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: Small independent U.S. natural gas producer Magnum Hunter Resources Corp (NYSE: MHR) stock dropped 10% today, after whipsawing back and forth all week. The company's stock is down big over the past year, largely due to the impact of falling natural gas wholesale prices on the company's bottom line:
So what: Over the past week, Magnum Hunter investors have gotten some bad news, as the company announced that it had received a Wells Notice from the SEC, informing the company that the SEC was recommending enforcement action against the company, its CEO, and several other current and former insiders. This led to a downgrade by Wunderlich Securities on Monday, further pressuring the stock price.
Factor in the 5% drop in crude oil prices today, and that's why Mr. Market smacked Magnum Hunter stock.
Now what: Yes, there is some potential risk from the Wells Notice, which could lead to fines against the company and actions against executives and board members, but the bigger risk for Magnum Hunter Resources is tied to its business operations. The company's debt has ballooned in recent years, while the price of oil and natural gas has collapsed, leaving the company with limited flexibility and shrinking cash flows:
MHR Free Cash Flow (TTM) data by YCharts.
While there's no news today behind the stock price drop, there's plenty of reason to avoid investing in Magnum Hunter Resources, at least for now. The one thing that would definitely lift the company's shares would be a big rebound in gas and oil prices, but unless you know someone with a crystal ball, there's no predicting when that could happen.
Looking for better alternatives? Start with the link below.
