Magnum Hunter to sell interest in Eureka Hunter pipeline, pay down debt

Magnum Hunter Resources Corp. (NYSE:  MHR) intends to monetize 100% of its 45.53% interest in the Eureka Hunter pipeline, according to commentary from Wunderlich Securities Inc.

While Magnum Hunter estimates that it will receive proceeds between $600 million and $700 million, Wunderlich Securities comments that, based on previous sales of Eureka Hunter to Morgan Stanley Infrastructure (MSI), the value would be closer to $450 million.
“However, MHR may get a premium for selling its entire share of Eureka,” Wunderlich Securities says. “Furthermore, the Eureka Hunter pipeline will actually be more valuable post-sale as Magnum Hunter, responsible for approximately 36% of Eureka's throughput, will be in better shape and more able to get back to drilling.”

MHR's second lien loan forces the company to pay back the loan after selling more than $200 million of secured assets including proved reserves and the Eureka Hunter pipeline. As a result, Wunderlich Securities believes that an approximate $650 million Eureka Hunter liquidity event would force the repayment of the $340 million second lien loan.

“On top of that, we estimate that MHR would have to pay back Morgan Stanley Infrastructure about $50 million in contributed CAPEX at the sale of Eureka,” Wunderlich Securities says. “This would leave $210 million to $310 million of free liquidity after paying those obligations. Given that the second lien loan requires repayment, MHR needs to get a good price on Eureka Hunter. If MHR gets only $450 million, likely the lower value limit for the asset, this would leave the company with only $60 million after paying MSI and the second lien loan. This would mean that MHR would still be liquidity constrained and in need of additional liquidity events. If MHR can get its range of $600 million to $700 million, then there would be a decent bit of cash left over to keep the company afloat.”

Wunderlich Securities believes that a market for the Eureka Hunter pipeline exists and could possibly include multiple players. “Morgan Stanley Infrastructure is naturally a potential buyer and previously wanted to increase its share in Eureka Hunter,” the analysts note. “Furthermore, there are a number of companies nearby with gathering and processing assets including EnLink Midstream Partners (ENLK-$24.13, Buy), MarkWest Energy Partners (MWE-$60.25, Hold), Williams Partners (WPZ-NR), and Energy Transfer Partners (ETP-NR), as well as private companies Blue Racer and Summit Investments. However, we have no knowledge of their appetite for the assets.”

According to the analytical firm, MHR still has a list of potential liquidity events. A joint venture in Ohio and Ritchie County, West Virginia, could still be a possibility, it says. MHR recently set the option of selling 20,000 net undeveloped acres in West Virginia and Ohio, and the company is also working on being released from letters of credit with its midstream partners. Should crude oil and natural gas pricing improve, MHR could sell its Kentucky assets, as well as its Bakken assets in Divide County, North Dakota. For short-term liquidity, Wunderlich Securities analysts believe that the company may still use its ATM equity facility.

The firm’s analysts believe that MHR is “moving in the right direction but still not out of the woods. This sale will do a lot to help out MHR's balance sheet. However, that said, Magnum Hunter will still have a lot of debt and debt-like papers on its balance sheet. In addition, crude prices are still weak, which is not great for the Williston Basin and production, and MHR still has to battle weak economics in the Marcellus and Utica, given the current natural gas macro. The proceeds from the sale should keep things going for now and keep MHR from becoming distressed; however, it would take a prolonged and sustainable improvement in gas, NGL, and crude prices to put the company back on track, in our view.”

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