Oil and gas driller Magnum Hunter wants to ramp up its Marcellus and Utica shale operations, and has sold a sizable stake in its company to a private investment fund to do it.
The Houston, Texas-based company last week sold $150 million in stock to Relational Investors to help finance its activity in the region, which would include deploying another rig on its 200,000-acre position in West Virginia and Ohio; buying new oil and gas leases in Ohio and West Virginia; and paying down debt.
The deal boosts the stake held by Relational Investors, a San Diego firm that’s developed a reputation for buying shares in companies and then lobbying for changes. Relational now holds about about 15 percent in Magnum Hunter, up from less than 5 percent previously.
“We are pleased that Relational Investors will now become our largest shareholder,” said Gary Evans, CEO of Magnum Hunter, in a statement released May 28. “We look forward to Relational’s continued involvement and support, as both a preeminent oil and gas investor and a proponent of long-term value creation for all shareholders.”
Relational will buy 21.4 million shares of Magnum Hunter’s common stock at $7 per share. The driller also will issue to Relational 2.1 million warrants to buy stock with an exercise price of $8.50 per share.
Relational, founded in 1996 by former oil and gas executives Ralph Whitworth and David Batchelder, invests in publicly traded companies that it believes are undervalued in the marketplace.
The firm did not return calls in time for publication.
“Our interest in increasing our investment in Magnum Hunter coincided with some very attractive opportunities for the company to extend its growth and long-term strategic plans,” Mr. Whitworth said in a press release.
“This investment reflects our confidence in Magnum’s outstanding management team and their strategic plan. The company, led by Gary [Evans], has assembled a premier acreage position in North America’s most prolific shale plays. Our cash infusion will allow the company to accelerate development and expansion in the highly attractive Appalachian Basin.”
Irene Haas, an analyst with Wunderlick Securities in Memphis, Tennessee, noted that Magnum Hunter needed the money.
“They had a $140 million gap for the second half of 2014,” Ms. Haas said. “By having this one private placement, it will buy them some wiggle room.”
Cham King, assistant vice president of investor relations for Magnum Hunter, said Relational reached out to the company initially.
The private stock offering is just the latest in a series of deals Magnum Hunter has struck as it refocuses on its operations in the Appalachian Basin, the geological formation that contains the Marcellus and Utica shales.
In April, the company sold off its remaining Canadian assets for $67.5 million — or $75 million Canadian — to focus on Appalachia. Upon announcing that deal, Magnum Hunter said the Marcellus and Utica are “essential for the success” of the company’s business plans.
Mr. King said more non-core assets are on the table as well.
“We have some non-core assets in the Bakken Shale that are being marketed as we speak, as well as our subsidiary, Magnum Hunter Production, that holds our legacy Kentucky gas assets,” Mr. King said. “We expect those deals to close this year.”
Later this year, the company expects to report on the results from several of its Utica wells. “We expect big well results in the second half of this year that will help us prove out the Utica,” Mr. King said.
The company has about 461,000 net acres in the Appalachia Basin, of which about 79,000 are in the Marcellus and 99,000 in the Utica. It also owns Eureka Hunter Pipeline in the basin.
Magnum Hunter entered the Marcellus in 2009 when it acquired Triad Energy Corp. out of Chapter 11 bankruptcy for $81 million.
“They have a quite large footprint relative to their market cap, which currently is about $1.3 billion,” Ms. Haas said. “They have a great land base and now they can realize what’s underground and turn those reserves into production and cash flow.”
Leo Mariani, an analyst with RBC Capital Partners who follows Magnum Hunter, said the deal with Relational Investors is a good move.
“From an acreage perspective, they have the land but not the capital to execute on it,” Mr. Mariani said. “If they have good success in the Utica, then yes, there’s additional upside for them.
“Ultimately, I can’t comment on Relational Investors’ angle in this,” he said. “This is a privately placed deal, not a public transaction, so they’re clearly seeking a partnership.”
Relational has investments in other energy companies, including Hess Corp. — which also operates in the Utica Shale — Occidental Petroleum Corp., and Plains Exploration and Production. Plains Exploration was acquired by Freeport-McMoRan Copper and Gold Inc. last year for $16.3 billion.
In 2010, Relational Investors and the California Teachers Retirement System, the second largest public pension fund in the United States, were involved in a shakeup at with Occidental Petroleum over CEO pay and chief executive succession policies and board composition.
Relational also made headlines with management shakeups at Home Depot and Hewlett Packard. Mr. Whitworth was named to HP’s board in 2011.
Stephanie Ritenbaugh: email@example.com or 412-263-4910