|Shares Out. (in M):||4||P/E||0.0x||0.0x|
|Market Cap (in $M):||100||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
Buy Magnum Hunter Resources 10.25% Cumulative Preferred (MHR-C) for a short-term but high IRR opportunity. Allocate to your “Alternative to Holding 0% Yielding Cash in an Overvalued Market” bucket.
On April 24, MHR closed a sale of Eagle Ford Hunter, Inc. to Penn Virginia (PVA) for $361 million in cash and 10 million shares of PVA (PVA share price ~ $4.70). As specified in MHR’s 8-K on May 9, the company intends to use some of the proceeds (a little over $100 million) to call its 10.25% preferred stock, which is already past its call protection date. However, in March the company identified material weaknesses in its accounting, which it is working to address. It’s 10-K and 10-Q have thus been delayed with the company projecting the 10-K to be released by June 17, with the 10-Q to follow as soon as practicable. The 10.25% preferred cannot be redeemed until the 10-K and 10-Q are out.
In addition, the company suspended dividends on all of its preferred stock issues until the filings are made. Dividends are paid on the last day of each month and one payment has been deferred thus far.
Assuming that the 10-Q is out by the end of June and a 30-day call notice is issued on July 1, I calculate a redemption value of the 10.25% preferred on August 1 to be $25.86. At a current price of $24.90, there is 3.8% upside and an IRR of 19% for a 2.5-month holding period. Any additional delay in the 10-Q will increase total return and decrease IRR slightly, but at a 10.25% accrual rate that is not such a bad outcome for a cash alternative.