Why Magnum Hunter Resources' Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Magnum Hunter Resources (NYSE: MHR  ) dropped as much as 27% today after the company dropped its auditor.

So what: It was disclosed late yesterday that Magnum Hunter has dismissed PricewaterhouseCoopers as its auditor. The auditor said it had found material weakness in internal controls and had requested additional information about the value of the company's oil and gas assets.

Now what: The moment an auditor discloses material weakness, investors run for the hills, so that's a big part of the move today. What's concerning for investors is that the company dismissed the auditor instead of solving the reported problems, a sign that maybe accounting standards aren't up to par. I'd stay far, far away from this stock, because any time a company fires an auditor or finds weakness in accounting procedures, there's trouble coming.

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  • Report this Comment On April 18, 2013, at 9:30 PM, Khizhim wrote:

    Travis:

    You said: "What's concerning for investors is that the company dismissed the auditor instead of solving the reported problems, a sign that MAYBE accounting standards aren't up to par."

    Yes. (My upper case.)

    I assume you've not seen the company's 11-page "confessional" 8K, "Changes in Registrant’s Certifying Accountant," at:

    http://b2i.api.edgar-online.com/EFX_dll/EdgarPro.dll?FetchFi...

    The document was released after the close of the market on 4-16-13, Tuesday.

    I'm not a Graham and Dodd guy. That's why I spend time at TMF. I believe I can rely on you folks for that type of fundamental analysis. Travis, you focus on the O&G sector, maybe you'd like to have a look a this document. You probably know much more about these filings than I do; ditto the topic of the dismissal of independent auditors. My impression is that this is simply "beyond the beyond." I like to study documents like this in detail, so I paste Plain Text copies of them into my own local word processing files and I then go over them carefully, highlighting them, adding footnotes, etc. It must be stressed that much of the 11-page 8K is an endless list of "mea culpas." They dispute some of PWC's criticisms, but they seem to admit most of the complaints! I'm unable to understand how their CFO remains employed.

    Here's one of my footnotes, just to give you a sense of the impression which this document made on me:

    "Is MHR suggesting that PWC personnel weren't competent, and that they questioned MHR's accounting more because they lacked knowledge of the O&G industry than due to any actual deficiency of the accounting? To some extent that may be the case, but what good does that do? Isn’t all of this an exceptional spectacle, a fiasco which seriously detracts from the company's stature and credibility? I'm seeing MHR as looking ludicrous. It looks like they're disgracing themselves because they're not only making all of this public, but they're wallowing in it, seemingly endlessly! It's as if they scheduled a conference call and submitted this endless SEC filing to complain about their independent auditor, but why did they choose PWC in the first place?! It's as if they've chosen to call attention to their own poor judgment, and, in the course of bringing attention to their poor selection of an auditor, they continue to demonstrate poor judgment! This looks like self-imposed humiliation!"

    Be sure to check out that "No Q&A" "conference call" of of the afternoon of yesterday, Wednesday, 4-17-13. Without Q&A it can't be described as a conference; it was actually a unilateral statement by CEO Gary Evans, who stressed that the objections raised by PWC were all "non-cash." The company offers an audio recording at:

    http://www.magnumhunterresources.com/MHR_Change_In_Auditor_C...

    Gary Evans emphasizes that the company enlarged its accounting payroll from 15 to 42 "in the last six months." He stresses their hiring of new top financial executives. After running on endlessly, confessing one major accounting "sin" after another, the 8K says (page 6) "... the Board, the Audit Committee and senior management have adopted a 'hands on' and proactive approach to address the internal control deficiencies." That's good, but how do they explain their previous "transgressions"?

    I'm way out of my water on this, but this surprises me. This type of fundamental detail seems like grist for TMF mill, and I wonder if you'd like to take a look at this stuff...

  • Report this Comment On April 18, 2013, at 11:02 PM, Khizhim wrote:

    Seeking Alpha offers a good text transcript of the phone comments which were made by the company yesterday afternoon at 4:30 PM EDT. The transcript's at:

    http://seekingalpha.com/article/1351771-magnum-hunter-resour...

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