The Door Closes

Back on October 15th I wrote a piece titled As The Dust Settles which chronicled the bizarre events going on at Magnum Hunter (MHR/MHRC).  With the recent Kinder Morgan (KMI) dividend cut, I figured it was probably time for an update given the similarities between the two, particularly since Magnum Hunter filed for Bankruptcy protection on Tuesday.It would be safe to assume not many DGI investors were aware of Magnum Hunter – in fact not one the public portfolios of my blog directory contained MHR.  KMI, on the other hand, is a DGI darling contained within 99 of the 213 blogs that I’ve encountered.  That’s an astounding 46.4% (at least prior to the dividend cut).  This isn’t to presume the same fate awaits KMI.  Although there are similarities (oil, pipeline(s), commodity pricing and a failure to anticipate market direction), there are differences as well – notably in size and scope.  KMI (as did MHR) is promoting its’ assets as toll roads – immune from oil pricing, i.e., fixed pricing often set via take or pay contracts.  In boom times this is a veritable printing press for cash.  When the bust cycle hits – as it often does here in Texas – these toll roads can become littered with road kill.

The real question that needs to be addressed is the credit quality of their customers.  As interest rates rise and bankruptcies escalate, contracts can be broken or modified.  As any investment can easily have its’ ROI extended, investors need to ensure they have the stomach for the inevitable gyrations.

I identified three personal takeaways from MHR’s filing:

  1. My exposure via BMO’s security interest appears to have been assumed by other lenders in the bridge financing agreement
  2. My exposure through WSBC is secure and affirmed
  3. I may want to increase my PJT holdings as they’re earning their fees

The downside is that investors have been injured.  Yes, yield chasing is a dangerous game and it appears both MHR’s common and preferred stock will be wiped out.  Bondholder’s will become the new owners although suffering massive haircuts.  Some of these (soon to be former) bondholders include pension funds such as Calpers, UAW,

And the Seeking Alpha contributor turned activist investor?  He’s been uncharacteristically silent.  Hiding behind a firewall to his subscription site.

I guess the real message is to do your own due diligence, stay within the boundaries of your own comfort level and understand your investments.