Magnum Hunter Resources' Investors Shouldn't Be Too Worried About the Company's Airplane Usage

Bloomberg had an interesting article last week detailing some of the risks investors face when owning shares of Magnum Hunter Resources  (NYSE: MHR  ) . One of the issues that the article pointed out is that the company has amassed a staggering amount of debt. The other really interesting item it pointed out was that the company has engaged in some questionable related party transactions, including renting the CEO's airplane. Is this an issue investors should be worried about? 

Related party transactions are quite common
Bloomberg noted that Magnum Hunter Resources engages in a lot of related party transactions, including leasing a plane from the CEO and leasing office space and equipment from a company its CEO owns a large stake in. While this is certainly an issue that investors need to monitor, it's not uncommon in the energy industry. For example, Rex Energy  (NASDAQ: REXX  )  engages in similar related party transactions with its chairman. In Rex Energy's annual report under related party transactions, investors will find the following disclosure:


Photo credit: Flickr/go_nils 

We have an oral month-to-month agreement with Charlie Brown Air Corp. ("Charlie Brown"), a New York corporation owned by Lance T. Shaner, our Chairman, regarding the use of two airplanes owned or managed on our behalf by Charlie Brown. Under our agreement with Charlie Brown, we pay a monthly fee for the right to use the airplanes equal to our percentage (based upon the total number of hours of use of the airplanes by us) of the monthly fixed costs for the airplanes, plus a variable per hour flight rate that ranges from $400 to $800 per hour. 

In addition to the oral agreement for airplane services, Rex Energy also leases office space from an entity owned by Shaner. Further, it has previously purchased land adjacent to its headquarters from that entity.

There are countless other examples in the energy industry involving related party transactions. Gulfport Energy  (NASDAQ: GPOR  )  for example, frequently engages in related party transactions. In fact, Gulfport Energy built much of its current portfolio through acquisitions from wealth management firm Wexford Capital that at one time owned a large stake in Gulfport Energy. Its annual report is filled with disclosures of transactions made with related parties. 

This isn't to say these deals are always in the best interests of investors. Gulfport Energy's Utica Shale acreage acquisitions have typically been well above the going price. For example, last year it paid $10,000 per acre for acreage owned by Wexford Capital when other acreage deals were in a range of $1,000 to $8,000 per acre. While this was for acreage in the core wet gas portion of the play, the company certainly didn't get a discount. Further, a Reuters exclusive last year pointed out that Gulfport Energy's former chairman received millions of dollars in equity from Wexford Capital in companies that did business with Gulfport Energy. The concern is that the company's former chairman could have profited from the companies doing business with Gulfport Energy at the expense of shareholders. 

Increasingly investors are becoming more concerned about the related business dealings of those in control of their energy companies. There have been a couple of high profile energy CEO's that were ousted by investors that were fed up with these inside deals. So, while these transactions aren't necessarily a reason to sell, it does at least raise a red flag.

Investor takeaway
That's why investors need to at least be aware of the inside dealing of those running the companies they've invested in. In many cases these deals are small and not even worth noting. Magnum Hunter Resources CEO Gary Evans certainly questioned it in the Bloomberg piece saying, "Are you serious?" Evans said. "We're talking about $150,000 a year on a company generating $400 million in revenues and you're asking me about a private plane?" That being said, despite how common and small these deals are, investors need to make sure those in charge of the companies they've invested in are being good stewards of that investment.

Do you know this energy tax "loophole"?
Investing in energy companies can be risky. However, there is a less risky way to invest thanks to an energy tax "loophole" that's designed to put more money in your pocket. You can learn how to take advantage of this profitable opportunity by grabbing our brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3017879, ~/Articles/ArticleHandler.aspx, 8/30/2015 4:03:43 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
GPOR $35.04 Down -0.30 -0.85%
Gulfport Energy Co… CAPS Rating: **
MHR $0.85 Down -0.06 -6.47%
Magnum Hunter Reso… CAPS Rating: **
REXX $3.11 Up +0.34 +12.27%
Rex Energy Corp CAPS Rating: *