Still Holding Those Energy Preferred Issues? You Better Keep Praying
By: Tim McPartland,
I am sure many of our readers took note of the total shellacking that energy related preferred stocks took last week. The preferred shares of Magnum Hunter Resources (ticker:MHR now trading at 47 cents) in particular took the biggest beating. The $50 issue (ticker:MHR-D) took a $5 hit on Friday alone to close at $10.86 (this is a yield to call of 386%). Of course Magnum Hunters’s chairman is Gary Evans–the same as the chairman of GreenHunter Energy, which recently suspended its preferred dividend, who shot his mouth off that he would pay the dividend out of his own pocket. I guess shareholders don’t believe that he will be paying the dividends for the Magnum Hunter preferreds. These dividends will be suspended in the next 60 days UNLESS they get the pipeline sold.
Was this a predictable situation? Absolutely!! Taking a quick look at the financials released for MHR for the 6 months ending 6/30/2015 it was not only predictable, but obvious.
Revenue has plunged from $237 million in the prior year 6 month period to just $98 million in the current 6 month period. A fair chunk of this plunge was based on the company determining that they were no longer the majority owner of Eureka Hunter, their pipeline system, so they could not consolidate those revenues. Without this event revenues were off ‘just’ 50%. The company had a current ratio of .3 (current assets/current liabilities) as their cash position has fallen from $53 million to just $9 million. With the exceptions of Utilities and REITs a more normal current ratio would be 1 or greater. The company burned $63 million just for debt interest and preferred dividends (64% of revenues)—very scary. On top of this disaster the company spent $137 million on capital expenditures. Both the income statement and balance sheet have been totally destroyed.
ONLY the sale of the pipeline system will save Magnum Hunter.
The preferred shares of Gastar Exploration (ticker:GST now trading at $1.40) took a pounding last week as well with their 2 issues now trading at $14 and $16 respectively. The company is in better shape that MHR, but they continue down the road to disaster. Revenue for the 6 months ending 6/30/2015 was $56 million and they spent $22 million on interest and preferred stock dividends (39% of revenues). Like Magnum Hunter they went overboard with capital expenditures of $84 million. The companies cash position has fallen to $9 million from $24 million the year before as they drew $55 million from their revolver. Gastar will likely have a short reprieve from dividend suspensions – maybe 2-3 quarters.
The preferred shares of Legacy Reserves (ticker:LGCY now trading at $5.90) have gotten rocked as well. LGCY would appear to be relatively safe from dividend cuts on their preferreds for the next number of quarters. They have a current ratio of near 2 and they spend just $45 million on interest and preferred stock dividends (about 27% of revenue), but just the same the preferreds are trading at $13 (2 issues). Smartly LGCY spent just $23 million in capital in the most recent 6 month period, versus $503 million a year ago. A few quarters more of dividends look to be safe.
So in summary if one is holding energy preferreds they are speculating–NOT income investing. HOPE is not a strategy and anyone holding energy preferreds simply is hoping that crude prices rise to $60 or more. We have seen bunches of oil and gas bankruptcies already this year (Quicksilver Resources, Dune Energy, BPZ Resources, Sabine Energy, Samson Resources, American Eagle Energy and more) and there will be bunches more. Huge producers like Sandridge (ticker:SD now trading at 40 cents) are only hanging on because their debt holders have agreed to pretty severe haircuts (likely under the threat of bankruptcy). For those issues above you can be certain that when debt holders agree to haircuts the preferred dividends will be gone–likely for good.