Several weeks ago, Magnum Hunter Resources filed for bankruptcy.

In this video segment, Sean O'Reilly, Taylor Muckerman, and Tyler Crowe explain just how bad the balance sheet was and why the company just couldn't hang in there. The Fools also discuss the incredible claims the CEO is making even now, how the bankruptcy will directly impact the company, and how this is the latest in a string of recent oil and gas sector bankruptcies.

The full podcast can be accessed by clicking here. A full transcript follows the video.

 

This podcast was recorded on Dec. 17, 2015.

Sean O'Reilly: Moving on to, another one bites the dust. Magnum Hunter Resources files for Chapter 11. I think this company was a penny stock?

Tyler Crowe: It was close. 

Taylor Muckerman: There's a few of those penny stocks out there in energy parts.

Crowe: They're not the only one, yeah.

Muckerman: It was a $2.5 billion company in 2014, at its peak.

O'Reilly: Yeah, so, was this just, was their cash flow that bad? A lot of people are doing a lot of finagling right now, and these guys just couldn't? Was it that bad?

Muckerman: Well, if you look at their balance sheet over the last three of four years, you can see that debt-to-equity, debt-to-capital [ratio] creeping up and up. It was like, 40%, 60%, 100%, 170%, and now it's just too late. They can't survive. Their income was decent, they suffered this year. But interest and coverage ratios just weren't there. This was a darling of the shale patch for quite a while.

O'Reilly: Where were they operating?

Crowe: Marcellus and Utica. In terms of an attractive place to be...

O'Reilly: Yeah. They weren't in western Pennsylvania or Michigan or something.

Crowe: No, they were.

Muckerman: Yeah.

O'Reilly: I should have guessed.

Crowe: They were in Ohio, right near home state. You don't have one of their rigs in your backyard?

Muckerman: Not anymore. It's owned by some bank now.

Crowe: Also, on a small side note, I find, there are certain CEOs in the energy industry who are very good cheerleaders for their stock, for their industry, or whatever. And the CEO of Magnum Hunter Resources, I'm sorry, I don't have his name in front of me right now, he is an amazing cheerleader, and can find...he can put lipstick on the ugliest pig. One of the statements that he made was, "This is going to be an unprecedented move that's going to make Magnum Hunter Resources... "

O'Reilly: Gary Evans?

Crowe: Yes. "It's going to make Magnum Hunter Resources a stronger company, they're going to reemerge as one of the leaders in the shale patch again." And I was like, your company just filed for Chapter 11, and you're talking about how wonderful this is going to be.

Muckerman: Above all hope.

O'Reilly: It's just a reorganization, Tyler.

Muckerman: What a great organization.

O'Reilly: Did he get a golden anything?

Crowe: No, he's still there.

O'Reilly: It's just a reorganization, like I said!

Crowe: A golden opportunity to wipe out all shareholder value and turn all the bonds into equity later on. Thinking about this a little more broadly, one of the things that I think is holding the industry back, we talked a lot over the year, "We need to see some bankruptcy so that production will roll off, and it'll help correct prices." But, as this says in their Chapter 11 ...

O'Reilly: They're going to keep pumping, baby.

Crowe: They're still pumping. And a lot of these companies that are filing for Chapter 11 are still producing, and it's not really helping the situation, because they have to find some way to pay off all those debts, and the only way they know how to do it is pump oil. So, if we're not losing production from companies going bankrupt, where are we going to lose it?

O'Reilly: Obviously, their capex will drop, because it's really hard to approve the capex budget in bankruptcy court. So, naturally, those will decline, I would hope.

Muckerman: An immediate drop isn't going to take place, but eventually.

O'Reilly: Yeah, I would think decline rates are the only saving grace there. We'll see.

Taylor Muckerman has no position in any stocks mentioned. Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.