still there. O’Reilly: It’s just a re-organization, like
I said! Crowe: A golden opportunity to wipe out all
shareholder value and turn all the bond into equity later on. Thinking about this a little
more broadly, one of the things that I think is holding the industry back, we talked a
lot over the year, “We need to see some bankruptcy so that production will roll off, and it’ll
help correct prices.” But, as this says in their Chapter 11– O’Reilly: They’re going to keep pumping, baby. Crowe: They’re still pumping. And a lot of
these companies that are filing for Chapter 11 are still producing, and it’s not really
helping the situation, because they have to find some way to pay off all those debts,
and the only way they know how to do it is pump oil. So, if we’re not losing production
from companies going bankrupt, where are we going to lose it? O’Reilly: Obviously, their capex will drop,
because it’s really hard to approve the capex budget in bankruptcy court. So, naturally,
those will decline, I would hope. Muckerman: An immediate drop isn’t going to
take place, but eventually. O’Reilly: Yeah, I would think decline rates
are the only saving grace there. We’ll see.

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