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Monday, August 24, 2015

Analyst Takes a Closer Look at Magnum Hunter's $430 Million Utica Shale Deal

From Seeking Alpha:
Magnum Hunter Resources (NYSE:MHR) announced a $430 million Utica Shale joint venture recently. This joint venture appears to be good for Magnum Hunter's cash flow in the long run and helps it prove its acreage some more. On the other hand, the deal has minimal impact on cash flow in the short term and doesn't address the present liquidity concerns. The consummation of the Eureka Hunter sale is needed to fix the liquidity issue. 
Deal Structure 
It appears that the joint venture will initially be funded with $40 million by the private equity partner, of which $5 million will be paid to Magnum Hunter's subsidiary Triad Hunter while the remainder goes toward funding well development costs. That $5 million represents an immediate boost to Magnum Hunter's liquidity, while it also can receive an additional $20 million in payments as development of the acreage progresses. Up to $405 million will eventually go toward well development costs. 
Once the private equity partner achieves the greater of a 12% IRR on invested capital or a 1.2x multiple on invested capital, its working interest decreases from 100% to 10%. Once a 16% IRR is achieved, this decreases to 5%. 
As noted, there's currently only a letter of intent for the joint venture, so there's a potential for the deal to not actually go through. However, the deal is expected to close in around two months, and I don't think the natural gas market will drastically weaken before then. Natural gas has been relatively stable during 2015 and it will be too early in mid-October to determine whether it will be a warmer or colder winter than currently expected.
Read much more about this deal by clicking here.

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