Shale Firm's Bankruptcy Exit Doesn't End Struggle

Magnum Hunter Resources Corp and its founder Gary Evans are emblematic for the U.S. shale revolution: it started small, borrowed heavily to snap up land and rivals and then crumbled under the weight of debt when prices crashed.

Now, the oil and gas company is among the first casualties of the energy slump to exit bankruptcy and Evans has a message for its peers: even once you are debt-free you cannot take survival for granted if energy prices do not recover soon.

With little chance of seeing hundreds of millions of dollars in debt repaid, creditors including Goldman Sachs, Highbridge Capital Management, CVC Capital Partners and Third Point agreed to convert all of it into shares in a revamped Magnum Hunter.

Bankruptcy lawyers say that by eliminating its entire $1 billion debt load, cutting costs by renegotiating contracts with suppliers and moving quickly, Magnum Hunter has already provided a template for other cash-strapped drillers.

Swift Energy, which filed a few weeks after Magnum Hunter, followed a similar route and has already emerged from bankruptcy. Companies that have lingered in bankruptcy, such as Quicksilver Resources Inc, have ended up in piecemeal asset sales at bargain basement prices.

Now Evans and the new board face a fateful decision.

One option is to hunker down and minimize spending and borrowing while waiting for markets to eventually recover.

Another is to ramp up drilling to get the company growing again, widening losses until oil and gas prices rise.

Evans told Reuters in an interview that even debt-free Magnum Hunter, primarily a gas producer, would need gas prices to rise to $2.50 - $3.00 per million cubic feet equivalent from about $2 now to get the 15 percent return on new wells it normally uses as a target when making spending decisions.

Magnum's new owners appear set to opt for the low-risk, low-cost scenario - the company has told the court it expects to keep posting net losses through 2018 and its oil and gas reserves to shrink about 11 percent over that period.

Without drilling new wells, however, the company risks forfeiting some leases and its cash-flow could begin to dwindle as existing wells run dry, crimping its long-term prospects.

"Everybody is having this issue. It's a dilemma," Evans told Reuters in an interview. "Do you hold 'em or fold 'em?"

Shale oil producers are in the same boat.

Wells Fargo Securities, concluded in an analysis early this year that even after debt restructuring most would need oil to fetch between $50 and $55 a barrel to secure their future. But oil is stuck near $44 a barrel today.

RISK AVERSION AND BOLD MOVES
Whether Evans, 58, stays on after the company exits bankruptcy in the coming days and how Magnum Hunter's second act unfolds will be a test of how risk-averse new owners can work in a shale industry with its big personalities and a penchant for bold moves.

The new shareholders declined to comment for this article and Evans would not discuss his plans.

Yet the former bank executive, with his 6'4" frame, cowboy boots, and an office decorated with taxidermied heads of buffalo, deer and other trophies, has that kind of aura that suggests being timid has never been much of an option.

His career, just like those of Continental Resources (CLR) boss Harold Hamm or the late Chesapeake Energy (CHKVZ) co-founder Aubrey McClendon, has been punctuated by wild market swings and big gambles.

Evans is quick to point out that he has raised up to $6 billion in capital since he started his first oil and gas company in 1985 for $1,000 when he charged into a down market. He later sold it for $2.2 billion.

"This business gets in your blood," he said.

Evans founded Magnum Hunter Resources in 2009 and drove its breakneck expansion via acquisitions, debt and new shares during the shale drilling boom, with its market value peaking at about $1.5 billion.

At first Magnum Hunter focused on oil fields in Texas and North Dakota, and then switched to bet big on the Utica and Marcellus gas fields in Ohio, West Virginia and Pennsylvania.

But gas prices just like crude later went into a tailspin and by early 2015 Magnum Hunter halted virtually all drilling and fracking to preserve cash.

Evans has reassured investors a solution to its cash woes was in sight, with the planned sale of its 45 percent stake in a pipeline company that carried Magnum Hunter's gas.

Evans' frequent media appearances and unwavering optimism attracted many retail investors, but the deal never materialized as the energy rout worsened and spread to pipeline companies.

Court records showed that many bought Magnum Hunter shares shortly after Evans told analysts on Aug. 7 the pipeline deal was just a week or so away, sending its shares 70 percent higher. Many of those shareholders wrote letters to the bankruptcy judge and used social media to vent their anger.

"I thought it would be a good shot," said Axel Pantin, a 49-year-old former banker from Delray Beach, Florida. "You are taking the word of the CEO." He said he invested around $200,000 in Magnum Hunter stock, most of it around early August.

What irked many was a 55-page presentation the company posted in October - just weeks before its Dec. 15 bankruptcy filing - that valued Magnum Hunter's assets at between $8.77 and $13.77 a share when the stock was trading for less than a $1.

In a court statement, Evans said potential pipeline buyers grew increasingly skittish and offered prices too low to solve the company's liquidity woes.

Evans said he never thought he would wind up in bankruptcy and worked day and night with lawyers to finish it quickly.

"Look, if it makes anybody feel any better, I lost $48 million in equity in this," he said. "The management and the board lost everything too."

Reporting By Tom Hals and Terry Wade