Relational Investors LLC, the activist fund co-founded by Ralph Whitworth and David Batchelder, agreed to boost its Magnum Hunter Resources Corp. stake to about 15 percent in a deal backing management at the oil and natural gas explorer.
The firm will buy 21.4 million shares at $7 apiece in a private placement, according to a statement. Net proceeds of about $150 million will allow the Houston, Texas-based company to expand drilling at its Marcellus and Utica shale projects in the U.S. Appalachian basin and repay some debt.
Relational had already acquired almost 5 percent of Magnum Hunter and held talks with management before negotiating the larger stake, said two people with knowledge of the matter. Once the potential of its fields are proven, the company may make an attractive takeover target for other energy companies, said one of the people, asking not to be identified discussing private information.
San Diego-based Relational, which manages about $6 billion, will also get about 2.1 million warrants exercisable at $8.50. Magnum Hunter Chairman Gary Evans has sold more than $100 million of properties in Canada and Texas this year and plans to divest more assets as he focuses on drilling in the most prolific fields in Ohio and West Virginia.
“This investment reflects our confidence in Magnum’s outstanding management team and their strategic plan,” Whitworth said in the statement. “Our cash infusion will allow the company to accelerate development and expansion in the highly attractive Appalachian region.”
Magnum Hunter rose as much as 8.5 percent today and traded at $7.82 (MHR:US) at 11:31 a.m. in New York.
Growth in shale drilling boosted U.S. oil production to 8.4 million barrels a day, 16 percent more than a year ago and the highest since 1986. Advances in horizontal drilling and hydraulic fracturing, or fracking, have unlocked crude and natural gas trapped in formations like North Dakota’s Bakken shale and the Marcellus.
Like many shale explorers, Magnum Hunter has relied heavily on debt to keep drilling. Shale debt has almost doubled to $163.6 billion over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers.
Magnum Hunter’s debt rose to $897 million (MHR:US) at the end of March, more than twice what it was two years earlier, data compiled by Bloomberg show.
Relational also holds stakes in aircraft seat maker B/E Aerospace Inc. (BEAV:US), energy group Hess Corp., agricultural commodity processor Bunge Ltd., snacks supplier Mondelez International Inc. and air-conditioning manufacturer Ingersoll-Rand Plc, according to recent disclosures.
Founded in 1996, Relational typically buys stakes in companies it considers undervalued and then lobbies management and boards for changes to boost investor returns. In recent years the firm has targeted industrial companies including equipment manufacturer SPX Corp. (SPW:US), bearings maker Timken Co., machinery builder Illinois Tool Works Inc. and hazardous waste disposer Clean Harbors Inc.
For more than a year, Whitworth has served as interim chairman of Hewlett-Packard Co. (HPQ:US) after urging changes to turn around the personal-computer maker.
Activist investors tend to buy at least 5 percent of a company’s stock and flag their intention to actively engage executives and directors by disclosing their holding in a 13D filing with the U.S. Securities and Exchange Commission.
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