Thumbs Down

A key part of trading, as no doubt all of you are aware, is to know when to cut your losses.  Here is a good example of why to engage in such actions.

On January 11 we featured Magnum Hunter Resources (NASDAQ – MHR - $2.69) as part of a 3-stock parlay in a special options focused version of the Market Monitor.  The stock is down over 32% from our pick at $4.13.  Yes, we know. Ouch.

The main drivers behind the drop appear to have been the overall decline in natural gas prices that bottomed out at $2 per million BTU in late February from a high of $12 in 2008 and a drop in oil prices since the start of 2013 in combination with some bad news and general downward trend of the energy sector in general.

As a refresher, MHR is involved in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids in West Virginia, Ohio, Texas, Kentucky, and North Dakota. Magnum Hunter has also become a major player in the Marcellus and Utica shale discovery in Ohio, West Virginia, and Kentucky with over 2,000 wells in operation and 87,000 acres in that tri-state region.

There are two pieces of information that are either good or bad depending on your frame of reference.

Magnum Hunter Resources is facing a class action suit from investors who purchased the stock between May of 2012 and April 2013.  On the downside, this caused a drop this week and may prove to cause more drops if the news is bad.  On the upside, if you bought the stock and participate in the suit you may recoup some of your losses, if the suit is successful (which is unlikely.)

The Company also just finalized a deal to sell on its properties to Penn Virginia Corporation (NYSE – PVA) for $401 million to sale to completely pay off all outstanding borrowings under its Senior Revolving Credit Facility and for general corporate purposes.  Selling off assets to pay off debt is a bad sign most of the time and it may be here.  However, the Company will now have a significant reduction in its overall debt and it has stated that it will allocate $300 million to its Williston and Appalachian Basin Divisions and has $375M in liquid cash.  These are crude oil and Marcellus shale sites, respectively. 

We should note that there has been a slight uptick in oil over the last few weeks.  Also, there has been a dramatic rise in natural gas since late February up to $4.24 per million BTU. Clearly, increased oil and gas prices could aid in top line growth.

From a technical perspective the MHR is definitely a sell in the short term.  Chart analysis predicts very bearish conditions in the short term.  Additionally, the put/call ratio, which was bullish and why we liked the stock back in January, definitely favors the puts, or selling.

We think the bad outweighs the good here and it is time to sell if short term profit is your goal.  The stock may rebound but probably not in the immediate future.

Have a great weekend!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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