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 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 boss
Harold Hamm or the late Chesapeake Energy co-founder Aubrey
McClendon, has been punctuated by wild market swings and big
gambles.
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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; Editing by Tomasz Janowski)
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